Guaranteeing Someone Else’s Debt

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   Proverbs 6:1-4 (ESV) reads “My son, if you have put up security for your neighbor, have given your pledge for a stranger…then do this, my son, and save yourself, for you have come into the hand of your neighbor: go, hasten, and plead urgently with your neighbor, give your eyes no sleep and your eyelids no slumber; save yourself like a gazelle from the hand of the hunter…” 

   Very few of us today would consider “putting up security” (i.e., signing a guarantee) for a neighbor, let alone a stranger. But what about doing the same for a child?  
 
   Early in my legal career, a couple came to me because they had co-signed a car loan for their son who had defaulted on the payments and had not told them. The car was eventually repossessed and sold, but as is usually the case with vehicles, the sales proceeds were insufficient to pay off the loan balance. (Everyone should know as a consumer that cars nearly always lose value much more rapidly than most car loans are retired by the installments.) The son was not making any effort to pay the “deficiency”; i.e., the difference between the sales proceeds and the remaining loan balance, and now the creditor was coming after the parents because they had guaranteed the debt. 

   When I pointed this out, and told my clients this was simply a foreseeable result of the law and the circumstances, their response was “but we never thought they would really come after us for the debt.” Most likely, they had briefly considered that scenario but decided to dismiss it from their minds because they wanted to accommodate their child’s request. To which I had to tell them “Oh yes, they would, and they are!” and unless my clients were prepared to file bankruptcy or majorly reconfigure their own assets to make themselves judgment proof, that is exactly what they were facing.
 
   So, what should a loving parent’s response be when asked to co-sign for a vehicle or residence? Rather than putting most of one’s own assets at risk for the creditor, a better strategy might be to offer to help the child build a credit record by co-signing for a small loan or a credit card with a small limit, so that the child can have the experience of improving their own credit score and the parents’ exposure is minimized. Also, it may be helpful for the parent to recall and possibly relate the circumstances of their own experience building a credit history; everyone of my generation is familiar with the term “starter home” which typically meant two to three bedrooms, single bath only, on a postage stamp lot in a middle or working-class neighborhood. It has been my observation over the past several years as a real estate attorney that the type of “starter homes” expected by many young couples today include a lot more space and amenities than those from one or two generations ago. The same observation can be made about vehicle purchases.
 
   The bottom line is that it is entirely natural for parents to want to pass good things on to their children. Sometimes the best gift that can be passed on to a child is an attitude of frugality, patience, and delayed gratification.

Attorney David Wells,
McLario, Helm, Bertling & Spiegel, S.C.
N88 W16783 Main St.
Menomonee Falls, WI 53051-2890
Tel: (262) 251-4210
McLario.com

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