Q: My husband and I still owe $44,000 in student debt between the two of us. We each have our own credit card, and I pay mine off in full every month while he owes $16,000 on his. We own our home together and have maybe $85,000 in equity today. My husband wants to use that equity to pay off our student loans and his credit card debt. I’m not sure that’s a good idea. Should we roll his credit card debt into a mortgage that we both co-signed? What impact does that have on my credit rating?
A: Consolidating your husband’s debt into a second mortgage is a risk. Many couples today bring their own personal debts to a union. Some of this is due to marriage-age people carrying more debt generally than they used to, and some is due to the fact there are more second marriages or blended families. It is fairly common that you are legally joint on a major asset — your home — despite the unequal personal debt between you. While consolidating your debt into a new loan can be a good way to save on interest charges, there are implications in rolling both of your non-joint debt into a second mortgage you each co-sign.
Today your husband’s debts are his alone. If he defaults on his payments, his creditors cannot pursue you for payment. But if you agree to consolidate his debts into a joint mortgage you are now liable personally for those debts. And that means 100% legal responsibility – not 50/50. This may not be a good solution if your second mortgage payments are still a stretch financially between the two of you.
If you were both to combine all your unsecured debt into a second mortgage, that would be a $60,000 loan for which you and your husband would be equally responsible as a result of co-signing. Assuming you can qualify for a second mortgage, which may not be feasible in today’s market, your interest rate on this loan will be higher than on your first mortgage because your lender will be assuming greater risk.
You would first want to ensure that you have the repayment capability for this new loan, on top of all your other fixed monthly payments. For a $60,000 second mortgage at an assumed rate of 5% interest, amortized over a 10-year period, it would likely cost you about $636 a month. Can you be certain that both you and your husband can afford this extra monthly payment? Recent polls have indicated that many Canadians could not afford an increase to their monthly expenses of far less than this amount.
Something we see often is an ‘event’ of some kind which pushes people over the edge financially, like a job loss or an unexpected illness. What if your husband is suddenly unable to contribute towards it? Again, you would be on the hook for the entirety of the mortgage payment.
Consolidating debt, whether student debt or credit card debt into a second mortgage also means putting an asset at risk, since your second mortgage would involve borrowing against your home. Are you willing to risk losing your home to deal with your husband’s credit card debt which appears to be the major financial problem?
As you are currently able to keep up with your debts, it may not make sense to risk your share of the home equity by collateralizing your manageable debts against your home. If you can also comfortably make payments on your student loan debt, I would suggest sticking to this plan until your student debt is paid off.
As an alternative, your husband may be able to deal with his personal debt through an affordable debt consolidation plan like a consumer proposal, rather than a second mortgage.
To be eligible to file a consumer proposal, a debtor must be insolvent. This means they either owe more than they own, or they cannot keep up with their debt payments as they come due. If your husband is struggling with excessive credit card and student debt, he may qualify.
In this case, however, your husband has a substantial asset that his creditors would expect to gain value from: his share of the equity in your home. The equity in his home is sufficient to cover all his debts in full. While it is possible to file an interest-free consumer proposal for 100% of your debts, whether this is financially feasible is too complicated to determine without a closer look at his budget.
Your husband’s situation is also complicated by his student debt. It’s important to note that student loan debt can only be discharged with a consumer proposal if you have been out of school for seven years or longer. Student debt is a complicated area of insolvency law; however, there may be options to allow your husband to deal with all his credit card debt and some or all of his student debt through a proposal.
The one major advantage of a proposal for your husband is that he would obtain debt relief, without having to give up security in your home. In addition, if your husband does file a consumer proposal, while it would affect his credit report, it would not affect yours.
This is a complicated scenario and one that should not be solved quickly and without a full understanding of all the options. I recommend you first talk with your mortgage lender to see what a second mortgage may cost. Then book an appointment with a Licensed Insolvency Trustee so you can compare the options, and risks, of consolidating and assuming liability for your husbands debt, with requiring your husband to deal with his debts on his own.
Scott Terrio is Manager, Consumer Insolvency at Hoyes Michalos & Associates Inc., Licensed Insolvency Trustees at Hoyes.com. Follow him on Twitter @ScottTerrioHMA