Relationship debt is where someone becomes involved in another person’s loan or debt because of an emotional attachment rather than obtaining any benefit themselves.

Many women are asked to sign loan documents as a co-borrower or guarantor, sometimes not realising the full significance of what they are signing. Some may think their signature is just a formality. Others may leave all financial decisions up to their partner. Some may feel obliged to support their partner or adult child or feel it is easier to sign a document than put up with all the pressure.

Unfortunately, they are often unaware that these loan documents are legally binding contracts. If you sign a document related to someone else’s loan, you could end up being sued for thousands of dollars.

It is important to inform and protect yourself in any financial arrangement before you sign any paperwork or documents. Seek independent legal advice if you’re not sure what you’re signing.

Be smart with finances. If you don’t understand something, seek further information or assistance from Fair Trading or one of the other organisations listed on this fact sheet.

Going co-borrower

If you take out a loan in joint names with your partner, it means you have become a co-borrower. This makes each of you responsible for the whole debt. If your partner asks you to sign papers for a new car, stereo or the expansion of their business, be aware that you may be required to pay for the entire amount of the loan if your partner stops making payments. In a default situation a lender will normally pursue the person with the highest income or most assets, or the one who can be found at the time.

There is no legal requirement that you and your partner must both become co-borrowers to secure a loan for one of the parties or that both signatures are required on the loan contract. You do not have to sign any document unless you are borrowing money for your own use or you are going to own a share of the item for which you are borrowing money.

Going guarantor

You may be asked to ‘go guarantor’ for your partner, friend or relative. People have signed a loan as a guarantor believing it was just a formality to help the borrower get credit, vouch for their good character or witness their signature.

But, in actual fact, being the guarantor means that you agree to guarantee that the payments on a loan will be made (even though you are not the borrower or the co-borrower). You are legally bound to pay back what is owed on the loan, even if the borrower can’t or won’t. The lender can sue you for the debt and you could lose your house, savings and other assets.

Going guarantor is generally a risky step. The lender is only insisting on a guarantor because they believe there is a significant risk that the borrower may not be able to make the repayments. Keep in mind that the lender’s assessment is based on their professional experience.

Always read any document before you sign it and obtain independent legal advice before agreeing to act as guarantor.

Questions to ask yourself before going
co-borrower or guarantor

It is important to know the answers to all of these questions before you sign any documents:

• What financial responsibilities am I taking on?
• What is the maximum amount I might have to repay?
• If I do sign, what are the benefits for me (if any)?
• Can I afford to pay off the loan in the future if the borrower can’t?
• What could go wrong to stop the borrower from making the repayments (eg. they lose their job, become sick or injured, their business declines, they have a car accident)?

If you are unsure about any of these questions, do not sign anything and get legal advice. Take your time when making any financial decisions. It can be helpful to talk it over with someone from outside the family to weigh up the risks and benefits.

It may cause tension in your relationship if you insist on making independent financial decisions. But you will face a much bigger problem if you sign something and the debt can’t be repaid. If your relationship can’t cope with an open and honest discussion about money, then going into a loan together can be fraught with danger.

When things go wrong

Relationship breaking down

If your relationship is under stress or your partner has left, your finances will be under a lot of strain. Don’t make things worse by taking on debts for which you are not legally liable. This may include bills that come to your home in their name, such as parking fines or electricity bills. Their debts are not your responsibility. Write back to whoever sent the bill and explain that your partner is liable. Give their address if you know it.

If you have a joint savings or cheque account, your partner may take whatever money is left in your joint accounts. Contact the bank or other financial institution immediately and take action to protect your share of the savings.

It is important to stop any further debts for which you may be responsible. You may have a credit card or store card that is in both names. When a relationship breaks down and your partner leaves, they may continue to use the credit to accumulate debts. The statements may have come to your home and you may be liable for the debt, including interests on outstanding amounts. Find out the extent of debt from all creditors. Often debts may have increased without you knowing about it.

In cases where there are joint credit or store cards, contact the card providers as soon as possible to ensure you are not left with liability for your partner’s spending.

Getting behind with payments

When you are involved in a joint debt, warning bells should ring if you start getting behind with your payments. It doesn’t matter if it’s your credit or store card, car payments or your mortgage. If you are having difficulty keeping up payments with any of these you should talk to your credit provider about your situation. They may agree to vary your payments by paying less per month and stretching payments over a longer period. They may even allow you to suspend payment until you are able to resume full payments.

Keep a copy of all correspondence you may have with your credit provider in case your version of events is ever disputed.

However, if you are having difficulty making payments due to unforseen circumstances such as illness, job loss or some other reasonable cause and the credit provider is unwilling to assist you, contact Fair Trading or one of the other organisations listed on this fact sheet.

Receiving a default notice

If you have made an arrangement to vary the payments but don’t keep to it, or if you fall behind and don’t make any arrangements with the credit provider, you may receive a phone call from them requesting payment. If you do not pay, you will then receive a default notice stating that you are behind

with your payments. Do not ignore this notice, you may only have limited time to rectify the default before legal action commences.

It may still be possible to negotiate a settlement with the lender. If that doesn’t work out contact Fair Trading or one of the other organisations listed below.

Legal action

Legal action is likely to follow if you ignore warning letters or fail to negotiate with the lender. If you are unable to pay, legal action can include:

• a ‘garnishee order’ to deduct money from your wages and/or bank account
• repossession of any items which are security for the loan (such as a car or home)
• a Writ of Execution, which allows a bailiff (sheriff) to come to your home and list property that could be seized or sold
• applying to make you bankrupt.

Other useful contacts

Banking and Financial Services Ombudsman
Tel: 1300 780 808

Consumer Credit Legal Centre
Tel: 9212 4111

Credit and Debt Hotline
Tel: 1800 808 488

LawAccess
Tel: 1300 888 529