The law is clear, a spouse’s debts are not reflected on another’s credit. The federal law, as well as basic legal principles, dictate that separate credit files are maintained for both the spouses so that debts of one are not reflected on another’s credit file. It is therefore not mandatory for both husband and wife to file for bankruptcy. However, there are some exceptions to the rule, like when both spouses are co-signers on a personal loan, car loan or mortgage on the house, or they share credit card(s). In case, the California means test affects your bankruptcy filing and if you have filed for divorce prior to or after bankruptcy, then also you might be affected by each other’s bankruptcy filing.
Liability of debt in bankruptcy between co-signers
More often than not, people think that co-signing a debt means that the liability of a co-signer is only when the original borrower is not available or does not fulfill the commitment. Many times spouses co-sign the mortgage of the house or opt for a car or personal loan as co-signers. According to Los Angeles based bankruptcy law firm, https://bankruptcy.staging.recoverylawgroup.com/ signing on the dotted line means that you are equally liable for the debt, i.e. you are joint debtors.
Both the co-signers are equally and fully responsible for the entire balance of the debt and can be pursued by the lender without any prejudice. This principle is applicable for spouses too. When a spouse co-signs any debt with the other, the co-signer is fully responsible for the debt. In case, you co-signed for a house or car loan for your spouse and your spouse files for bankruptcy, then you are fully liable for the balance. This holds true for all kinds of debts including student loan debts which are generally not discharged during bankruptcy!
Credit card debts are slightly tricky, especially if one spouse gets a second credit card for the other. Since the non-filing spouse didn’t sign for the card or anyhow made themselves liable for the debt, they should not be held liable for the debts. In such a case, the non-filing spouse should check their credit report after a few months of bankruptcy case getting over. In case the debt of the second credit card is reflected in their credit report, they should contact, both the bank and the credit agency to remove the said debt from their credit report since they were neither liable for the debt, nor did they file for bankruptcy.
Married couples and Chapter 7 Means test
Chapter 7 or liquidation bankruptcy is preferred by people as you often get all your unsecured debts discharged without losing selling off many assets. However, to qualify for it you have to pass the Means Test. If the debtor has means to pay off debt, they cannot qualify for Chapter 7 bankruptcy and have to opt for Chapter 13 bankruptcy. This chapter of bankruptcy involves repayment of debts via a court-approved repayment plan over a period of 3-5 years.
The means test involves assessing whether the income of a debtor is above the mean income of the state. When the individual is married and living with the spouse the median family income rises. With each addition of family member, the median family income continues rising. In case of a married couple living together, their incomes are added to see if they meet the means test. It may be possible that individually a person’s income is not enough for repayment however, with the combined incomes of both, repayment plan might be necessary.
What happens in case of divorce?
Divorce offers a different scenario. Unless a provision has been made in the divorce settlement regarding any debt co-signed by the spouses, neither spouse is relieved from paying off the debt if either file for bankruptcy. In case the spouses are divorced and if the bankruptcy filing spouse was ordered to pay for a credit card, they will have to clear the debt irrespective of the bankruptcy filing.
In case your spouse is filing for bankruptcy, it is important to know how much of the debts will be discharged and how many need to be paid off amongst the joint liabilities. In case the debts are huge and only one card with joint liability, filing for bankruptcy and paying the debt might well be worth it. In the case of Chapter 13, regular payments are made till the debt is cleared off without having any effect on the credit score of the non-filing spouse. There is no doubt that bankruptcy is complex and it would be better if you keep debts separated from your spouse, with the exception of mortgage of your jointly owned home.
In case you are thinking of filing for bankruptcy, contact expert bankruptcy lawyers at (888-297-6203) to get advice on how to protect your assets as well as those of your spouse.