When you are in a financial pit, it may seem nearly impossible to get yourself out. That is when declaring bankruptcy might start to cross your mind. Declaring bankruptcy could clear away several kinds of debt that you may currently owe and give you a fresh clean slate. Declaring bankruptcy may seem like a pretty nice solution to a gigantic problem, does it not? However, not only does this create negative repercussions for you but declaring bankruptcy could also do financial harm to your spouse/co-signer.
Does Declaring Bankruptcy Affect Your Co-signers/Spouse?
Unfortunately, yes it does. When you declare bankruptcy, depending on your situation, you are not the only person who will be affected as a result. There are all kinds of ways in which someone who co-signed on a loan with you, or even your spouse, may be negatively affected by your decision to sweep all of your debts out of the door by deciding to do this.
It is important that you have a complete understanding of these effects before you declare bankruptcy so that you do not unintentionally harm someone you care about in a severe financial way.
How Bankruptcy Affects Your Spouse
If you are married and filing for bankruptcy, your spouse does not have to file with you. You may file completely alone. However, despite the fact that you have filed alone, that does not mean that your spouse will not be affected by your actions.
There are still consequences that should be taken into consideration by the both of you before filing for bankruptcy. Make sure that you are making the best financial decision for both yourself and your spouse.
Whether or not your spouse will be affected by your declaration of bankruptcy will depend largely on a few different factors, including:
- Whether or not you currently have any debts or joint property with your spouse
- The property laws of the state you reside in
- Whether you file for a Chapter 7 or a Chapter 13 bankruptcy
Filing for bankruptcy may not affect your spouse’s credit directly. However, if you have joint debts then the fact that you have decided to file for bankruptcy could end up appearing on your spouse’s credit report. Furthermore, creditors may still come after your spouse even though you have gotten yourself in the free and clear.
Property may also be brought up when declaring bankruptcy. In states such as Arizona, California, Idaho, Louisiana, Nevada New Mexico, Washington, and Wisconsin, any marital asset could be part of the bankruptcy estate. This means that any property held by either spouse that was acquired during the marriage may be seized and sold by creditors to earn their money back.
In common law states however, only property that is jointly owned by both spouses may be seized in order to pay off creditors. A non-filing spouse that has property in their name will not have to worry about having any of those assets seized because their spouse declared bankruptcy.
How it Affects Your Co-signer
That being said, a spouse is not the only person who may be affected by your declaration of bankruptcy. If someone co-signed a loan or any kind of credit with you, they could face some negative repercussions as well. A co-signer is there to make sure that the debt you have taken out gets repaid if you are unable to do so.
If you declare bankruptcy while having had someone co-sign for you, creditors will come after them. Although collection activities against you will have come to a halt, they will now be harassing your co-signer. That said, there are steps you may take in order to protect your co-signer.
If you filed for a Chapter 7 bankruptcy, there are a couple of different things you can do that will keep a creditor from harassing your co-signer, such as:
- Paying Off the Debt: Even though you have declared bankruptcy, you may continue to pay off your debt until it is completely paid off. You could also pay in one lump sum, but of course this would be unusual considering most people declare bankruptcy because they do not have the money to pay their debts.
- Reaffirming the Debt: Before you decide to file a Chapter 7 bankruptcy and receive the discharge for it, you could reaffirm secured debts like mortgages, car loans, and other credit accounts. By reaffirming a debt, you are giving up the benefit of your discharge and making yourself personally liable for that obligation once more. That being said, unless you need the particular item it is not advised that you do this.
With a Chapter 13 bankruptcy, there is more protection offered to your co-signers. Additionally, you will have more time to repay the co-signed debt through your three to five year Chapter 13 repayment plan.
The automatic stay you acquire from a Chapter 13 bankruptcy will protect your co-signer from any creditors being able to collect on consumer (or rather non-business) debts. However, this could be lifted in the case(s) of:
- The co-signer got the consideration (aka benefit of the deal) for the claim of the creditor
- You are not planning and offering to fully repay the debt through your Chapter 13 plan
- The creditor will end up losing money somehow if the stay remains in place