23
Collateral
If the amount of the loan is high and the child/
borrower has assets that could be used as collateral
for the parent/lender, the parent could consider
taking a mortgage on the child's asset: a chattel
mortgage for personal property or a real estate
mortgage for immovable property. In this case, if
the property is already being held as collateral, the
parent/lender will have a second mortgage. Having
collateral may reduce the risk of loss if the child/
borrower does not keep up their obligations under
the loan.
Death or Incapacity of the Borrower
If the child/borrower were to die, the debt would
be included in their liabilities. It is important to take
this into consideration. Would the child/borrower's
financial situation allow for the repayment of the
remaining balance at the time of their death?
The heirs of the child/borrower may become
responsible for the debt if the estate is insolvent
and the heirs do not comply with all the steps set
out in the Civil Code of Québec for the settlement
of the estate. Furthermore, the parent/lender may
never recover the debt if the estate is insolvent.
Therefore, before granting a loan, the parent/lender
should discuss these issues with the child in order
to manage the risks and uncertainties the death
may create.
If the child/borrower becomes incapacitated, the
obligations related to the loan must still be fulfilled.
In this respect, before granting the loan, the parent
and child should discuss this risk and assess the
child's capacity to pay if they were to become
incapacitated.
Death or Incapacity of the Lender
It is also important to add provisions about the loan
to the lender's will. If the parent/lender wants the
loan balance to be extinguished on their death, they
could consider a debt cancellation clause for the
child/borrower. But if the parent/lender wants the
child/borrower to repay the balance of the loan –
because they want to be fair toward other children,
for example, and the borrower is also an heir – the
liquidator of the estate could reduce the child/
borrower's share of the total estate (including the
debt owed to the parent) by the amount required
to repay the loan.
If the parent/lender were to become incapacitated,
the mandatary to the property will have to continue
to collect the payments and ensure that the
obligations related to the debt are fulfilled by the
child/borrower.
For both these situations, it is strongly recommended
that a copy of the loan agreement be attached to
the will and the protection mandate.
FEATURE ARTICLE
