For many people taking out joint debt such as personal loans, hire purchase agreements, etc are a simple natural progression during a blossoming relationship. In the early days, each party may have their own bank account, their own personal loans but when they finally commit there is a temptation to bring everything together. Unfortunately, for many different reasons, these commitments may not stand the test of time which can in certain circumstances leave a significant amount of joint debt to sort out.
If you take a pragmatic approach to joint debt there are ways and means of mitigating the liabilities and finding some way to work together to bring them back under control.
What are the types of joint debt?
Before we look at who is liable for joint debt it is worth looking at the more common forms of joint debt which can accumulate to a fair amount of money. Some of the more common forms of joint debt include:
- Personal loans
- Credit agreements
- Bank account overdrafts
- Council tax
- Rent
- Mortgages
- Business loans
Even though the vast majority of joint debt arrangements tend to be of a personal nature, we have added business loans to show that they can also be business-related. In effect these are loan/debt agreements where two parties have agreed to cover the ongoing financial liability together.
Where does legal liability lay for joint debt?
If you are in the unfortunate situation of having to untangle joint debt liabilities you will come across the term “joint and several liability”. This effectively means that while both parties have agreed to the debt/financial liability, the full burden will fall on one party if the other is unable to contribute to repayments. The argument that one party spent more than the other or has repaid a greater level of the debt is irrelevant when it comes to legal liability.
There are a number of scenarios where one party may be unable to contribute an agreed figure or even any amount to repayments going forward. These include:
Bankruptcy
If your partner was to be declared bankrupt you might assume that their share of the joint debt would be included in their bankruptcy petition. This is not the case as you would become wholly responsible for the remaining debt.
Independent voluntary arrangement/Trust deed
There will be occasions where one of the signatories to a joint financial liability is unable to cover their debts. In some cases the individual would be able to make an offer to creditors whereby for example they would pay 20p in the pound. Unfortunately, the creditor would look to the other party in any joint liability arrangements to cover their share and any shortfall.
Debt management plan
One of the other options is to take out a less formal debt management plan whereby an individual agrees to pay back a percentage of their financial liabilities with each party. Again, creditors would look for any shortfall to be made up by the other parties to a joint agreement.
Death
Many joint debtors have mistakenly assumed that the death of one party to a joint agreement would seem them take their share of the debt with them to the grave. As you guessed, this is not the case and creditors would look to the other party to cover all liabilities.
If the parties in a joint credit arrangement fail to discharge their legal obligations then the lender can pursue either both parties or one individual for the outstanding monies. In law, individual parties in a joint arrangement are liable in full for the monies due, not just their “share”. If one party is pursued for the full monies owed then they may attempt to claim a share from the other liable party. It is irrelevant as to how the funds were spent, whether one party spent more than the other or who has contributed more to any repayments.
Unfortunately, for many people it is very difficult to escape not only their own liabilities in a joint agreement but those of the other party if they fail to contribute fully. It is therefore very important to know exactly what you are letting yourself in for with joint debt arrangements.
Credit ratings
The law of “joint and several liability” is something that can be difficult to comprehend from a non-legal point of view. Unfortunately, it can also impact your credit rating through no fault of your own.
Linked/associated credit files
If you are successful in obtaining joint debt then the credit files of the two parties would be linked together. As a consequence, if you were to apply for additional finance in your own name in the future, any credit check would take into account the credit rating of the other person. If the other person had a poor credit rating then this would impact your ability to secure finance. On the other hand, if both parties abide by their joint debt arrangements this is beneficial to both credit ratings.
In some ways the idea of linking two associated borrowers not only brings together their joint credit history but is also a reflection of their choice of credit partner. These are factors which lenders will take into account when considering individual applications for finance.
How to deal with joint debt repayments?
It is a fact of life that many couples and partners will at some point go their separate ways and need to untangle what can be a complex financial situation. In a perfect world, both parties would agree to pay their share of financial liabilities until repaid in full. Unfortunately, it very rarely works this way with parties often at loggerheads and unable to come to an agreement acceptable to both.
Finding an acceptable arrangement is in the best interests of both parties and might include:-
- Setting up a joint account into which both parties pay an agreed figure to go towards the joint debt
- Each party taking out an individual personal loan to pay off their share of the joint debt
In the event of a fall out and the likelihood there will be difficulties covering joint debt payments going forward, it is sensible to approach creditors at the earliest opportunity. Make them aware of the situation, what you are doing to resolve the issues and keep them up-to-date with developments. In some cases this can help to avoid additional interest or late repayment charges while both parties come to a long-term agreement.
Structuring future debt arrangements
The emotional and the mental turmoil which often follows the breakdown of a relationship can be magnified where there are issues with joint financial liabilities. There may be a temptation to take on more than your fair share of the debts as a way of bringing to an end a difficult period in your life. The problem is that once you have agreed to cover repayments in excess of your fair share then it is difficult to backtrack. Take a breath, take a step back and look at the situation in the cold light of day.
Work out what you can realistically pay towards the debt, any additional financial outlay in the short to medium term and what the other party could reasonably contribute. It may be that one party has more income than the other on separation and agrees to take on a greater share. There are long-term benefits with regards to maintaining a healthy credit rating in the event that you were to apply for a mortgage or other form of personal finance in the future. However, if the other party is able to take on at least their fair share, but not willing, then you may need to stand your ground.
Summary
When couples get married, live together or even take on a joint business, many people see joint debt as the next natural stage. In the early days, it can seem like you are taking a journey together but if the ship hits the rocks then a difficult breakup may be on the cards. This is when you realise that taking out joint debt does not reflect a 50/50 share of the overall liability and the term “joint and several liability” comes into play.
There will obviously be occasions, such as when applying for a mortgage, when the cumulative strength of both party’s income combined is required. These situations are traditionally covered by a first charge on a property in favour of the mortgage company. However, even this type of relatively straightforward scenario can get very complicated.
If you are struggling to unravel the challenges of joint debt when one party is unable/unwilling to contribute to repayments, you should seek financial advice at the earliest opportunity.