But for whatever reason the client is concerned, all of my clients have the same feeling: they do not want their family members to get “sucked in” to any problems associated with a bankruptcy. And for some people, the potential to have family members impacted by a bankruptcy case is a deal breaker - the potential client simply will not file a bankruptcy case if family members are going to, in some way, become involved in the bankruptcy at all.
Let’s take a look at common concerns.
While most married couples that I see choose to file a joint bankruptcy - that is, both spouses file - there are certain circumstances in which only one spouse should file a bankruptcy case. In these situations, it is not uncommon for the non-filing spouse to have concerns about the impact their spouse’s bankruptcy case will have on them. There are two common concerns in this situation.
First, some non-filing spouses worry that their spouse’s debt will somehow become the non-filing spouse’s obligation. I think this mindset comes from the knowledge that many people have of marriage dissolution law. In divorce cases, the debt of one of the spouses is “marital debt” and is subject to division by the court, even if the debt is listed in only one of the spouse’s names. So in essence, in a divorce case, the spouse who is not obligated on a credit account still feels some sort of consequence of the debt.
This is not the case in bankruptcy law. The only person obligated on any one particular account is the spouse who contracted for the account (of course, with one very important exception that I will come to shortly). So if spouse A has $20,000 in unsecured debt only in spouse A’s name, and spouse B has no debt in spouse B’s name, then if spouse A files bankruptcy, spouse B will not be responsible for payment of spouse A’s bills, provided that spouse B was not listed on the account and did not join spouse A in applying for credit.
Of course, all rules have exceptions, and there’s a major one with relation to spousal liability for debt. Under Minnesota law, a spouse is not obligated to pay the other spouse’s debts except if the debt is for medical services that the other spouse incurred. Although some hospitals and clinics choose to not collect against spouse’s of patients who are not paying medical bills, the law gives the medical creditor the right to do so.
Second, non-filing spouses are often worried about the negative impact to them on their credit score once their spouse files a bankruptcy case. Again, just like liability for spousal bills, non-filing spouses do not have much to worry about when it comes to credit scores. Filing a bankruptcy case results in negative credit reporting for the spouse who files. The non-filing spouse should have no negative entries on his or her credit report due to their spouse’s bankruptcy case. If for some reason a non-filing spouse is scored negatively because of her spouse’s bankruptcy case, the non-filing spouse should activate the credit reporters dispute policy, since the negative credit report is not based in fact.
A major concern of many of my clients is what will happen to the person who co-signed a loan to assist my client in obtaining financing. In answering this question, it’s good to take a look at what the difference is for co-signers in Chapter 7 and Chapter 13.
In chapter 7 cases, the filing of a bankruptcy case offers no protection to cosigners. The co-signer of a chapter 7 debtor is obligated to pay on the account, even if the cosigner has filed a bankruptcy case. And co-signers of chapter 7 debtors have no recourse for contribution from the bankruptcy debtor - co-signers are barred from collection against the bankruptcy debtor by the same law - the automatic stay - the prevents third-party creditors from attempting to collect debt.
So the co-signer for the chapter 7 debtor has to beware - it’s possible that collection on an account will commence immediately once there is a bankruptcy case filed.
Chapter 13 has a different approach: co-signers on consumer debt cannot be collected on while the chapter 13 case is in effect (cases last from 3 years - 36 months - to five years -60 months). So chapter 13 is a good option for people with debt problems that have co-signed debt.
The chapter 13 debtor can address the immediate and urgent problem of unpaid, impossible to afford credit accounts and other debts, while not exposing the co-signer on some of their loans to collection.
While this is a good option in co-signing situations, clients should know that the “co-debtor stay” found in chapter 13 has some complications. First, while the co-signer cannot be collected on while the chapter 13 case is open, once the chapter 13 plan has been paid and the chapter 13 debtor has received a discharge, the co-signer's liability on the loan will spring back to life. So the problem is, in most cases where the chapter 13 plan will be paying only a portion and not all of the debt a debtor has, simply deferred, not eliminated.
And some (but not all) creditors have recently begun reporting negative information on the co-signer's credit if there are no monthly payments being made while the chapter 13 case is pending. So anyone who has co-signed for a chapter 13 debtor is well-advised to check their credit report to see if there is negative credit reporting taking place on the co-signed loan. These negative reports can be repaired through correction of the entry, but in order to do so, co-signers must be aware of credit reporting.
That’s enough for this week. Next week, I’ll continue to write about protecting relatives in bankruptcy cases.