For years, the bank of mom and dad has likely reigned supreme as the largest bank in Canada. Any parent can probably recall a time where their child approached them for some kind of financial assistance. As loving parents, we like to try to do what we can to help, but what happens when your children are showing signs of struggling with an overwhelming debt load?
The most comforting thing that you could do is reassure your child that it’s not a problem they need to face alone.
You want to help – what can you do?
The first step would be to see if you can get to the bottom of how severe the debt problem is and what caused the problem in the first place. Was it a sudden, unexpected event like a job loss, medical problem, or separation? Or perhaps, it's a poor money management problem that needs to be addressed along with the incurred debt?
The gift of help
Before any other option, can you help your child understand all the options they have available to them? Can you help them review their budget and provide advice on money saving opportunities? Can you help them review ways to increase their income or cut back on expenses? Would you volunteer some time to help with a yard sale on the weekend to raise some money? Are you able to volunteer some time to babysit the grandchildren so that your children can save on expensive daycare costs? There are many ways you may be able to provide a nudge in the right direction before any further and perhaps more drastic steps are required.
The gift of financial assistance
If you, yourself are financially stable, the second option you might consider is helping your child by giving them some financial assistance as a gift. Before giving away the gift, you will want to be satisfied that you can comfortably afford it without leaving yourself short or in difficulty; and that it won’t be squandered and that it addresses your child’s problem in full. It might be a good opportunity to remind your child, you’re willing to help them with a gift just this one time, but it may not be so readily available if a similar problem were to occur again.
Should you loan money?
If you’re uncertain as to whether or not simply giving out a gift is going to work or you’re not sure that you want to completely give away your hard earned money for free, then the third option would be to consider providing a loan to your child. If you’re satisfied a temporary loan will help your child and again, not leave yourself struggling or relying on the guarantee of repayment of the loan, it could work for you both.
However, be cautious and ensure you have a degree of protection, just in case your child’s situation continues to worsen. For example, in the world of bankruptcy laws, your loan to your child is treated the exact same way as any other debts your child has and you have no priority to repayment over the other debts. To mitigate this risk, you could consider entering into a security agreement with your child; for example, if your child owns a home, you could talk to your lawyers about registering your loan as a secured loan to your child’s house – like a second mortgage. Provided this was not set up right before your child’s bankruptcy, it would provide you a better degree of protection if your child were to subsequently file a bankruptcy as typically a bankruptcy would not affect your loan if it is secured properly to an asset.
Should you co-sign a loan?
Your child may approach you, asking you to co-sign a consolidation loan for them. Be extremely cautious before co-signing anything. Although it’s difficult to say no to your children sometimes, you’d want to fully understand what your child is asking you to do before you agree to co-sign a debt.
The biggest reason a bank would ask your child to find a co-signor, is because the bank is not convinced that your child will have the ability to repay this debt. So, if the banks are not convinced, why would you be? What the bank is really looking for by asking you to co-sign is “two for the price of one”; meaning if your child does not repay the debt (for any reason), they have the right to pursue you for the full amount owing on the debt. They don’t split the debt in half or give you any special allowances; once you co-sign it’s as good as your debt and you need to take full responsibility for ensuring its repayment. To minimize any risk, only co-sign to the extent of a gift you’d be willing to give. If your child is asking you to co-sign a $10,000 loan and you’d don’t have $10,000 you’d happily part with, think twice before agreeing to do so!
Help find professional support
If you’re not in a position to help with any of the above suggestions, refer your child to a professional like a licensed insolvency trustee. If your child is nervous about going to such a meeting, offer to go with them if necessary or help them set up the initial meeting. Consultations are free and there’s no obligation. It’s an opportunity to meet with a professional who’ll be happy to review your situation in detail, to see what options are available and what solutions would work best for your child. There’s no cost or risk to either of you, and you’ll both leave the consultation armed with the necessary information to make an informed choice on the best direction to take.