Joint Debt in Bankruptcy: Will You Both Be Held Responsible?
Filing for bankruptcy can feel overwhelming, even more so when it comes to dealing with joint debts in bankruptcy. Knowing how debts like these are treated is essential if you’re in Illinois and considering bankruptcy. The ins and outs of dealing with joint debts in bankruptcy — or worrying about your responsibility for spousal debt — can become tricky.
This is where an Illinois bankruptcy attorney becomes essential because they understand the intricacies of bankruptcy in Illinois law. In this article, you will learn more about what happens to joint debts during bankruptcy in Illinois.
Quick Summary:
- In a Chapter 7 bankruptcy, nonexempt assets are sold to pay creditors, and unsecured debts are discharged. However, joint debtors remain liable unless both file or reaffirm the debt. Chapter 13 bankruptcy has a repayment plan and can allow asset retention. Like Chapter 7, if only one spouse files, the other remains responsible for joint debts unless separate arrangements are made.
- Spouses are usually responsible for debts incurred during the marriage, so creditors can sue either spouse for the whole debt. A spouse typically files for bankruptcy, which eliminates the other spouse’s liability on the debt unless the debt is specifically dealt with in the bankruptcy.
- Couples can shield themselves by filing jointly, which discharges shared debts. They may also ask for reaffirmation agreements on certain debts or negotiate separate payment plans to minimize damage to their credit reports. An Illinois bankruptcy attorney can guide you through these options.
Overview of Bankruptcy Types
In Illinois (as in other states), the two most common types of bankruptcy are Chapter 7 and Chapter 13. Knowing these types is essential to anyone working through joint debts during bankruptcy.
Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy (also called liquidation bankruptcy), a trustee sells off a debtor’s nonexempt assets to pay creditors. When you file this type of bankruptcy, you can get most of your unsecured debts discharged, giving you a fresh start.
- Qualification: Individuals must pass the means test to qualify for Chapter 7, which determines if gaining their debts part would be feasible.
- Process: The process can take months and involves an automatic stay that temporarily stops creditor collection efforts.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy — which is also referred to as reorganization or wage earner’s plan — enables an individual with regular income to develop a repayment plan lasting three to five years. This option is helpful for those who want to keep specific assets or need more time to make up for secured debt payments.
- Eligibility: Must have a steady income, and total unsecured debts must be below certain limits set by law.
- Involves: Proposal of a repayment plan that shows how much will be paid back each month towards outstanding debts.
Depending on your situation and what you want to achieve in dealing with joint debts in an Illinois bankruptcy case, either option has advantages. An experienced Illinois bankruptcy lawyer can help you decide which route makes the most sense for your circumstances.
Effect of Joint Debts on Bankruptcy
When facing financial difficulties, understanding how bankruptcy affects your debts is necessary, especially when those debts are shared. Here’s how Chapter 7 and Chapter 13 bankruptcies handle joint debts:
- Chapter 7: Joint debtors remain liable under Chapter 7 unless both file or otherwise reaffirm the debt.
- Chapter 13: Like Chapter 7, if either spouse files under Chapter 13 while the other does not join in the filing (or makes separate arrangements), only a part of the jointly held responsibility may be covered by this process.
Joint Debts and Spousal Liability
In Illinois, when you and your partner incur debt jointly — such as on a credit card, a home mortgage, or a car loan — you’re typically both responsible for paying it off. That means creditors can pursue either of you for the entire amount.
A spouse who files for bankruptcy doesn’t automatically eliminate the other spouse’s responsibility for both joint debts. If a debt is not explicitly dealt with in the bankruptcy filing (often by a process called reaffirmation), then a non-filing spouse is still responsible for repaying the full amount. Below is a brief breakdown:
- You’re both liable: Generally, when you both sign a credit agreement, you’re considered co-signers or co-borrowers. Therefore, both are equally responsible for the debt. That makes you ‘jointly and severally liable,’ a legal term that gives the creditor the right to chase either or both of you for the full amount owed.
- Bankruptcy does not always lead to relief for both: When one spouse files for bankruptcy, creditors may still come after the other spouse for any debts they had together. The bankruptcy may affect what creditors can do to collect, but it doesn’t discharge the non-filing spouse’s obligation.
- Your credit score matters: If your spouse goes bankrupt and stops paying a joint debt, it could badly hurt your credit score, even if you did not file. That’s because the debt is under both your names.
Protection from Joint Debt Liability
What can couples do to protect themselves from joint debts? Below are a few options:
- File jointly: If both spouses file for bankruptcy simultaneously, they wipe out a full slate of shared debts in one go. That can simplify things and ensure everybody’s on the same page.
- Reaffirmation agreement: You and/or your spouse can agree with your creditors to continue paying certain debts even after you file for bankruptcy. This ‘reaffirmation agreement’ is typically used for car loans or mortgages, where you want to hold onto the asset.
- Negotiate a separate payment plan: The non-filing spouse could negotiate with the creditors and set up a separate payment plan for the joint debt. That could mitigate more harm to their credit score.
Call Our Illinois Bankruptcy Attorney Now!
If your spouse is contemplating bankruptcy, their issues can have severe implications. Deciding on joint debts in bankruptcy and spousal debt liability needs personalized guidance. This is where our Illinois bankruptcy attorney enters the picture.
Our team at Cutler & Associates, Ltd. will help you learn to control your debts, save your assets, and secure your financial future. We can help you with Chapter 7 and Chapter 13 bankruptcy. Don’t take on the emotional burden of bankruptcy by yourself. Schedule a free initial consultation today!