Liable for someone else’s debt? Consider this

When a loved one or family member is in debt, it may well affect you indirectly. However, in some instances, you may be held directly liable for someone else’s debt.

We ask the experts to outline some important factors to bear in mind, steps to take if you find yourself in this situation, and helpful debt-reduction, budgeting, and other strategies.

Tip: Juggling multiple repayments? Find out if you qualify for debt consolidation.

Consider your legal agreements

You’re not automatically liable for someone else’s debt unless specific conditions apply, explains Erin White, a director at Crue Invest financial consultants. 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 loan with a spouse
• If you have co-signed a loan with someone
• If you stand surety for someone, or sign a formal debt-settlement agreement

Under these circumstances, you’re tied into a legal agreement, making you personally liable for debts that may have been incurred by another person.

Know your marital regime

It’s important to understand the specifics of your marriage contract, says White.

“If you’re married in community of property, all your assets and liabilities are combined to form a single joint estate,” she explains.

“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 elaborates.

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.

Johannes Burger, an independent financial adviser at OBIN Wealth Management, says it’s important to realise that marrying without an antenuptial agreement means defaulting to being married in community of property.

“How you marry is critical to your financial story, which is why you need to have your affairs in order and understand the financial consequences of your choices,” he says.

Be transparent about debt management

If you do find yourself saddled with someone else’s debt, the first step is to have an honest conversation with that person, and be transparent about all financial matters.

“This can be difficult for the partner in debt as they may feel shame or embarrassment, so address the matter without criticism or judgement,” advises White.

An open conversation will set the groundwork for putting strategies in place to manage the debt.

White recommends going through six months’ bank and credit card statements to assess spending patterns, and then creating a clear, realistic budget both parties can stick to.

“Review [the budget] at least once a month and make adjustments as needed. Check in with one another on an emotional level to remain accountable and motivated to get out of debt,” she counsels.

Put effective strategies in place 

Once you’ve decided to act, choose the debt-reduction strategy that will work best and motivate you to see it through, advises White. Two options are:

• The “snowball method”. Pay the lowest balance off first for a confidence boost. The downside is that you may end up paying more if you tackle low-interest debt before high-interest debt.
• The “avalanche method”. Pay your high-interest debt first. The disadvantage is that it could take longer to see your first debt cleared, especially if the amount is large.

If you’ve become responsible for your partner’s debt, agree on how you will manage household expenses and who will be responsible for bills.

Consider setting up a household account from which joint expenses can be paid, while maintaining separate personal accounts.

Consult a financial adviser for an objective view of your finances. They can help you to set goals and understand the complexities of financial products and contracts.

Seek professional help for your partner, if necessary

You can help your partner deal with debt, but it’s not your responsibility to bail them out.

If your partner is burdened with unmanageable debt, they should consider debt counselling.

“This should be done with a clear understanding of the impact it will have, however. For example, they won’t be able to access new credit under debt counselling, and they’ll be tied into a legal process,” White explains.

If the debt results from reckless or addictive behaviour, it’s also a good idea to consult a psychologist for counselling.

Tip: Missed payments can affect your credit score. View your credit score here.