Last week I was in Dallas speaking at a credit event and a frantic woman cornered me after one of my sessions and asked me the following series of questions:
“My spouse is going to file for bankruptcy. We have joint accounts including credit cards and a car loan. What happens to our joint accounts if my spouse files for Chapter 7 Bankruptcy? How will that impact my credit reports and scores?”
Where Bankruptcy Shows Up On Your Credit Report
The decision to file bankruptcy is no doubt a difficult one. Not only does it leave your unprotected bank accounts at risk of being drained by creditors, but it’s also like rolling a hand grenade into your credit reports.
A bankruptcy shows up on your credit report in two distinct places; the public records’ section and the “trade” section, where all of your credit accounts are listed.
In the public records section the filing information will be listed. This includes the type of bankruptcy (Chapter 7 or Chapter 13), the date it was filed, and whether it was a joint or individual bankruptcy.
In the trade section every debt that’s included in the bankruptcy will be listed as such, “Account included in bankruptcy.”
Chapter 7 bankruptcies liquidate all statutorily dischargeable debts. They remain on your credit reports for 10 years from the filing date.
Chapter 13 bankruptcies are for people who can afford to make some payment to satisfy their debts. After a few years of making payments to a trustee your debts will be discharged.
13s remain on credit reports for 7 years from the discharge date, but not to exceed 10 years.
The Bad News
If you have a joint debt with a spouse and that spouse decides to file for bankruptcy you are going to be unwillingly dragged into the mess, and not in a good way.
Just because your spouse has discharged his debts doesn’t mean that the debt disappears. When you decided to become jointly liable for the debt you made a commitment to act as a liable party, which is why I don’t recommend co-signing for anything for anyone.
When your spouse files for bankruptcy protection from his creditors they will no longer be legally allowed to attempt to collect the debt…from him.
If they do continue to send bills, call him asking for payment or worse, hire a collection agency to collect the debt, then they’re likely violating the rules set forth by the U.S Bankruptcy code.
They will, however, be able to continue to pursue you for payment of the debts. If your husband filed an individual bankruptcy the legal protection from creditors only applies to him, not to you.
Your creditors, and yes they are your creditors as well, will undoubtedly continue to pursue you for payment on the debt. This can include negative credit reporting and aggressive collection activities.
The Good News
Your husband’s bankruptcy will not appear on your credit report. That’s the good news.
That means the debts will also not be listed as being included in a bankruptcy. You’ll be able to protect your credit reports and credit scores but only if you choose to continue to make payments on the debts.
If you stop making the payments, then it’s really no different than if they were your individual or “sole” debts. Late payments will begin to accrue, your credit scores will plummet, and the collectors will start hounding you for payments.
In fact, you might be forced into bankruptcy as well. I always tell people that a bankruptcy isn’t always the worst option, but it should probably be your last.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.