Lending money to family or friends is tricky terrain to navigate both financially and personally. Before co-signing that loan or writing that cheque, make sure you take measures to reduce your financial risk and avoid lasting damages to the relationship.
If your efforts to help someone you care about lead to disagreements or put your own finances in disarray, then saying ‘no’ is the right thing to do. Licensed Insolvency Trustee, Matthew Fader, sees people who have had lasting consequences when co-signed loans have defaulted or money has not been paid back. He gives his advice on:
- How to protect yourself when lending money or co-signing loans
- What to can do when the money you lend is not paid back
- The percentage of the loan you are liable for when you co-sign
- When a request for money gives you an opportunity to get involved with their finances
- Possible lasting consequences to your finances when things go sideways
If you are in financial trouble, speak with a Licensed Insolvency Trustee. They are federally regulated and approved by the Canadian government. With their extensive knowledge of financial services, they will give you honest advice and help you find a solution to your debt problem.
Read the Transcript
Wayne Kay 0:04
Welcome to another edition of Debt Matters podcast where we can help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay.
And today we’re going to talk about how to say no to people asking for financial help, because it can often put a tremendous strain on you. And why is it so hard to say no? What are the lasting consequences? If you say, Yes, is co-signing a good idea? Now, what do you do if people don’t pay you back? Is there any way that you can get that money back eventually or not? And how do you ensure that your money is safe?
This is what we’re going to learn today from Matthew Fader from Allan Marshall and Associates, Licensed Insolvency Trustee with office locations in Alberta, New Brunswick, Nova Scotia, and Prince Edward Island. Matthew, thanks for being here.
Matt Fader 0:58
Thanks for having me.
Wayne Kay 0:59
Well, this is a great topic, because there’s so many people that are always willing to help and they help when they shouldn’t. Why is it so hard for people to say no?
Matt Fader 1:10
A lot of it has to do with just being a yes person. No is one of those very hard words to say. Just like the word help is often a very hard thing for people to say. So somebody comes for you to help. And you say, Well, this is going to create some problems for me, but I would hope they would do the same for me. So let’s put some Karma out there or whatever it is, and away they go.
I can’t speak for what it’s like as a parent. You probably could Wayne, I have cats, I don’t have small humans. I can only imagine the difficulty and I see it when I deal with parents, you’ll die for your kids. So of course, you’ll help them out of a bind, of course you’ll help them cosign that loan, or do whatever it is that’s going to help them out.
I wish I didn’t see those people coming into my office. This is one of the problems that we run into is people that just get in over their head. And they’re getting in over their heads simply because they say, Well, I’ve been supporting family or friends on my limited income. So, it’s a hard thing for people to do. And you know, a lot of times I’m just like, Well, why don’t you send your kids to see me instead of you coming in the door?
Wayne Kay 2:38
Yes, I actually just saw something recently, saying the average amount of money that parents help their adult teen or their adult children with is roughly like, $800 or $900 a month that they help out with.
Matt Fader 2:55
Yes, I can see that. When we’re talking about in the last podcast, parents with children – my parents are boomers. So I don’t know how old you are, because you always have your camera off. So I don’t even know what you look like, but that’s okay. My parents have a real hard time comprehending what life is like now, for people like me, or for people who would be like my kids.
They went out, they bought their first house. It was the equivalent of a year and a half of the value of their stuff, their salary. Oh, I paid 17 grand for my first house, and I made $900 a month. And I’m like, okay, that logic doesn’t add up.
Now with house prices, kids are really like, Well, how do I afford homeownership? They can’t. And so they have to rent. I don’t know what rents like where you’re at, but they are high around here. There’s a housing crisis at the rents through the roof. And then you couple that off with issues with employment. People trying to work what’s called a living wage, and having three or four roommates just to be able to afford rent. So it’s not really a surprise.
It’s not through the kids just being kids. It’s the fact of saying, life is expensive. And the parents are sitting there and they say, Well, you know, we have access to cash and assets, and our kids are struggling, so let’s help them out. There’s nothing wrong with that. That’s what a parent’s supposed to do. You love your kids, you’ll do anything for them. Right.
Wayne Kay 4:33
But when things go sideways, and you see that, what is that lasting consequence of when things go sideways?
Matt Fader 4:41
Well, that’s exactly it. It’s because it’s not the kids that are the ones that are in my office, it’s their parents.
Wayne Kay 4:50
So the kids get into financial trouble, they go to the parents, the parents then put themselves in financial trouble.
Matt Fader 4:57
100%. Although yes, I get the line of credit – so sure, I’ll pay it off. I’ll make your student loan payments for you while you’re unemployed or I’ll bail you out of this. You made a dumb decision here, growing up, it’s part of life. And it is right.
I’m not saying it to slag on parents or slag off kids, we all make mistakes. But I’ve seen it time and time and time again, where the first time they ask for help it is difficult. If you swallow your pride. But it always tends to get a little bit easier and easier, the more that you do it. And that’s where I see the real problem that comes in – with personal lending, especially in the inability to say no. It is the fact that it just gets easier and easier for them to keep asking, and then you just feel worse and worse and worse for saying I don’t, I can’t say no to my kid.
It’s a tricky spot. I don’t envy anyone in that position. As I said, I’m not a parent. Someday, maybe I don’t know. And I would have the same problems, because I’m sure that that kid would have me wrapped around their finger too. I’m realistic that way.
Wayne Kay 6:16
Well, we played money games, education games from when they were basically born, so that they wouldn’t have these situations and have it easier. So you have to educate your kids by listening to podcasts like this on what you can do to help set them up. And of course, things will go sideways every once in a while. But more so than even, with your family situation. You might even see this with parents needing a hand nowadays.
Matt Fader 6:46
Oh, absolutely. 100%. It goes both ways. Especially people that are retiring. They’re like, Oh, well, I paid in my CPP and my OAS and I’ve done the right thing. I’ve worked my 30, 40, 50 years, and now I’m retiring. And then they retire. And they look at what they’re getting for their CPP in their OAS, and they’re like, it’s like $1,500 a month, how do I survive off of this?
And then if they’re retiring with debt, then of course, they’re that much further crushed. They say, I have access to less money, and therefore, I can’t afford to survive. Then it ends up going the other way, the kids take them in. The kids help support the bills to help pay the debt off. And so it’s a two way street.
I do have parents, so I can’t speak to what it would be like to have kids asking me for money. I do have parents, and I know if my parents came to me and said, we’re in a rough spot, and we need some cash. Absolutely. You’re my parents and if there’s consequences, I’ll deal with them, because I’m a grown up.
But I think the bigger lesson to be learned is there’s a big difference between saying I’ll hand out some cash to solve this problem, versus I’ll be involved in helping you solve this problem so that we can make sure it never happens again. Because there’s nothing that says that you’re lending doesn’t have to come with terms. I will lend you this money but you and I were going over your budget. I want to see your credit card statements. I want to see this, I want to see this. That’s the price of that loan.
Wayne Kay 8:39
Right. So that’s fair. That’s fair to do.
Matt Fader 8:41
Yes, 100%. Somebody’s coming to me looking for money, I’m going to say okay, sure. But I need to make sure you’re not coming back here again. And better yet. If I solve this problem for you, I need this as an investment. And that’s what I would always view somebody in saying, Well, my kids are coming to me or my parents are coming, whoever’s coming to look for money, this is your opportunity to invest in them. You say yes, I’ll help you out of this problem. But we’re going to do the work to ensure that this problem never happens again.
We’re into a cost of living calculation, we’re going to determine where your money is being spent. Are there areas of waste, are there areas that we can reduce? Are there areas that we can not only set you up to say okay, don’t get into this problem again, but then I’m on a path to become wealthy and successful, or at least stable. Now, we can’t all be wealthy and successful, but stability is available to everyone. Absolutely.
Wayne Kay 9:39
So what about co-signing? Somebody asks you if they can co-sign a loan?
Matt Fader 9:46
I had a conversation with a debtor about this, this morning and tried to explain to them the difference of what joint and several liability is. So they think, okay, I co-sign for them, they’re going to make the payment. And the worst that will happen to me is I’m on the hook for 50% of it.
That’s not how it works. When you enter into a contract as a co-signer, you’re saying, Okay, if this party fails to pay, I will pay on their behalf. Not I will pay 50%, I will pay it all. That’s what joint and several means – is that you are both jointly and severally responsible for the full amount.
Now, they can’t collect 200%, right? You can only collect so much. But it means that actions for repayment are brought in full against both parties. So you co-sign on a $100,000 loan, the person that borrowed it comes in to see somebody like me – I tell them, oh, boy, you’re going to have to have a really awkward conversation with this co-sign person. They say I had it. I said, Okay, great. We signed the papers. And then that person is left with the burden of that full debt.
Wayne Kay 11:01
Matt Fader 11:05
Yes, it’s not half. It’s joint on a $100,000 loan. So therefore, my liability is 50 and theirs this 50? No, it’s $100,000 each. You have 100% shared liability for that full amount of the debt. Okay, like I said, they can’t collect 200 on it, they can only collect 100, because that’s what you owe. But they can go after both of you with equal force to get their money. And that’s kind of terrifying.
Wayne Kay 11:38
Absolutely, but we don’t think about that, because we trust. We trust that whoever it is we’re going to be doing this for is going to take care of it. And we don’t even think that things are going to go sideways and then we will have to take care of this payment.
Here’s a situation I can share with you. This is a story from somebody in my family, who I found out after the fact. He had a business partner. The business partner said, can I borrow 15 grand? He’s like, I don’t have 15 grand. So but you have a lot of credit. Yes, sure and I’ll pay you on your line of credit instead. He gets 15 grand and then never pays any money back. And that person was on the hook for the whole thing, couldn’t afford it and ended up going to see a Licensed Insolvency Trustee because of that. They were totally trusting. They’ve worked together for how long and this fell apart.
So when people don’t pay you back, there’s a real life consequence of that. And I’m sure you hear that all the time.
Matt Fader 12:43
And how do you get it back? There’s a real burden that comes with that. So if I said lend me 15 grand, and you said, Okay, great. I’ll go and I’ll take 15 grand off my line of credit. That’s very foolish. You shouldn’t do that. But if you did, and you said, Okay, I lent this person money and they’re not paying me back. What is your recourse?
Well, you don’t really have any. You don’t have a contract with them. You haven’t entered into any obligation with them. You took your own cash, you gave it to them. How do you enforce that? You don’t ,unless you’re going to have them sign off on something on a promissory note. And even that is very difficult to enforce.
Wayne Kay 13:27
Well, that’s good to know. I mean, for me, it would be simpler. It would be a no – heartless as it can be.
Matt Fader 13:36
That’s the proper answer. But with the proper backing – if you have a promissory note, if you have something there that they’ve signed off on, as far as the documentation – you at least have recourse to say, Okay, well, I could register this and under the PPSA, granting a general security instrument. I could register it under the land registry. I have ways to register debt. I could secure it against your house, I’ll just get you to say that you’re allowing me to do that.
You know, he had talked to a lawyer about ways to protect himself. If you’re going to get into any kind of large personal lending – the 300 or 400 bucks that you spend and talking to a lawyer and finding out how you can protect yourself in case this goes south, is far worth the money versus having it go south and you being left saying, Well, what do I do?
Wayne Kay 14:29
And what about family members? What do you do if they don’t pay you back? I guess you’re just on the hook, as you mentioned.
Matt Fader 14:38
Well, you’re on the hook and you know, Christmas dinner just got a lot more awkward. So yes, I had a grandmother come in and she said, Why are you here? Why I cosigned for my grandson’s vehicle. And I’m like, oh, and he didn’t pay it? No, he didn’t pay it. So they came and took it back and then they are after her for 30 or 40 grand. She’s like, What do I do? And I say, Well, you can sue them. Well, I don’t want to sue my grandson. So what do you do?
We’re going to have a conversation about what you do. But you know, and that’s the thing, people help out kindness. They help because they say it’s the right thing to do. And I’m not saying it’s not the right thing to do. But there has to be that follow up, there has to be that commitment from the person that you say, if I’m going to do this for you, you need to do this for me. And it’s not just you’re going to pay me back $200 a month, or whatever it is, until the loan is repaid. It’s you becoming active in their financial education. Yes, it’s you being that active participant.
You can say, okay, these are the areas that you’re going on. Like I said, that is an investment, that’s not only an investment, you getting your money back, but it’s an investment, ensuring that they don’t come after you for more money. So he lent me more because he gave me this money. And I just put it on here, and I didn’t adjust my behavior. So I’m back again.
You really want to take that time to go over budget with them – the cost of living. Help them in viewing their debt service. What does it cost for you to service your debt in relation to your income? Are there better ways for you to do this? Or they go talk to a Trustee?
I’ve had parents say, Okay, I’ll lend you money. But step one, you have got to call this guy. Oh, and I’m not calling them for you. You need to call them they put that on a conditional loan. So then, they call me up, and they say, Yes, I’m sending my nephew or whatever it is to see you and to scare the crap out. Okay, great. That’s what I do, right? That’s not really what I do.
I sit down with them. And I say, Okay, what’s your debt? What’s your income? What’s this? What’s this? What’s this? So we run through those steps. And I say, Okay, you do this. And they’re going to do it if you’re going to have somebody come and bail you out here. You have to look at these other factors to make sure that this behavior does not repeat. So be involved, make that a condition of it – it’s not just, you’ll pay me back. I need to be involved. If they say they don’t want you involved, then they’re going to go to somebody else. Your problem solved.
Wayne Kay 17:26
Oh, that’s a good point. What’s your advice here on keeping our money safe?
Matt Fader 17:33
That’s a pretty big, big, big statement, it’s to keep your money yours. Keep it in a place where it’s not going to go and vanish on you. It’s really just trying to be knowledgeable and aware of what your spending is. The jeopardy is the fact that people often think in terms of short rather than long term. They don’t see the lengthy consequence to some of these actions. So I’m almost sort of at a loss right now for what else I can say about keeping your money safe, other than, try very hard not to just give it away. You worked hard for it. You should be able to spend it on you, I think.
Wayne Kay 18:28
Yes. I think that’s really it. I think people need to know it’s okay. That you don’t solve every immediate family member’s problems, that there are other options for them.
Matt Fader 18:43
You don’t know how true that is. Being extra helpful can actually be extra hurtful. You have the best intentions, you love these people, you want to help them out as much as you possibly can. But enabling it doesn’t help them to learn their lesson. There’s all kinds of unforeseen consequences that can pop out. And then you’re left picking up the pieces. You got into it with the best of intentions to help somebody and it went south and now you’re left dealing with it.
Wayne Kay 19:23
Yes, I think that’s a perfect place to end today’s podcast. Matthew, always a pleasure. And I thank you very much for your time.
Matt Fader 19:32
Oh, it’s my pleasure, Wayne anytime.
Wayne Kay 19:34
My guest today Matthew Fader from Allan Marshall and Associates. You can learn more or set up a free consultation with Allan Marshall and Associates through their website at wecanhelp.ca.
And that’s it for today’s Debt Matters podcast. Now make sure you subscribe wherever you get your favorite podcast from. And of course for more information, you can always check out debtmatters.ca. Thanks for listening.
About Matthew Fader
Matthew has worked in the insolvency field since 2005 and joined Allan Marshall and Associates in 2017. His positive outlook helps reassure his clients with any financial insecurities they may have. Matt’s goal is to ensure that everyone has the best possible experience and is treated with respect.