Will my Spouse be Affected?
Richard Killen explains how your spouse may be affected during a bankruptcy.
Sorry, Dear, I’m Bankrupt
Nothing can make for a frostier breakfast conversation than revealing your financial woes have led to bankruptcy. Fuelling the tension of guilt and anger is the fear one spouse filing for bankruptcy is going to drag down the other.
But if you do file for bankruptcy does this automatically affect your spouse?
The short answer is no. Each person is responsible for their own debts. So if your spouse hasn’t co-signed a loan or guaranteed your debt, then they won’t be directly affected and their credit rating won’t be damaged. There may be indirect consequences, however. For example, your spouse may not qualify for a loan in future if your bankruptcy prevents you from being able to co-sign for it.
Don’t Give Credit Where it’s Due
But the truth is, married life can be complicated, with intertwined finances and joint ownership of assets. Take credit cards, for example. If your spouse has a joint or supplementary credit card – that is, one with their name but has the same account number as yours – then he/she would also be responsible for any debt.
On the other hand, if they have a supplementary credit card and have never used it, chances are they wouldn’t be responsible for the debt. The case could also be made that they are not saddled with the debt if they have only used the card occasionally, for small amounts.
However, if the two of you have used the cards extensively, you are both on the hook for the debt. This doesn’t change if only you go bankrupt. In fact, things can get worse for your spouse because creditors can, and probably will, pursue them for the full amount of the money owed, and not just 50 per cent. This scenario would be the same for any loan they’ve co-signed, such as a mortgage. (Though a legal case could be made that they are not responsible if they didn’t get legal counsel before co-signing the loan.)
Nothing Ruins a Good Divorce Like . . .
The risk of being saddled with joint debt seems to increase during divorce, when communication and cooperation often dwindle. Some might be under the impression that debt is divided 50-50, as assets often are. But if one spouse files for bankruptcy, the other could be left responsible for the full debt and not just half, with avid creditors giving them their undivided attention.
Time to Take Out the Saw
Another consideration when one spouse goes bankrupt and the other is spared is jointly owned assets. That Harley and sidecar you both own for summer camping trips might need to be sold to pay what you owe to creditors. Your spouse’s portion of the motorcycle would be spared but you couldn’t exactly saw the vehicle in half.
Generally speaking, jointly owned assets have to be reviewed one by one by the trustee to see how they will be treated. And in fact all the ins and outs of the affects of bankruptcy on a spouse need to be considered and explained by a licensed trustee.