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Creating Debt

Most credit arrangements are voluntary. When you choose to enter into a credit agreement, you accept the obligation to pay in the future and agree to the payment terms.

Some kinds of debt are not voluntary. Rather, they are obligations to pay which are imposed by law, not by voluntary agreements. Involuntary debt can include things like spousal or child maintenance, property taxes or income taxes. Although you may not have explicitly agreed to these debts you still have a legal obligation to pay them.

Secured and Unsecured Debt

It is important to distinguish between secured and unsecured debt, as the distinction will affect the methods a creditor can use to collect the debt.

Secured debts are when you borrow money and secure the debt by giving the creditor the right to seize something if you don't repay the debt or if you break other terms of the agreement. A mortgage creates a secure debt, as well as many car or furniture loans. Typically in those cases you would give the creditor the right to seize the car, furniture or house that was used to secure the debt if you fail to pay. The creditor can register the security agreement with the Personal Property Registry. Before purchasing goods, potential buyers can search the registry to see if a creditor has a prior claim on the goods.

A secured creditor cannot enter your home to repossess goods given as security without your agreement. They can, however, enter your yard and seize property that is in the open. If the secured creditor is not able to repossess the goods, they may go to court to get an order for you to hand over the goods, and may also get an order against you for any further money owing on the goods.

Unsecured debts are when you do not give the creditor security or collateral. If you don't pay an unsecured debt, the creditor must sue you to get a court judgment that will allow the creditor to collect the debt.

Co-signing /Personal Guarantee

If you co-sign a loan you are agreeing in writing, along with the borrower, to repay the debt to the creditor. A guarantee is similar, in that you are promising to make good on the debt if the borrower fails to make payments. In either case, you do not need to have control over the loan proceeds or otherwise benefit from the loan to be legally bound to pay the debt.

For example, you may have co-signed your spouse's loan application or guaranteed a promissory note for the family business. If your spouse or the family business cannot make payments, the creditor will look to you to pay the debt. It doesn't matter whether you have received or spent any of the money. The fact that you co-signed or guaranteed the loan makes you just as liable to the creditor as if you borrowed the money in your own name and spent it all yourself. In fact, the creditor may have more means of collecting the debt against you as a guarantor than it does against the borrower. Creditors can choose to collect from a co-signer or guarantor instead of or in addition to collecting from the borrower. You should consult a lawyer prior to co- signing a loan or signing a guarantee.

Your credit score can also be affected if you are not able to pay the loan that you have co-signed or guaranteed for someone else. You should be sure that you can pay the other person's loan and be prepared to do so, if called upon by the creditor.

Even if the principal borrower makes payments, having co-signed or guaranteed a loan can affect your ability to get credit for yourself. A creditor may see that you have a potential liability under the other person's loan and decide that adding another liability in your own right is too much of a risk, in case you are called on at some point to make payments as a co-signer or guarantor for the first loan.

Q

Am I responsible for my spouse's debt?

A

You are not automatically responsible for your spouse's debts. Spouses may have monetary obligations to each other, but the only debts both spouses are responsible to creditors for are...

  • where one spouse co-signs a loan for the other spouse
  • where both agree with the creditor that they are both responsible for the debt
  • when one spouse guarantees to the creditor the debts of the other spouse by signing a guarantee document

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