A joint debt is created when two or more people borrow money from the same lender at the same time under a joint contract. Most joint debts are taken out by just two people such as a married couple, a co-habiting couple, a parent and an adult child, two adult siblings, two business people who have set up as a formal business partnership or indeed any two consenting adults who have something in common, be it family, personal or business. The joint loan imposes contractual obligations on each of the joint borrowers and this is part of the reason that lenders like to have joint signatories on funds that they lend.
Joint loans are attractive to the financial institution mainly because each of the signatories to the personal loan contract is individually liable to repay it. If, for example, two business partners obtain a joint loan and if one of them dies, the lending company can go after the other person looking for full payment of all of the outstanding repayable balance of the loan. This is the principle normally known as ‘joint and several liability’. What this basically means is that according to the laws relating to agreements, each of the borrowers is equally liable to settle the debt in whole. If any one of the borrowers can’t or won’t pay back the borrowed funds as and when it falls due in accordance with stipulations of the loan contract, then the loan provider can go after the other borrower for repayment of 100% of the loan and not 50% of it.
Joint liabilities can be secured such as when a mortgage is taken out by both parties on a mutually owned property or unsecured such as a joint current bank account. Providing both parties signed the initial credit contract when the liability was incurred, then they are both individually liable for settlement. This offers the lending company increased protection and assurance of settlement if an unfavorable incident should occur impacting either of the debtors. Such an negative incident could possibly be ill-health, serious accident or even the demise of one of the debtors. An event which affects the two borrowers might for instance be the break-up of a business partnership, divorce or separation. Because each debtor could have a completely different outcome after such an event, the lender is reasonably entitled to seek settlement from the borrower who is best placed to pay up.
One more negative situation that may transpire is the insolvency of one of the joint borrowers. If, by way of example, one of the joint borrowers should turn out to be insolvent and as a consequence should enter into an Individual Voluntary Arrangement (IVA) and the other joint borrower continues to be solvent, all of the unsecured liabilities of the insolvent individual is required to be entered into the IVA including the total outstanding unpaid balance of the joint unsecured debt. Should the IVA be accepted, creditors will expect to obtain dividends on all of the unsecured liabilities in the IVA, including the joint unsecured debt. Nevertheless, the solvent person, who is not in an IVA, is still expected by lenders to keep servicing the joint liability as well in keeping with the terms of the credit agreement or as renegotiated by the solvent individual directly with the loan provider. The lender of the joint loan will often get repaid from two sources: returns from the IVA and regular repayments from the solvent party. If the debt is not wholly paid back by the conclusion of the term of the IVA, the co-borrower who was the solvent party will remain entirely accountable to pay back the entire unpaid balance.
Other examples of joint and several liability are secured loans taken out by two (or more) parties; tenancy agreements entered into by two (or more) parties; HP agreements entered into by two (or more) parties; council tax and certain utility agreements where both parties sign up. Oddly, many credit card agreements do not incorporate joint liability, even though two (or more) parties may be card holders. This is because only one of the card holders was a signatory on the original credit agreement but the lender decided to offer the borrower the facility of making the borrower’s spouse or partner a second card-holder.
In a nutshell then, joint liabilities must be included in an IVA, regardless of the wishes of the solvent party. One way to avoid this would be for the solvent party to clear the debt in its entirety prior to the IVA commencing.
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Tags: Debt, Debt Management, insolvency, Joint debt