Money problems can create marital problems, especially if your household debt was incurred mostly by one spouse. In other cases, a husband or wife brings existing debt into a second marriage. If household debt belongs primarily to one spouse, does the other one also have to file, and if not, will the non-filing spouse’s credit be damaged?
You are Not Responsible for Your Spouse’s Debt
One issue that frequently comes up is whether you are responsible for you spouse’s debt. As long as you did not co-sign or guarantee the debt, you are absolutely not responsible for your spouse’s or anyone else’s debt. We have heard stories of debt collectors suggesting or stating that a husband or wife has legal responsibility for his/her spouse’s debt simply because of the marital relationship. This is false. The fact that you are married to someone does not make you responsible for a contract your spouse signed with a third party.
A divorce judge, of course, can divide household debt regardless of whose name it is in but a credit card company or car lender cannot unilaterally make a spouse responsible for the other spouse’s debt
You Do Not Have to File Bankruptcy if Your Spouse Decides to do so, but ….
Let’s assume that your spouse has incurred tens of thousands of dollars of debt and bankruptcy appears to be a reasonable solution. What does that mean to you?
First, while you cannot be held legally responsible for your spouse’s debt, you will be affected if your spouse’s wages are garnished or vehicle is repossessed. You will be impacted if there is not enough money coming into your household to pay the electric bill or buy food.
Second, you could be affected if you and your financially strapped spouse maintain joint bank accounts or jointly own other liquid assets. If your spouse is sued and a judgment rendered, the judgment creditor can go after any liquid asset they can find. It is much more difficult to get money back from a judgment creditor on the grounds that funds did not fully belong to the judgment debtor. Thus, if your spouse is being sued or has judgments issued against him, you should open a separate bank account and separate your financial lives as much as possible.
Third, your joint credit accounts with your spouse could be affected if your spouse goes into default on other accounts. Credit card companies in particular will raise interest rates on cards issued to borrowers who have gone into default elsewhere, so here, too, you should close joint accounts and open credit accounts in your name. Your credit score, by the way, should not be affected by defaults by your spouse on other accounts but you should not assume anything – check your credit reports often.
Fourth, if your spouse files, the Bankruptcy Court will require him to include information about your income, as well as all household expenses, whether unique to you or joint. The means test now used in consumer bankruptcy cases looks at household income and expenses, even if only one member of the household is filing. Thus, your unemployed spouse could be barred from filing a Chapter 7 liquidation bankruptcy solely because of your income.
So, even though you do not need to file jointly with your spouse, you will be involved, like it or not. We therefore advise married clients who want to file individually to include their non-filing spouse in the decision and bring the non-filing spouse to meet with use at some point to have his/her questions answered.
If You Are Filing Chapter 7
You are permitted to file an individual case, even if you are married. If you file individually, only your debts will be included in the bankruptcy. If you have co-signed debts with your spouse, you will probably want to reaffirm those debts (sign a new agreement with the creditor and continue to pay).
If you reaffirm the debts, and continue to pay, your bankruptcy should not negatively impact your spouse’s credit. I say “should not” because federal law says so. As a practical matter, your spouse should verify that his/her credit has not been damaged by checking his/her credit report. In late 2002, a number of non-filing, credit damaged spouses filed a huge class action lawsuit against the three credit bureaus because of errors in the credit reports of non-filing spouses. It will be interesting to see how this case changes the way credit bureaus collect and verify information.
If you and your non-filing spouse have a joint credit card debt and you choose not to reaffirm, the credit card lender can (and will) look to your non-filing spouse for payment after your case is over.
If You Are Filing Chapter 13
You are permitted to file an individual case, even if you are married. If you file individually, and you have co-signed or joint debts, you can pay the co-signed debts in full as a special payment class in your Chapter 13 plan. In most cases, you can pay co-signed debts at 100% even if you are paying other debts at 5%.
If you choose not to protect your co-debtor in your Chapter 13 plan, the creditor can ask the Judge for permission to collect and sue the co-debtor.
Which is best for you?
If you are married, the Bankruptcy Code permits you to file bankruptcy either individually or jointly. Which is preferable depends on your circumstances.
- Do you each have separate credit card accounts, or are they jointly held?
- How is title to your house and cars held?
- Did you both sign the mortgage note?
- How much does each of you earn?
For most married couples it is usually more advantageous to file jointly because
- The costs would be double if they filed separately
- Most of the debts are joint obligations
- If only one spouse files, the non-filing spouse would still be liable for the joint debts, so he or she might as well file and be discharged from the obligation as well.
There are situations, however, when it is better for just one spouse to file individually, such as when
- Most of the debts are owed individually by the filing spouse
- The non-filing spouse has significant non-exempt assets
- The non-filing spouse is barred from filing because of a prior bankruptcy
- The non-filing spouse was denied a discharge in another case due to fraud or concealment of assets
Filing individually does not relieve the non-filing spouse of his or her obligation to repay joint debts. Furthermore, if those joint debts are secured, the lender will still have a lien on the collateral (such as a house or car). In other words, if you don’t make payments, the lender can still get the collateral. Also, transferring non-exempt assets to the non-filing spouse shortly before filing bankruptcy will be considered fraudulent, resulting in denial of discharge (or worse).
It may come as a surprise to you to learn that the Means Test may take into consideration the income of both spouses, even when only one of them is filing bankruptcy. The question will be the extent to which the non-filing spouse is contributing to household expenses.