It always amazes me how generous some people are when it comes to lending their name or credit to a friend or family member. I understand why it happens. It could be a business venture, cosigning on a car, or sometimes even a home.
I heard a story recently about a friend of a friend who had taken a home equity loan in order to buy her daughter a modest home and help her daughter pay off a student loan and car loan. The agreement was that her daughter would make the home equity loan payment in exchange for this help her mother provided. From the outside looking in, you can probably see that this plan was fraught with potential pitfalls. What if this woman's daughter lost her job? What if she became sick or injured and couldn't work any longer? What if she simply decided not to make the payments?
For whatever reason, this generous mother overlooked all of these possibilities and took her daughter's word that she would pay. So far, she has. Here is the problem she didn't anticipate: Mom is now considering bankruptcy due to her own mounting debt. If she plans to keep her own home, she will be required to maintain the payments on that home equity loan. Here's the hitch - when a person files bankruptcy, any money that is owed to them becomes property of the bankruptcy estate. This means that the bankruptcy trustee appointed to administer her case will step into her shoes as the person her daughter owes the money to.
So, if she files bankruptcy, her daughter will be required to make those payments to the bankruptcy trustee and mom will still have to make the home equity loan payment, which is significant. On top of all this, neither mom's home nor her daughter's home are worth anywhere near what they were worth at the time the loan was taken. What incentive does the daughter have to pay? Well, if she doesn't, the bankruptcy trustee can sue her for payment. What incentive does mom have to pay? If she doesn't, she could lose the home she's lived in for the past 25 years.
I can't count the number of clients I've had over the years who financed a vehicle to help out a friend, cousin, child, or parent, who ended up with the obvious problem of missed payments by this loved one. I'm sure the loved one never intended this to be the end result, especially since my client was so nice to agree to finance the car to begin with. Nonetheless, life happens and now my client feels backed into a corner with bankruptcy being the only option because their paycheck is at risk of being garnished due to the repossession.
The only way to avoid these types of situations is not to mix family and finances to begin with. As parents, we often want to give our children any help we can. We want the best for our friends and family members. But in providing this kind of help we may be sacrificing our own financial security. On top of that, if the unexpected happens to us, we may be putting our loved ones at risk if we are ever forced to seek bankruptcy relief. No one should fault you for protecting your own financial wellbeing. The best policy if asked for help that puts you at risk is to say, "I wish I could, but I just can't." If you can say these words, you'll never have to suffer the regret many others have, and you'll preserve your relationships by keeping good boundaries.
• Denise K. Aguilar is an Ahwatukee attorney whose practice focuses in consumer and small business bankruptcy. Reach her at (480) 455-1881, or visit www.aguilarlawonline.com.