Bankruptcy, Retirement, and Your Spouse’s Credit

Bankruptcy is an excellent retirement strategy, especially if you are behind in saving for retirement because your credit card debt is robbing you of your ability to save.

Just look at the math:

Let’s say you’re about 10 years away from retirement, and you owe $25,000 in credit card debt at a typical 18.9% interest. Based upon your budget, you can pay no more than $500 per month toward this debt while maintaining your monthly expenses.

If you pay $500 per month toward the credit card, it will take you 100 months (8 years, 4 months) to pay it off. You’ll pay a total of $50,000, including interest.

Pay that same amount per month into a retirement account with a mediocre net annual return of 7% (after fees), and at the end of 100 months, you’d have about $100,000!

That’s a total wealth swing of nearly $150,000 in 100 months!

There are many interesting and easy to use financial calculators here on the Internet, so do your own computations. The results will astound you. While your repayment strategy seems reasonable, it really isn’t because you’ll end up on the eve of retirement $150,000 poorer that if you filed a bankruptcy today.  That 100 month repayment strategy is a huge commitment because if you quit at any time in the process, you’ll end up with the bad credit you’ve been trying to avoid.  If you file a bankruptcy now, your credit will take an immediate hit, but it will begin to improve immediately as well.

Of course, other factors you should consider are other debt (like medical bills, money judgments, foreclosures and repossessions), your age, health and employability over the coming years. However, if you are married, you may be wondering how declaring bankruptcy will affect your spouse’s credit.

Your spouse’s credit will not be affected by filing a bankruptcy unless you owe money jointly with your spouse. Furthermore, if you and your spouse jointly owe a debt that remains current, your spouse’s credit should not be impacted. I will speak specifically about spousal debt, but of course, this article also applies to all joint debtors, whether married or not. Joint debt?

Often, my clients are unsure whether they have any joint spousal debt. The key is whether both spouses agreed to be liable. A person is liable for a debt only if he signs an obligation such as a revolving credit card application or a financing agreement. With respect to credit cards, spouses often carry the same credit card in their wallet, but that doesn’t mean they are both liable for that card.

My wife and I have a credit card that accumulates reward points, and we try to use that card exclusively. However, I am the only one who signed the credit application, and I requested that the issuer send a card in my wife’s name. That means she is a “permissive user” rather than a “joint obligor.” That also means I am the only one responsible for that credit card balance, regardless of whether my wife makes purchases with the card and signs receipts. With respect to a house or a car, it can be confusing because there are multiple documents involved. A homebuyer will sign no less than a dozen documents at a typical closing.

The most important of these home-closing documents are the mortgage note, the deed and the mortgage, but there is only one document that determines whether a joint obligation is created. A mortgage note is the obligation to pay, and often only one spouse executes a mortgage note. That spouse is the only person legally obligated to make the house payment.

I often have clients concerned because their spouse signed the mortgage. If a non-obligated spouse is on the deed, he has an ownership interest in the collateral (the home) that secures the loan. The non-obligated spouse signs the mortgage because he is pledging his interest in the house to guarantee the mortgage note. In essence, he’s saying, “To the extent I have an ownership interest in this house, I pledge it to the bank to guarantee my spouse will make all the payments.”  Because he did not sign the promissory note, he is not liable, and the debt will not appear on his credit.

Both the mortgage and the deed are recorded in the official records of the county in which the house is located, and those documents are usually accessible online. The mortgage note is never recorded, and if the buyers misplaced their copy of the closing documents (it happens), it is not easy to determine whether the debt is a joint obligation. In this situation, one clue is the monthly bank statement. The lender or servicer only addresses the monthly statement to the obligor. So, if both spouses are on the bank statement, they are probably both liable for the debt. Of course, a credit report should also reveal whether a spouse is liable on a home loan.

Joint debt that remains current

If a spouse is jointly obligated to pay a debt (a home loan, for instance) with a bankruptcy filer, and that debt is current, is the non-filing spouse negatively impacted on her credit? There is a theoretical answer and a realistic answer.

Theoretically, the non-filing spouse’s credit should not be impacted whatsoever, but that is not always the case. Realistically, the mortgage lender will note in its file that the debt is “in bankruptcy,” and that notation will sometimes carry over onto both credit reports, even if the mortgage note is up-to-date. It doesn’t seem fair that a creditor would report anything other than “paid as agreed” if the debt is current, but that’s what creditors do.

Both the debtor and her non-filing spouse should contact the three credit reporting agencies and dispute the trade line. We consumers can notate our credit files to ensure that they reflect the most accurate information, including the fact that a mortgage or automobile note remains current.

The possible impact a bankruptcy would have on a joint debtor is one of the many factors in determining the best course of action. An experienced bankruptcy lawyer can analyze the “big picture,” and help guide a debtor through such financial considerations.

Really, if you are reading this, you probably have serious concerns about your finances.  Do yourself a favor and take advantage of a free consultation from an experienced bankruptcy lawyer in your area.