Safe Ways to Help out Financially
Most people are more than willing to help out a friend or family member in trouble. We all want to say, like the song: “You have a friend in me.” Sometimes we help by providing free childcare or offering a ride to work or appointments. Other times we cook a casserole or buy some groceries for a friend who is having financial trouble and has run out of money before the month-end. These are all positive ways of helping friends safely – things we can do without risking our financial health.
If you can afford to do so, gifting money to tide someone over is also a good option. By making it a gift, you know exactly how much you will give and know you can afford it. Because it is a gift, you have no expectation of being paid back. This avoids the hard feelings that happen when a loan goes unpaid. Friends and family are too important to risk your future relationship with them.
It may appear that co-signing a loan for a friend is both a safe and inexpensive way to help. It sounds like it doesn’t cost you anything – except a signature. The truth is that the signature can cost you a lot. There is tremendous risk involved in co-signing a loan.
Let’s talk about being a cosigner for your grandson. Banks and other financial institutions are in the business of risk management. If they feel that the risk in loaning funds to your grandson is too great they will require a cosigner. If you are asked to cosign a loan the first question you should ask yourself is, “Can I afford to make the payments if my grandson is unable to do so?”
If the answer is no, you should not co-sign the loan. If your grandson, who applied for the loan, defaults on the loan, the bank will turn to you for the payments. There are lots of very good reasons why he might not be able to fulfill his commitment, and then you will be left with the sole responsibility. If you are not able to make those payments it will negatively affect your credit rating or could eventually lead to your wages being garnished – all for someone else’s loan!
Let’s look at this from the perspective of the borrower, with you being the one that needs the loan. The bank will not give you a short-term loan. If you only had a few thousand dollars you could likely make it to next month as you are expecting a raise at work. You know that the amount will not cover your entire debt load, but it would be enough to get you through this tough patch. Your good friend just sold his house, maybe he will loan you the funds to get by.
Being the great friend that he is, he loans you the money. More than three months goes by and still no raise. You can’t keep up with your other debts, and a creditor is threatening to garnish your wages. You decide that you must file a Consumer Proposal. Your friend is now an unsecured creditor and will have to wait to receive about 20 cents on the dollar, in six-month increments.
It would have been better to either borrow enough to put together a lump sum proposal to all of your creditors (if your friend could wait to be repaid), or to have not borrowed any money at all. The loan from your friend didn’t solve your problem, but it has likely lost you a friend.
Registering Someone Else’s Car in Your Name
Say you have a great driving record so it is inexpensive to register vehicles in your name. A friend asks you to register his vehicle in your name so it will be cheaper. Lots of people do this. There are several significant risks involved, however.
When you are registered as the owner of a vehicle of which you do not have the care and control, you leave yourself open to liability if the driver of that vehicle is unlicensed, reckless, or driving impaired. There are lots of people who have ended up in Bankruptcy because of it.
Also, red light camera tickets are the responsibility of the registered owner of the vehicle. You may trust your friend to pay those tickets, but what if they can’t or won’t? You may be left with a debt you cannot afford – one that is not dischargeable even in a Consumer Proposal or Bankruptcy.
Let’s look at another example. You have registered your boyfriend’s vehicle in your name. As time goes by, your debt load becomes unmanageable and you decide that bankruptcy is your only option. The car is still in your name and without any evidence to the contrary, the registration is proof of ownership. That car, which appears to be your car, is now an asset in your estate. But you already have another car – one that you need to get to and from work, so you claim it as an exempt asset that you will keep in the bankruptcy.
You can only claim one vehicle as exempt, so your boyfriend’s car cannot be considered exempt. The Trustee will need to realize its value for your creditors. There are options so that you (or your boyfriend) can keep the car, but they will be at a cost – the value of the vehicle. Any savings gained from getting cheaper insurance is now lost.
If In Doubt, Seek Professional Help
The point I am trying to get across is that people generally mean well and do want to help their friends when they are in a pinch. Sometimes that help causes unforeseen problems for both the lender and the borrower.
If you are struggling with a decision about how to help out a friend or family member, you should contact a Licensed Insolvency Trustee (LIT) for advice. An LIT will have the experience necessary to help you discern the pros and cons of whatever assistance you are considering, and may be able to make some suggestions for a safer way to help out.
In the same way, if you are struggling with debt, and considering asking friends or family for help, an LIT can help you sort out your options. It is likely that asking your fixed-income grandparents to co-sign your loan is not a good idea; nor is cashing out your RRSPs which would have been safe from your creditors, even in a Bankruptcy.
Even getting a second job can have tax implications if not done correctly. As Licensed Insolvency Trustees, it is our job to help you assess your situation and look at all of the options available to you. A Consumer Proposal or Bankruptcy is not the only option, although sometimes one of those can truly be the best option.
Contact an LIT to find out your options before you take drastic steps that might end up hurting family and friends. You could have many options, some as simple as knowing where your money is going and learning how to reallocate your spending.
If your grandmother really wants to help maybe she could help fund a proposal to your creditors. Let a trustee become the friend you turn to on your road to financial wellbeing.