Effect of Spouse's Bankruptcy on Your Credit

The effect of bankruptcy on credit can be significant. In bankruptcy, the borrower comes to the courts and requests that his or her debt be eliminated (in Chapter 7 bankruptcy) or reorganized (in Chapter 13 bankruptcy.) In doing this, the borrower is not fulfilling on the agreement made with the lender originally, that repayment of borrowed funds would occur. This affects the borrower filing bankruptcy significantly and in many cases, will affect a spouse's credit as well.

Negative Effect of Bankruptcy

The effect of bankruptcy on credit for the spouse will be dependent on a number of factors. If the debt is in the name of both spouses, then the creditor can come after the spouse for repayment of the debt. Even if the debt is discharged in bankruptcy, a notation on the credit report of the spouse will alert future creditors to the lack of repayment of the debt. The spouse's credit, then, will have a black mark because of the nonpayment of the debt. However, this is only the case when the spouse's name is part of the agreement made with the lender. If the spouse is not a user of the account or a co-signer on the debt, the nonpayment will not be on their credit report.

Important Considerations

In situations where a spouse is not filing bankruptcy, there is not necessarily a negative impact on their credit score. However, this is dependent on if the spouse has any associated debts with the bankruptcy filer.

• The spouse does not have to file bankruptcy with their spouse. For example, Jane and Joe are married and only Jane files bankruptcy. Joe does not have to. However, Joe's debts remain payable.
• If the spouse shares responsibility for repayment of a debt with the bankruptcy filer, and the debt is to be forgiven, the spouse may need to repay the debt or will have a negative mark on their credit. If Jane and Joe share a credit card, it is likely that Joe will need to repay that debt or a negative mark will be on his credit.
• If the spouse shares a responsibility with the bankruptcy filer but the debt will be reaffirmed, no negative mark will be made. For example, if the married couple is co-signers on a home loan, but that debt is reaffirmed, both will continue to repay the debt.

Determining the effect of a spouse's bankruptcy can be difficult in some situations. The effect of bankruptcy on credit is negative, if there is any connection between the two parties in terms of the responsibility of repaying the debt.