Real Situation
A recent meeting I had with Stephen and Joanne (names changed) from Lisburn, Co. Antrim highlighted the dangers involved in standing ‘guarantor’ for a family member’s loans. Stephen and Joanne rent their home from the local council and have a reasonable joint income. Over the past few years however they have managed to rack up over £25,000 of unsecured debt – credit cards, mobile phones, loans and store cards. They have fallen foul of the temptation we all succumb to at least once in our lives, to buy the things we want on credit without really thinking through how we are going to repay the money, or how much it is going to cost us in interest charges along the way.
“We never really thought much about what we owed”, said Joanne “we were both earning and were able to keep up with the repayments, so it didn’t bother us”. Unfortunately for this young couple a recent fall in income for Joanne meant that they went from being able to service the minimum payments on their debts to falling behind and having to juggle with their bills in an effort to keep up.
They are falling deeper into debt and their creditors are starting to apply pressure – overdue letters, threats of defaults and court action, debt collectors at the door. I received a call from them to come and see if I could do anything to help.
Looking at their debt situation there was one major fly in the ointment which totally changed their options regarding their debts – Stephen had taken out an unsecured loan a year or so ago for £8,000 and his mother had also gone on the application to strengthen his case with the loan company. Stephen didn’t want his mother involved in their debt situation and had been hiding the fact from her that he had been struggling to keep up repayments.
Joint borrowings with a third party often pose a problem in debt situations because one particularly powerful tool in making debts manageable is an IVA (Individual Voluntary Arrangement), which can ‘compress’ the debt to an affordable level. In essence you pay what you can afford each month for five years, and at the end of it the balance of your debt is written off. To enter into an IVA however is not possible for Stephen, unless he agrees to repay 100p in the £1 plus the costs involved in being in the arrangement. As his mother has assets (savings in the bank), if Stephen were to propose a debt compression IVA his creditors would refuse and choose instead to pursue his mother for the entire debt. For those borrowing money in joint names it is important to realise that you are held by the lender to be ‘jointly and severally liable’ – that is to say that you are both legally responsible for the whole debt, and the loan company can therefore pursue either one of you for the recovery of the whole debt.
Thankfully we were able to achieve a different solution in this case; as virtually all of the borrowings apart from the loan are in Joanne’s sole name we were able to propose putting her into a debt management plan at an affordable level of monthly repayment based on her budget showing half the household expenditure as her responsibility. For Stephen he is expected to contribute towards half the household running costs to help out Joanna, and he is also able to repay his joint loan with his mother at the full amount each month. This achieved the overall solution of paying their priority debts (rent, household costs etc.), clearing the joint loan with his mother without any issues from creditors and also making a start on repaying the balance of their other debts.
If you are thinking of standing as guarantor for any family member on a loan please do remember that this ‘favour’ can be called in some day, often when times are hard and you are possibly least likely to be able to come up with the money. For those thinking about asking a family member to stand guarantor I would also encourage you to think about the fact that by doing this you could be putting a relative in an awkward situation, with potentially financially damaging consequences for them if you are unable to keep up with the repayments. Thankfully however there was a solution for this situation and a family crisis was averted, and Stephen and Joanne are now determined to get on top of their debts and rein in their spending in future. Good luck guys, be strong and try hard to resist the daily bombardment we receive from marketers to spend, spend, spend!
This post was contributed by Patrick Bryan
“We never really thought much about what we owed”, said Joanne “we were both earning and were able to keep up with the repayments, so it didn’t bother us”. Unfortunately for this young couple a recent fall in income for Joanne meant that they went from being able to service the minimum payments on their debts to falling behind and having to juggle with their bills in an effort to keep up.
They are falling deeper into debt and their creditors are starting to apply pressure – overdue letters, threats of defaults and court action, debt collectors at the door. I received a call from them to come and see if I could do anything to help.
Looking at their debt situation there was one major fly in the ointment which totally changed their options regarding their debts – Stephen had taken out an unsecured loan a year or so ago for £8,000 and his mother had also gone on the application to strengthen his case with the loan company. Stephen didn’t want his mother involved in their debt situation and had been hiding the fact from her that he had been struggling to keep up repayments.
Joint borrowings with a third party often pose a problem in debt situations because one particularly powerful tool in making debts manageable is an IVA (Individual Voluntary Arrangement), which can ‘compress’ the debt to an affordable level. In essence you pay what you can afford each month for five years, and at the end of it the balance of your debt is written off. To enter into an IVA however is not possible for Stephen, unless he agrees to repay 100p in the £1 plus the costs involved in being in the arrangement. As his mother has assets (savings in the bank), if Stephen were to propose a debt compression IVA his creditors would refuse and choose instead to pursue his mother for the entire debt. For those borrowing money in joint names it is important to realise that you are held by the lender to be ‘jointly and severally liable’ – that is to say that you are both legally responsible for the whole debt, and the loan company can therefore pursue either one of you for the recovery of the whole debt.
Thankfully we were able to achieve a different solution in this case; as virtually all of the borrowings apart from the loan are in Joanne’s sole name we were able to propose putting her into a debt management plan at an affordable level of monthly repayment based on her budget showing half the household expenditure as her responsibility. For Stephen he is expected to contribute towards half the household running costs to help out Joanna, and he is also able to repay his joint loan with his mother at the full amount each month. This achieved the overall solution of paying their priority debts (rent, household costs etc.), clearing the joint loan with his mother without any issues from creditors and also making a start on repaying the balance of their other debts.
If you are thinking of standing as guarantor for any family member on a loan please do remember that this ‘favour’ can be called in some day, often when times are hard and you are possibly least likely to be able to come up with the money. For those thinking about asking a family member to stand guarantor I would also encourage you to think about the fact that by doing this you could be putting a relative in an awkward situation, with potentially financially damaging consequences for them if you are unable to keep up with the repayments. Thankfully however there was a solution for this situation and a family crisis was averted, and Stephen and Joanne are now determined to get on top of their debts and rein in their spending in future. Good luck guys, be strong and try hard to resist the daily bombardment we receive from marketers to spend, spend, spend!
This post was contributed by Patrick Bryan
