Legal Responsibility to Repay a Debt

Who should be Liable for Debts Incurred?

Mar 23, 2009 Wei Yin Wong

Those who have borrowed money, taken out a loan or incurred a credit card debt have a legal responsibility to repay the debt.

Sometimes, people aren’t sure if they are in debt, or if they are legally responsible for someone else’s debt. A spouse or a parent, for instance, may feel they are somehow legally responsible for settling the debt of his partner or child. Here is a quick definition of debt and the legal responsibility to repay a debt.

Defining Debt

A good understanding of basic debt terms is necessary when defining debt. A person is in debt when he borrows money from someone and has to repay the amount with interest within an agreed specific time frame – weekly, bi-weekly or monthly. The borrower is called a debtor while the lender a creditor. Debts can come in many forms, including credit card bills, personal loans, mortgages and car loans.

Sometimes, when a debtor fails to make payments as agreed, the creditor may engage the service of a debt collector to collect the debt. The debt collector gets a percentage when the amount is finally recovered or the debt collector buys the debt at a discount from the creditor and keeps the amount collected.

Who is Responsible for a Debt?

Only the person who actually owes a debt has the legal responsibility to repay the debt. That means if a person’s spouse, partner or child has borrowed money, bought something with finance or has a huge credit card debt, it is not that person'slegal responsibility to repay the debt. The creditor or debt collector cannot demand repayments from family members of a debtor. If a family member has a serious debt problem, encourage him to consult a financial counselor as soon as possible.

Becoming a Guarantor or Co-Borrower

Sometimes, people do become legally responsible for other people’s debts because they have agreed to be a guarantor or co-borrower for a big loan. Think very carefully about agreeing to be someone’s guarantor or co-borrower no matter how close the relationship is. There are two reasons for this. A guarantor or co-borrower doesn’t really benefit from the loans. Worse, he can easily end up being liable for the entire amount borrowed if the person who took out the loan defaults on his repayment!

Those who have consented to be a guarantor or co-borrower under duress, pressure or through fear, or who did not really understand the nature of the commitment made should get legal and financial advice. In Australia, free and independent financial counseling services are available in every state. Visit the Australian Financial Counseling and Credit Reform Association (AFCCRA) for more details.

Anyone who has borrowed money has the legal responsibility to repay the debt – not his spouse, partner or parents. However, a person can be liable for an amount of money borrowed if he is a guarantor or co-borrower for a loan. If you’ve been asked to be someone’s guarantor or co-borrower, think through it thoroughly before agreeing to the suggestion.

Found this article useful? Read also Understanding Debt, Dealing with Debt Collectors and Tips for Disputing a Debt.

Reference:

Australian Securities and Investments Commission (ASIC) website

The copyright of the article Legal Responsibility to Repay a Debt in Personal Budgeting/Finance is owned by Wei Yin Wong. Permission to republish Legal Responsibility to Repay a Debt in print or online must be granted by the author in writing.

Borrowers are Liable for Debts Incurred