What Are Joint Debts?
Joint debts are financial obligations shared by two or more individuals, typically co-signers or joint account holders. Common examples include:
Mortgages: A loan taken out by two or more parties to purchase a property.
Car Loans: Loans co-signed to finance a vehicle.
Credit Cards: Accounts opened jointly, where both parties share responsibility for repayments.
Personal Loans: Loans borrowed by multiple individuals with shared liability.
Each party is equally responsible for the full amount of the debt unless otherwise specified in the loan agreement.
Bankruptcy and Its Impact on Joint Debts
Bankruptcy provides legal protection to individuals unable to meet their financial obligations. However, the type of bankruptcy filed—Chapter 7 or Chapter 13 in the U.S., for example—determines how joint debts are handled:
1. Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, most unsecured debts are discharged, meaning the filer is no longer legally obligated to pay them. However, this discharge applies only to the individual who files for bankruptcy. If the joint debtor does not file, they remain fully responsible for the debt.
For example, if one spouse files for Chapter 7 and the other does not, creditors may pursue the non-filing spouse for the entire outstanding balance.
2. Chapter 13 Bankruptcy
Chapter 13 involves a repayment plan, allowing the filer to pay back debts over three to five years. Joint debts are included in the repayment plan, which may offer protection to the co-debtor during the plan’s duration. However, once the repayment period ends, any remaining balance could still be pursued from the non-filing co-debtor unless explicitly discharged.
Protecting Joint Debtors
When dealing with joint debts in bankruptcy, protecting the non-filing party is a common concern. Here are some strategies:
Co-Debtor Stay: In Chapter 13, the automatic stay often extends to co-debtors, temporarily halting collection efforts against them.
Separate Agreements: Some creditors may allow the joint debtor to renegotiate terms independently.
Filing Together: In cases where both parties face financial hardship, filing for bankruptcy jointly may simplify the process and protect both individuals from creditor actions.
Alternatives to Bankruptcy for Joint Debtors
If bankruptcy is not the preferred solution, consider these alternatives:
Debt Settlement: Negotiating with creditors to reduce the total amount owed can benefit both parties.
Refinancing: Consolidating joint debts into a single loan under one person’s name can relieve the other party of responsibility.
Legal Agreements: Drafting a legally binding agreement that outlines each party’s responsibility can provide clarity and protection.
Key Considerations
Credit Impact: Bankruptcy significantly affects the filer’s credit score but does not directly impact the co-debtor’s credit unless they default on payments.
Community Property States: In states with community property laws, both spouses may be responsible for debts incurred during the marriage, regardless of whose name is on the account.
Consult Legal Experts: Bankruptcy laws vary by jurisdiction, so consulting a qualified attorney is essential for understanding your rights and obligations.
Conclusion
Bankruptcy can offer relief from financial burdens, but joint debts complicate the process. Understanding how shared obligations are treated and exploring all available options is essential for protecting both parties involved. By seeking professional advice and making informed decisions, individuals can navigate the challenges of joint debts and work toward financial stability.
