How is Co-Signed Debt Treated in an Insolvency?
"Joint and several"
Much of the housing boom in Canada was built on co-signing. In the rush generated by FOMO, people did anything possible to get mortgage approvals over the line. The results of this are starting to appear in our meetings with clients.
This post’s intention is to demonstrate what “joint and several” means as a legal concept (ie, co-signing). The following is fictional but based on many meetings with people caught up in the real estate market mess.
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Example:
Condo, bought in 2021; value dropped to $560,000
Mortgage 1 $520,000 (co-signed w/ brother)
Renovation loan (secured) $90,000 (co-signed with brother)
Underwater by approx. $78,000 (factoring out selling costs)
The brother doesn’t live there – he “only” co-signed to get his brother approved, and to share in any appreciations over time. (I guess they were going to split the cp gains exemption??)
Unsecured debts: $85,000
- Includes an instalment loan of $9,000 co-signed by brother
- Also includes a bank student line of credit of $19,000 co-signed by brother
Here’s how this works in insolvency:
- Either keep the condo or sell it; the negative equity means no impact on either a bankruptcy or a consumer proposal
- Any shortfall if selling is unsecured, and then gets added to the total unsecured debt (effectively doubling it in this case); reference my Macleans article on this matter here: https://macleans.ca/economy/economicanalysis/heres-how-canadians-could-walk-away-from-their-homes-if-house-prices-fall/
- The insolvency clears brother 1 from the debts but not the co-signator;
o That includes the reno loan shortfall (and any 1st mortgage shortfall if it sells for even less)
o It also means the student t line of credit and the instalment loans both become the legal duty of the co-signor to repay
o “Joint and several” means the co-signor is on the hook for the full amount owed, not half
What this ends up meaning in real life is that the person filing the insolvency, although legally removed from the debt by virtue of the bankruptcy or proposal, is often (almost always) morally obliged to pay the minimums on the co-signed debt. This could mean hundreds of dollars still to be paid every month. (Either that, or you really don’t like your brother and stick him with the debt.)
Never co-sign.