Finances are one of the most contentious issues in a marriage. This is especially true when one spouse has serious financial problems and the other has none – or at least not enough to warrant filing for bankruptcy.
It’s possible for one spouse to file for bankruptcy without the other doing the same, but rarely does the non-filing spouse go completely unaffected. Here’s what you need to know if you or your spouse alone is filing for bankruptcy and you want to know how it will affect the other.
The good news and often something that’s largely misunderstood is that your spouse filing a bankruptcy will not directly affect your credit. Your debts are treated separate. A spouse filing for his or her debts is completely independent of your credit history and score.
A common situation is when you have a joint obligation/debt. But again, it’s good news because the act of one spouse filing a bankruptcy still has no impact on the non-filing spouse’s credit score.
In a Chapter 7 filing, the filing spouse will discharge his or her obligation. The non-filing spouse will still owe the debt. The only effect on the non-filing spouse’s credit score would be if he or she stopped making payments. The missed payments would then be a blemish on the non-filing spouse’s credit score. The easy solution is for the non-filing spouse to stay current and continue to make payments on the debt so that it never goes into default. The only difference would be the filing spouse would no longer be legally obligated on the debt after his or her discharge.
So essentially, the only way the non-filing spouse’s score would be affected would be by non-payment. That’s a simple truth that exists whether or not the other spouse is filing bankruptcy.
In a Chapter 13 filing, the act of one spouse filing puts a co-debtor stay into affect. That means the non-filing spouse is now under bankruptcy protection during the filing spouse’s Chapter 13 plan. The non-filing spouse will still owe whatever balance is left after the filing spouse’s bankruptcy is completed. The co-debtor stay just means that the creditor cannot pursue the non-filing spouse during the bankruptcy.
The Creditor could file to have the stay lifted and pursue the non-filing spouse earlier.
The question is: how does this affect the non-filing spouse’s credit score? The answer is similar to the Chapter 7 filing. The bankruptcy filing of one spouse does not have any credit impact on the non-filing spouse. The trick here is if there’s a co-debtor stay in place and the non-filing spouse stops making payments, then there could be an impact because no payments are being made.
The impact on the non-filing spouse’s credit would be due to non-payment NOT simply the act of the other spouse filing a bankruptcy. The simple cure is if the debt was current by making minimum payments, the non-filing spouse should continue to make the minimum payments during the spouse’s bankruptcy plan. This might require contacting the creditor and making sure some statement is generated so you know the amount that needs to be paid.
The bottom line is the filing of the bankruptcy of one spouse has no direct affect on the non-filing spouse’s credit. The issue will be whether the non-filing spouse stops making payments on debts he or she is liable for.
To learn more about how credit scores are calculated, check out this explanation from myfico.com.
Joint Bank Accounts
Despite not being the filing spouse, a person’s bank accounts could be at risk if they are shared with someone who files for bankruptcy. It’s possible for a bankruptcy filer to exempt some assets, including bank accounts, from the bankruptcy or, as the non-filing spouse, you could protect the money in the account by claiming it as your sole property, but you’ll need to show what percentage was added to the account by your contribution.
Separating accounts before one spouse files for bankruptcy could be an option, but this can be tricky. Transfer of assets just before a bankruptcy filing is a red flag and can result in the bankruptcy being dismissed. Your best bet is to speak to an attorney about your situation and determine how best to protect the assets of the non-filing spouse.
The non-filing spouse will need to provide information about employment and salary to the filing spouse, which will then be included on the filing spouse’s bankruptcy schedule. This means the non-filing spouse’s personal information will become public record.
A Final Note about Bankruptcy and Marriage
Often, the issue of one spouse filing for bankruptcy and the other not filing is due to a divorce. A couple in the process of ending their relationship might be more likely to have one filing and one non-filing spouse. As tempting as it might be to let your divorce attorney handle bankruptcy issues in this situation, it’s important you speak to someone familiar with bankruptcy law. You need to be sure you get facts and you’re able to make decisions based on the most accurate information.
Bankruptcy and divorce is an intricate issue and needs to be done with cooperation and consultation between bankruptcy and divorce counsel. One spouse can file and discharge debts, but yet still be liable to the other spouse for them in the divorce if the other spouse was a joint-debtor. That is just one example of how important it is to have proper guidance when the paths of bankruptcy and divorce converge.
If you have questions about bankruptcy as the filing or non-filing spouse, or you would like to know more about bankruptcy in general, contact the law office of Frank J. LaPerch, PC at 845.942.5500.