Joint Debts: Did you sign on the dotted line?
It's time for another FAQ podcast and today we talk about if and when you might be responsible for your spouse's debt and how one spouse filing bankruptcy might affect the other. To answer these questions I talk with Hoyes Michalos Trustee in Bankruptcy Jason Quinney about joint debts and co-signed loans. Jason explains what a joint debt is, what happens to a co-signer if a debt goes unpaid and clears up the misconception that joint debts settled in a bankruptcy or consumer proposal need to be filed individually.
What are joint debts?
Jason explains that joint debts are debts that you sign with another person. For example,
...a lot of couples when they go to get loans, they have to get a co-signer; so they co-sign debts together.
He asserts that a co-signer is generally needed because an individual poses a lending risk and that by having a guarantor on the debt, they have ensured that two people are now responsible for that debt. Examples of joint debts include lines of credit, mortgages and credit cards. The latter has two different options to consider: a joint card and a supplementary card.
- Joint Credit Card - Both individuals have signed for the card and are responsible for the whole amount of the debt (not just 50% of it).
- Supplementary Credit Card - An additional credit card for your spouse, adult child or anyone that you wish to give the card to. Legally, the supplemental card holder has no responsibility for the debt because they did not sign the paperwork. The amount owing is legally the primary cardholder's responsibility.
A common misunderstanding is that just because you are married and use the same credit card account or loan, you are liable for the debt. However, if you did not sign for the debt, you are legally not responsible for it. Furthermore, if your spouse files bankruptcy or a consumer proposal it will not affect you if your name is not on the statement.
How will filing bankruptcy or a consumer proposal affect my co-signer?
If your debts are not joint (only your name is on the account), filing insolvency will not legally affect anyone else and your bankruptcy will not show up on your spouses credit report, just because you're married. Realistically, a bankruptcy could affect future loans (such as a mortgage) that you wish to sign jointly, because following a bankruptcy lenders will consider you a risk. Jason explains that,
in real life it's going to affect [your future co-signer]. I mean the bankrupt isn't going to be a very good co-signer. And so, if you go and apply for a loan or a line of credit or a mortgage, it may be difficult.
However, the important thing to remember is that you've dealt with your debt, and that prior to your bankruptcy you were probably considered a lending risk anyway.
Differently, if a debt is joint or co-signed (both you and another individual have signed on the account and both names are on the account statement) then creditors could continue to pursue that individual for the full amount, even though you have filed bankruptcy. Your bankruptcy will not affect your that person's credit report as long as they continue to make payments on the co-signed debt, because they are liable for the full amount.
What is a joint consumer proposal or bankruptcy?
A common misconception is that joint debts need to be handled individually by filing separate insolvencies. Contrary to this belief, it is possible to file a bankruptcy or consumer proposal together if you are carrying joint debts. This is one process that covers both individuals at a lower cost than filing separate insolvencies.
Jason explains that,
if you file two separate proposals, we would have to look at both. The amount of debt would be 100% for both separate files. So, we don't split the debts, you can't split the debts in half.
He goes on to say that filing a joint consumer proposal would be around half of that cost because you're only dealing with the debt once.
If you're unsure whether your debts are joint or you're wondering how a joint bankruptcy or consumer proposal process works, contact a licensed Trustee in Bankruptcy to review your situation and discuss all of your options.
For more information about joint debts, co-signers and how to deal with joint debts during a separation or divorce, read the full transcript here.