Are You Responsible for Paying Someone Else’s Debt?

You didn’t spend the money, but that doesn’t always mean you don’t have to pay it back. Understanding when this occurs can help you avoid negative financial situations or, in the event you are taking on the debt, how to proceed. In many cases, seeking legal counsel can be extremely helpful. General Electric Credit Union (GECU) members can schedule a no-cost consultation with a legal advisor.¹  Use the information below as a baseline, then meet with a dedicated legal advisor to go over your options. 

Co-signed accounts

If you co-sign on a loan of any type or credit card, you have a joint obligation to repay the debt. By co-signing, you're agreeing that you will also be responsible for the debt owed to the lender. If the other person on the loan stops making payments, the lender will likely look to you for repayment. Below are a few scenarios:

• Your friend had sparse credit history and asked you to co-sign on a loan for a new car purchase. You have a verbal agreement with your friend that they are responsible for making payments on the vehicle. A year later, you have a falling out and they stop making payments. Unfortunately, the verbal agreement you made has no bearing on the lender leaving you liable for the balance of the debt as a co-signor. 
• You co-sign on a dependent’s credit card to help them build credit history. They neglect to make payments for several months; eventually, their account goes to collections. As a co-signor, you are also financially responsible for the debt.  
• Your parents wanted to refinance their home and asked you to be a co-signer for their new mortgage. If both parents pass away before the home loan is paid off, you are still responsible for the loan. The lender may require you to re-finance for a new mortgage to gauge your ability to make payments on your own. If you can’t qualify alone, they may require you to get another co-signer. 

In any of these situations, it’s important to get payments squared away ASAP, as a delinquent account could tarnish your own credit score. Meet with a legal advisor to verify your liability. Then, consider options like refinancing or consolidating debt. Both options may help you lower the amount of interest you have to pay over the life of the loan or card balance. 

Marital debt

You are not responsible for any debt your spouse accumulated prior to marriage. For example, if they took out student loans before you said, “I do.” An exception would be if you co-signed or were a joint owner on the account. 

Debt accumulated during marriage is a different story. Certain life events, like divorce or the death of a spouse, will impact your liability. 

Marital debt during a divorce 

You’ll need to understand your debt liability in the event you and your spouse decide to dissolve the marriage. This may differ depending on state law.  States have two main ways of dividing marital property: equitable distribution or community property.

• Ohio, Kentucky, and Indiana are equitable distribution states. This means marital property isn't automatically assumed to be owned by both spouses and therefore should be divided equally in a divorce. Generally, the spouse that created the premarital debt will be responsible for that debt separately. Debt created during the marriage will be divided “equitably” between the parties. During divorce proceedings, a judge will review the liability of each spouse (for example, if you were a joint accountholder or co-signer), the financial circumstances of each spouse (your ability to make payments), and how the debt was acquired (e.g. they may look at debt accumulated through meeting basic needs differently than gambling debt). They will use these factors to determine an equitable distribution of debt, which may or may not be 50/50. Similarly, if there is financial misconduct or a premarital agreement, the division may not be 50/50. Notwithstanding the general principals above, each state has its own set of laws that will be applied to a particular case and impact the end result. 
  • Note: An order from a domestic relations court requiring one spouse to pay a debt in full when both are obligated on the debt will not in and of itself alleviate either spouse from their obligation to the lender.  The lender would still likely seek to recover from both parties. When that happens, the spouse who wasn’t ordered to pay the debt can seek recovery from the other spouse for any money the lender recovers. 

Marital debt after a spouse passes 

Losing a life partner can be incredibly hard. GECU is here to help you navigate this difficult time and settle your loved one’s accounts. In general, outstanding balances become the responsibility of your loved one’s estate if they were the only borrower on the account. If you are a co-signer, GECU can re-qualify you upon request. As a co-signer, you assume responsibility for the balance regardless of whether you choose to re-qualify. Please refer to our Guide for Settling GECU Accounts for further information. 
 

We hope this guide helped you better understand some of the situations in which you may be on the hook for someone else’s debt. Your situation is unique, and it’s important to seek legal counsel for a clear picture of your debt obligations. Schedule a consultation with a legal advisor, available through Wood + Lamping LLP. They’ll help you determine whether you’re responsible for paying and how to proceed.