Monday, February 22, 2016

Bankruptcy, Joint Debt and Non-Filing Co-debtor

This post is meant to be an update to the previous post How Will Bankruptcy Affect My Spouse. I get asked all the time how bankruptcy will impact a non-filing spouse or other party. The answer to this question can be a little twisty, especially with credit card debt. 

Liability for Credit Card Debt

It is often unclear if certain credit card accounts are joint or one person is just a permissive user of the account. What matters is whether a person agreed to be liable for the debt. To be liable, a person would need to sign an obligation (i.e. contract, application for credit, financing agreement, etc.). Having your name on a credit card does not automatically mean you are liable. 

So, what happens to debt that is joint and only one person is filing? Only the person filing is discharging their liability. The non-filing person would remain liable for 100% of the debt. So, when contemplating filing bankruptcy, it is extremely important to determine whether any debts are joint, especially if the debt is owed by your spouse. If the debt is joint and for an amount that exceeds your spouse's ability to pay, it may lead to two separate bankruptcy filings. While an attorney may really appreciate you paying them for preparing two bankruptcies, it just doesn't make financial sense when married individuals can file one joint case.

Current Joint Debt

What happens to the non-filing person's credit when there is joint debt that is current and remains current? Unfortunately, this question is not so simple to answer. The non-filing person's credit should not be impacted. However, a lot of things should not happen but they do. It is fairly common for creditors to report this type of an account as being in bankruptcy on a non-filing party's credit. It is also fairly common for creditors to shut the account down and transfer the debt to a collection company. If that happens, the debtor and the non-filing party should contact the three credit reporting agencies (Experian, Transunion and Equifax) and dispute the tradeline [Creditors refer to each separate reporting of the account as a "tradeline."].   

The Bottom Line

If you are considering bankruptcy, make sure you meet with an experienced bankruptcy attorney. Make sure to discuss your debts with the attorney in detail. Figure out whether any accounts are joint and discuss the best way to proceed so that you and any potentially non-filing party are protected. Maybe it makes sense to file with your spouse, maybe it doesn't. Just make sure you and your spouse aren't paying to file two separate cases when it could have been take care of together for half the cost.

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