The Top 5 Categories Of Family Debt – Part 1

2015-01-26   minute read

Lifestyle Debt

One of the most heartbreaking aspects of debt we see is the breakup of family relationships when a guarantor is called upon to pay a family debt. These situations can put a strain on their finances and potentially jeopardize their own credit situation, leading to strife amongst family members. It is important to take the time to learn about the types of family debts. Over my next two blog posts, I will explore the top five categories of family debt. 

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Becoming a Loan Guarantor

Most loans are generally approved after your credit file and ability to service the loan are assessed. In cases where a loan application cannot stand on its own merits, a lender will sometimes suggest a guarantor to secure the loan. It’s not uncommon for the guarantor to be a family member. In these circumstances, it’s very important to think long and hard before you agree to act as a guarantor, because it comes with a whole lot of responsibilities.

As a guarantor, if the loan falls into arrears, you will be called upon to take over the payments. Clearly this situation is especially dangerous for the guarantor, even more so if the guarantor is unable to afford the repayments. When a family member is approached to act as a guarantor, it is generally very difficult to say no. The family member wants to be supportive and after all, the loan applicant has every intention of paying the loan.

Despite the loan applicant’s best intentions, however, situations and circumstances change and there is no way anyone can give absolute assurance they will always be able to service the debt. For instance, changes in employment, relationship breakdowns, injury or accidents, health issues and any sudden increase in costs will place pressure on anyone trying to service debt.

Therefore, it is really important to consider the consequences of acting as a guarantor before agreeing to do so.

Becoming a Guarantor for Your Spouse’s Business Loan

When a spouse applies for a business loan, the lender will often require the other spouse to act as a guarantor. In cases like these, most financial institutions will require the guaranteeing spouse to obtain “independent legal advice” (ILA). The purpose of the ILA is to protect the lender in case the guaranteeing spouse brings about an argument that he / she did not know what he / she was getting into by signing the business loan guarantee. The idea is to have an independent lawyer explain to the guaranteeing spouse the pitfalls of signing such a guarantee.

The guaranteeing spouse generally pays very little attention to this ILA, as they are so anxious to obtain the business loan, they just consider this a formality. This is particularly risky if the business fails and either spouse is left with little or nothing to repay the business loan, resulting in collective financial ruin.

It is very important to consider both the business venture’s prospects for success and the significance of becoming a guarantor. When you’re looking at one couple’s household income, the consequences of a business failure could be devastating.

Read part 2 here.

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