September 24, 2017

Joint Liability for Debts: An FAQ

movie poster "Divorce American Style"I am frequently asked whether spouses have joint liability for debts. This FAQ should help readers gain a basic understanding of the issues to consider, but is not a replacement for a qualified bankruptcy attorney’s opinion on your specifics.

Q: MY HUSBAND HAS SUBSTANTIAL DEBT THAT HE CANNOT PAY. HE NEEDS TO FILE BANKRUPTCY. DO I HAVE TO FILE WITH HIM?

A: I have heard this quite often. One spouse has substantial debt; either consumer debt, business debt, or both. The other spouse has no debt or very little deb. However, he or she believes that they are liable based on the mere fact that they are married to the debtor.

This is not true. Marriage alone does not make the non-debtor spouse liable.

There is one very limited exception in North Carolina pertaining to hospital bills. However, in many years of practice, I have never seen it invoked.

Q: MY WIFE HAS A CREDIT CARD AND SHE PUT MY NAME ON IT. AM I LIABLE FOR THE DEBT ON THE CREDIT CARD?

A: If you did not sign the credit card application or otherwise guarantee the obligation, you are not liable. You are an authorized user of the card and not obligated to pay the debt.

Think of the employee of Giant Corporation, Inc. He or she is given a company credit card and told to use it. Obviously, the employee is not liable. The same concept applies to husband and wife.

Q: MY HUSBAND GAVE THE BANK A MORTGAGE ON OUR HOME TO SECURE AN OBLIGATION OWED BY HIS BUSINESS. I SIGNED SOME PAPERS IN CONNTECTION WITH THE LOAN. AM I LIABLE?

A: The answer is maybe yes and maybe no depending on the documents that you signed.

Generally, a transaction such as this will involve two documents. These are 1) a note that evidences the indebtedness and 2) a deed of trust that is recorded in the county in which the real estate is located and evidences the mortgage lien. If you signed the note, you are liable. If not, you have no liability.

Nevertheless, the lender will require the spouse who did not sign the note to sign the deed of trust. This waives marital rights that the spouse has in the property, but it does not make the spouse liable for the debt.

I wrote a primer for distressed homeowners that will answer further questions on that topic. Download it here.

Q: MY WIFE AND I BOUGHT A HOUSE. MY NAME IS ON THE DEED ALONG WITH HER NAME. THERE IS A MORTGAGE LIEN ON THE PROPERTY TO THE BANK. AM I LIABLE FOR THE DEBT TO THE BANK?

A: Again, the answer is maybe.

In this situation, in addition to the note and deed of trust there is a third document, the deed. The deed evidences ownership of the property.

In the situation set out above the husband’s name is on the deed; therefore, he along with his wife own the property. The next inquiry is as to whether or not he signed the note. If he did, he is liable. If not, he is not liable. The mere fact that he has an ownership interest in the property is immaterial. Again, he would have signed the deed of trust to waive his marital rights.

Q: MY HUSBAND AND I HAVE A NUMBER OF JOINT CREDIT CARD DEBTS. WE HAVE SEPARATED AND HAVE SIGNED A SEPARATION AND PROPERTY SETTLEMENT AGREEMENT. HE WAS TO PAY SOME OF THE CREDIT CARD DEBT, AND I WAS TO PAY SOME OF THE CREDIT CARD DEBT. HE IS NOT MAKING THE PAYMENTS, AND SOME OF THE CREDITORS THAT HE WAS TO PAY ARE CONTACTING ME. AM I LIABLE?

A: Unfortunately, you are liable. You have made an agreement with your husband that he will pay these debts. Your agreement with him cannot change your underlying obligation to the creditors. You do have the right to bring an action against your husband to force him to pay the creditors that he has agreed to pay or to reimburse you for any payments that you have made.

However, this does not mean that your obligation to the creditors that he was to pay no longer exists.

Q: MY WIFE AND I OWE SUBSTANTIAL DEBT BOTH BUSINESS DEBT AND CONSUMER DEBT. WE HAVE SEPARATED AND HAVE SIGNED A SEPARATION AGREEMENT. I AM GOING TO HAVE TO FILE BANKRUPTCY. CAN MY WIFE AND I FILE A JOINT BANKRUPTCY CASE?

A: The answer is yes.

The requirement for filing a joint case is that both debtors, husband and wife, are legally married. The fact that husband and wife are separated has no bearing on whether or not they can file a joint case.

Certainly, husband and wife can file separate bankruptcy cases, however, a joint filing will usually mean a substantial saving in attorney fees and filing fees over filing two cases.

Again, there is no substitute for  a bankruptcy counseling session to help you understand your legal options for debts you cannot repay.