Smart strategies: Managing liability for another’s debt
March 2024
Navigating an unexpected financial burden can be daunting, especially when it comes in the form of someone else’s debt.
You could unwittingly find yourself responsible for debt you didn’t directly incur if you hold a joint account, co-sign a loan, or don’t understand the implications of your marriage contract, for example.
JustMoney.co.za, a platform that helps South Africans make good money choices, says it’s essential to understand when you can be held liable for debt incurred by your partner or another person.
“Co-signing a loan for a spouse, friend, or family member can be a generous gesture, but it comes with significant risk,” says Sarah Nicholson, operations manager of JustMoney. “You’re essentially guaranteeing the loan and agreeing to repay it if the primary borrower defaults.
“No one taking out a loan intends to slip into a precarious financial situation, but an unexpected retrenchment or illness could lead to you dealing with the financial fallout, as a co-signatory. This can trigger a range of emotions, from frustration to fear.”
You’re liable for someone else’s debt when specific conditions apply, says Nicholson. These include:
⦁ If you’re married in community of property, or your antenuptial agreement specifies certain financial responsibilities
⦁ If you hold a joint credit card or account
⦁ If you add an authorised user to your credit card
⦁ If you’ve co-signed a loan with someone
⦁ If you stand surety for someone, or sign a formal debt-settlement agreement
Be clear on your commitments
Not understanding the implications of your marriage contract, or lacking a contract, can lead to liability for your spouse’s debt.
Erin White, a director at Crue Invest financial consultants, says that if you’re married in community of property, all your assets and liabilities are combined to form a single, joint estate.
“All debts incurred before and during your marriage will form part of the joint estate, and the actions of each spouse can affect the other. For example, if one is declared insolvent, both spouses will automatically be sequestrated,” she says.
If you marry out of community of property, your estates will remain separate, and any debt accumulated before or during the marriage will remain the responsibility of the spouse who incurred it.
“If you marry out of community of property, with accrual, debts will be considered on the dissolution of the marriage, through either divorce or death,” White notes.
“Debts you incur before you marry will be excluded from the accrual calculation. However, debts reduce the value of the assets to be shared if your marriage dissolves, so even though you would be protected from creditors, excessive debt would affect your share,” she adds.
If you marry without an antenuptial agreement, you will default to being married in community of property.
⦁ Read a JustMoney article on ⦁ why you should sign an antenuptial contract.
Manage the risk
If you’re approached to co-sign a loan or similar debt agreement, JustMoney advises considering the following:
⦁ Financial stability: Assess the borrower’s ability to repay the debt. Do they have a steady income and a good track record of managing their money?
⦁ Communication: Discuss expectations and responsibilities.
⦁ Alternative options: Explore other ways to help the borrower, such as putting them in touch with a financial adviser, or helping them access alternative financing.
⦁ Legal obligations: If you do go ahead as a co-signatory, ensure you understand the legal ramifications, and your liability if the borrower defaults.
⦁ Credit card boundaries: As the primary account holder, you’re ultimately liable, so be sure to monitor the spending of any other authorised user and set clear guidelines.
Take control of repayments
If, despite the above precautions, you find yourself dealing with someone else’s debt, there are steps you can take to manage it effectively:
⦁ Assess the situation: Determine the amount owed, to whom it is owed, and details such as payment terms, interest rates, and deadlines.
⦁ Communicate with the creditor(s): Explain the situation and see if they’re willing to work out a repayment plan or negotiate a settlement.
⦁ Consider consolidation: If the debt is significant and you’re struggling, consider consolidating or refinancing the debt. This can help reduce your monthly repayments and make them more manageable.
⦁ Protect your credit score: Even if you’re not originally responsible for the debt, it could affect your credit score if it’s reported under your name. Monitor your credit report regularly and address inaccuracies.
⦁ Read a JustMoney article on ⦁ whether your debt can be cancelled.
