Loans, families and relationship breakdowns
Generally, you have no legal responsibility for another person’s debts – even if that person is your spouse, partner or child. However, you may experience hardship due to another’s debts if you are financially and/or emotionally dependent on them. Creditors may also attempt to take possession of joint assets in an attempt to recoup part of the debt.
Loan guarantees and co-borrowers
You may become legally responsible for someone else's debts if you:
- Have given a personal guarantee for someone else's loan; or
- help someone get a loan by becoming a co-borrower with them and signing the paperwork.
For this reason, it is very important that you think carefully before you agree to be a co-borrower or guarantor - though you might not benefit from the loan yourself, you could end up being legally responsible for the entire amount owing if the person who took out the loan defaults on their repayments.
If the debtor has defaulted and the lender demands that you as guarantor or co-borrower take over the payments, or threatens legal action, consider getting legal advice. In certain limited situations, guarantors may be able to challenge a claim even where they signed the contracts.
Relationship breakdown and debt
Debt problems often arise when relationships break down. To reduce the financial impact of relationship breakdown on you, ensure that your ex-partner does not take savings and use available credit from joint bank accounts, home loan redraw facilities and credit card accounts.
To avoid debt due to the breakdown of a relationship, you should:
- Establish a new transaction account in your name only and ensure that your salary and other payments are diverted to the new account.
- Close joint accounts. You may wish to use any funds remaining in a joint account to pay joint debts of the relationship, childrens expenses etc.
- Tell your bank or lender about the relationship breakdown and demand, in writing, that it stop any further use of the loan redraw facility. This will be critical if the redraw facility allows either party to access the available credit without the other borrower's authorisation.
- Cancel any right your ex-partner may have to access your credit card account as a secondary card-holder.
- Arrange for copies of all joint account statements to be sent to you if you change address.
Find more relevant information on finances and family relationships:
- How to manage joint accounts
- How to deal with debt
- When to use a financial councellor
- How to cut the family budget
This article was created by Ella Walsh for Kidspot - New Zealand's leading parenting website. Sources include the federal government and ASIC.