How spouse’s bankruptcy may affect your credit
By Allie Johnson
April 18, 2016
You vowed to stick together for richer or poorer. But now that your spouse is facing bankruptcy, you worry his or her debt woes will affect your good credit.
When one spouse is filing for bankruptcy and the other isn’t, both often fear financial damage to the non-filing spouse, says Ed Boltz, president of the National Association of Consumer Bankruptcy Attorneys.
“Some debtors worry they will hurt their spouse’s credit, and their spouse will be mad at them,” he says. “It’s a huge fear.”
If either you or your spouse is considering bankruptcy, here are five things to know about how that bankruptcy filing will affect your credit and finances:
1. You should visit the bankruptcy attorney as a couple. Maybe your beloved was a financial mess before you met, and you’ve got your money in top shape. Even if the debt problems seem one-sided, couples should meet with a bankruptcy attorney together, Boltz says.
“When you’re married, your finances are usually intermingled,” says Dennis Johnson, a credit counselor with ClearPoint Credit Counseling Solutions. The attorney can look at your finances and recommend one of three options: filing together, filing separately for different types of bankruptcy or one spouse filing alone.
For example, so the couple can keep an asset such as a house or a car, Boltz says, a wife might file Chapter 7, in which many debts go away, while her husband files Chapter 13, in which some or all debts are paid back over time. Or vice versa. “Going to a lawyer together gives you the best advice on ways to mix and match bankruptcies and non-bankruptcies,” he says.
“Some debtors worry they will hurt their spouse’s credit, and their spouse will be mad at them. It’s a huge fear.”
— Ed Boltz, president
of the National Association
of Consumer Bankruptcy Attorneys
2. If you don’t file, your credit may stay clean. What if you decide not to file for bankruptcy, but your spouse does? “If you have completely segregated credit with no debt in common, then your spouse’s bankruptcy doesn’t affect your credit at all,” Boltz says.
Also, if you’re an authorized user on your spouse’s credit card, that’s not the same as having a joint account, says Ronald LeVine, a New Jersey bankruptcy attorney. Only the primary cardholder is responsible for the debt — not the authorized user, he says.
One easy way to tell if an account is joint or not: Look at the bill, he says. “If it’s addressed to John and Mary Smith, they’re both debtors on the account.” If a card on which you’re an authorized user is included in a bankruptcy, then it’s best to get your name removed from the card.
3. Joint debts could mar your credit slightly. If you and your spouse have a joint debt, such as a joint credit card or loan, a note indicating that the account is involved in a bankruptcy could appear on your credit report, Boltz says. But that notation doesn’t affect your FICO score or indicate that you filed for bankruptcy, he adds.
However, if you apply for credit or try to rent an apartment, the B-word can make a creditor or landlord raise an eyebrow. If that happens, explain that it’s not you but your spouse who filed for bankruptcy, he says. It’s also important to remember that if your spouse files Chapter 7 bankruptcy, as a co-debtor on the loan, you’ll be 100 percent responsible for paying the debt as agreed, he adds.
However, in a Chapter 13 bankruptcy, “automatic stay” provisions stop most collection action against both the debtor and the co-debtor during the bankruptcy, according to USCourts.gov. A creditor can ask the court for “relief from the automatic stay,” according to King Law Bankruptcy, a California bankruptcy law firm.
4. You may lose some of your pricey stuff. Different states have different laws that can have an impact on how a bankruptcy affects a non-filing spouse, says Robbin Itkin, head of the business solutions and financial restructuring and bankruptcy group at Liner LLP in Los Angeles.
For example, nine states, including Arizona, California and Texas, are community property states. In these states, each spouse legally owns half of everything acquired during the marriage. In California, that could affect an array of assets, including a home, an investment property, money in a savings account, artwork and jewelry, Itkin says.
“That diamond necklace may be a community asset.”
— Robbin Itkin,
Even a prized possession you consider yours, such as the WaveRunner your wife got you for your birthday or the diamond necklace your hubby gave you for your anniversary, could end up being taken and sold to pay creditors, Itkin says. “That diamond necklace may be a community asset,” she says.
5. You may have to shoulder some of the credit burden down the road. Keep in mind that your spouse’s credit score likely will take a big hit in bankruptcy and could drop by 100 to 150 points or more, says Johnson. That may affect your shared financial life in the future. Debtors can start rebuilding credit after the bankruptcy is discharged, but a Chapter 7 bankruptcy can stay on your credit report for 10 years and a Chapter 13 bankruptcy for seven years, according to myFICO.com.
In the first year or two after the bankruptcy, it could be hard to get mortgage together, Johnson says. A couple in this situation might decide it’s better for the non-filing spouse to apply for the home loan alone, he says. “If they do get approved, it might not be for the dollar amount they hoped and they might have to scale back on the house they want,” he adds.
In the wake of a bankruptcy, the non-filing spouse may have to co-sign for the other, or pay much higher interest, if a car loan is needed, Johnson says. A car loan, though, is easier to get than a mortgage and is a good way to rebuild credit, he notes. “You might want to just bite the bullet on the interest rate and refinance in a few years,” he says.
One more thing to consider: If you apply for most of the credit in the years after your spouse files bankruptcy and you end up divorcing, it could come back to hurt you later, Johnson says. A divorce decree might order each spouse to pay different debts, but creditors only care who took out the loan, Johnson says. “You could be on the hook for all that debt,” he says.