I am often asked if bankruptcy will impact other people who are important in the Debtor’s life. One of the most common questions is: “How will this affect my husband/wife/boyfriend/girlfriend/partner or fiancé”? That question can be expanded to be about people with whom you live or are associated or who are related to you. I will address co-debtors below, so this part of the answer relates to non-co-Debtors or non-co-Borrowers. The fact of the matter is that your bankruptcy filing should have no direct impact upon them. There was a time when things appeared on credit reports that ought not to have. As a result, it was fairly common for one person’s filing to show up on their spouse’s credit report. The spouse was often an authorized user on a credit card, or may have even been a co-borrower. As such, the bank linked the two together. There was a time when it was fairly common for the bankrupt’s children or parents to show up on the other one’s credit report, especially if the father was a “Sr.” and the son was a “Jr.”. This is a less frequent occurrence now, although it sometimes still happens. The good news is that this is now an easy problem to fix.
In the bad old days, it was very difficult to correct an error in a credit report. The burden was on the person to prove that the statement in the credit report was false. Fortunately, we now have the Federal Fair Credit Reporting Act (FCRA). FCRA puts the burden of proof on the credit-reporting agency. As such, if you report to the credit reporting agency that something is false, they now have thirty (30) days either to verify that it is true, or to remove it from the credit report. If you file bankruptcy and your spouse or fiancé does not, then they cannot verify the truth of the bankruptcy filing that did not occur. If John Smith, Sr.’s bankruptcy shows up on John Smith, Jr.’s credit report, then once again, the credit-reporting agency would not be able to verify this false information. It really is no big deal to fix these things anymore. Now, fixing a credit report is simply a matter of knowing the correct address to contact and using the appropriate “magic words”.
I did say that it would have no “direct” impact upon any of these people. Obviously, if your spouse files for bankruptcy, then you are married to a bankrupt. This could be a problem if you need to apply for something that requires joint credit, such as a mortgage. There may be a period of a couple of years where the filing spouse will be unable to cosign a mortgage. If the non-filing spouse can get a mortgage without the filing spouse, then that is the solution. Banks now do this quite commonly. However this is a situation where the non-filing spouse could be indirectly impacted by the bankruptcy. It is unlikely that the filing spouse’s co-signature would have been helpful on a mortgage application anyway. Obviously, the Debtor-Spouse would not have had a strong credit profile before the bankruptcy filing either.
If your spouse or fiancé or significant other is a co-borrower, that does create a different situation. If you file bankruptcy, the co-signers are left “holding the bag”. If your mother co-signed your car loan and you filed bankruptcy, then your mother would now be responsible for your car loan if you do not pay it. The creditor probably wanted the co-signer specifically because it was worried that the borrower could not pay. There is an interesting wrinkle to this in Chapter 13.
Chapter 13 has something called the “Co-Debtor Stay”. During the pendency of the Chapter 13 Plan, which can be anywhere from three (3) to five (5) years, the Creditor is not allowed to contact the Co-Debtor or otherwise seek to collect from the Co-Debtor without permission from the Bankruptcy Court. As result, if your mother cosigned for a debt that you owe, the Creditor has to leave your mother alone for as long as you are in Chapter 13. There are situations where they get permission from the Court, but that does not usually happen. This can be very helpful in a situation where you cannot take care of the debt now, because you are in Chapter 13, but should be able to help out once the Chapter 13 is over. At that point, you can step in and protect mom or whoever the Co-Borrower is.
I like telling stories, so I am going to conclude this blog by talking about a case that I once had that is informative of what happens to Co-Borrowers in bankruptcy. My client bought a house along with his wife, her two brothers, and their two wives. All six (6) people were on the mortgage. My client got divorced; moved out of the house, and stopped contributing to the mortgage. The other five (5) people stopped making mortgage payments somewhere along the line. My client filed Chapter 7, and the bank moved for Relief from Stay to foreclose on the house. We did not oppose the motion, because we did not care. However, the other five (5) did file an opposition, and I had to appear for a hearing. At the hearing, one of them told the Judge something to the effect of ‘if he is allowed to walk away without paying the debt, then we are left holding the bag.’ I could see that the Judge was struggling not to laugh as he responded to this person, ‘leaving other people holding the bag happens all of the time in this Court.’