08 Jan Hawryliw: good intentions aside, draft an agreement when co-signing

Co-signing a loan for a family member starts with the best of intentions, but can lead to unexpected financial woes, bad blood, and legal battles, Barrie civil litigator Scott Hawryliw tells AdvocateDaily.com.

Hawryliw, founder of SRH Litigation, whose practice areas include personal injury, commercial and labour law, says many Canadians are still unsure about the implications of debt.

“When you get a secured loan, such as a mortgage or car loan, it’s secured against an asset,” he says. “But, if you don’t have any assets, and don’t have the income to support the loan, you need a co-signer.”

Hawryliw says these individuals attach much more than their names when they become party to someone else’s loan.

Possible repercussions include:

• All the amounts owed by the borrower also show as being owed by the co-signer, conversely increasing their recorded debt load.
• They may also be liable in lawsuits, and their own property could be put at risk as a result.
• Co-signers are seen as a safety net, and payments not made by the borrower become their responsibility.
• A co-signer’s credit record will be affected by any missed payments by the borrower.

Hawryliw says this could cause a denial of credit when a co-signer needs to borrow, or make a purchase of their own. It can also cause long-term damage to his or her credit rating.

Since most are family members, this can lead to disputes, and severed relationships, he says.

“I see cases where the mother and father co-sign for their child, but a few years later they want to buy a cottage or refinance their house, and that debt interferes with their ability to do that,” Hawryliw says.

The sale of the house can cause additional problems.

“I’ve seen instances where B and C support A in getting a mortgage for a house,” he says. “In these cases, the bank usually wants all three names on the title. The problem arises down the road when C wants to get off the title, or when A wants to sell and B and C (or their heirs), who haven’t put any money or work into the house, turn up and say, ‘Hey, we get a third of what you make on the sale.’”

With their names are on title, they have an argument for a share, Hawryliw says.

“Unless you can produce a document setting out the terms of the arrangement, then that claim could stand,” he says. “If you have no documentation you might lose.”

Getting an agreement drafted is as simple as going to a lawyer, but often people fail to do that, Hawryliw says.

“It’s critical because B may expect that because he put in all the work building an addition on the house, and supplied all the materials as a contractor, that he has a rightful claim,” he says.

The important thing for all parties is to spell out the specifics of their loan arrangement so that at the time of sale each party understands what to expect.

In the event that those on the title can’t agree, the parties can go to court and make an application under the Ontario Partition and Sale Act to force the title to be divided, and the interest sold. However, that option is quite avoidable, Hawryliw says.

“I don’t see any cases in my office where there was a previous agreement drawn up by a lawyer and signed by the parties.”