Q&A: How one spouse’s bankruptcy filing affects the other spouse

Dear Liz: If one spouse files for bankruptcy, how does that affect the other spouse? What happens to the joint accounts?

Answer: How the nonfiling spouse is affected depends on whether they live in a community-property or a common-law state.

Most states are common-law states. Property and debts acquired during marriage can belong to only one spouse.

In these states, the filing spouse’s separate property and their share of any jointly owned property become part of the bankruptcy. Any property that isn’t protected under the state’s bankruptcy exemption laws can be taken and sold to pay creditors.

The bankruptcy trustee may try to partition any joint property so only the filing spouse’s share is sold, but if that’s not possible the whole property may be sold and the nonfiling spouse will be paid for his or her share. The bankruptcy erases the filing spouse’s separate debts and share of any joint debts, but the nonfiling spouse still has to pay his or her share of those joint debts.

In community-property states, property and debts acquired during marriage typically belong to both spouses, even if they’re in only one spouse’s name. So a bankruptcy filing by one spouse in a community property state can put more property at risk. (Community-property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.)

As in common-law states, a completed bankruptcy erases the filing spouse’s debts but leaves the other spouse on the hook for his or her share of any joint debts.

In community-property states, though, the nonfiling spouse can get a benefit known as a “phantom discharge.” If the filing spouse gets debts wiped out and is able to protect community property under the state’s exemption laws, then that property stays protected. As long as the couple is married, creditors won’t be able to touch it.

Bankruptcy has gotten complicated enough that you’ll want to get good, solid advice from an experienced bankruptcy attorney before you proceed with any filing. Most such attorneys offer a free or low-cost initial consultation to discuss whether it’s the right solution for your situation. You can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org.

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Q&A: What to do about heavy credit card debt

Dear Liz: I have a lot of credit card debt and am just able to make minimum payments. I feel like after doing this for four years now that I am not getting ahead. I will be 61 this summer and don’t have much saved for retirement. My rent keeps going up along with other expenses. I have an 11-year-old car that is in need of maintenance but don’t have the funds to do it. My question is, what would happen if I walk away from the credit card debt? Will I be facing garnishment?

Answer: Yes, you could be sued and face wage garnishment if you simply stopped paying your debts.

You could consider a debt management plan offered through a credit counselor, which could lower the interest rates you pay. You can get referrals from the National Foundation for Credit Counseling at www.nfcc.org. But you’d be making payments for the next five years or so, when you could be putting that cash toward your retirement.

A Chapter 7 bankruptcy, by contrast, would take a few months and legally erase your credit card debt to give you a fresh start. Bankruptcy is often the best of bad options when you can’t make progress on your debts. Consider meeting with both a credit counselor and a bankruptcy attorney so you understand all your options.

Tuesday’s need-to-know money news

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Q&A: Credit score after bankruptcy

Dear Liz: This is just to add to your observation that credit scores tend to improve after a bankruptcy. I filed Chapter 13, which required a five-year repayment plan. At that point my score was around 640. The day of the discharge, I was able to get a car loan at 3% interest. Also, the bankruptcy dropped off my credit reports seven years from the filing date, and my scores actually dropped a good bit.

Answer: It’s pretty unusual for scores to go down after a bankruptcy drops off your credit reports. It’s possible you weren’t looking at the same type of score because there are many different formulas in use. It also could be there were other changes that happened simultaneously, such as a high balance on a credit account or an old, paid-off loan that a creditor stopped reporting.

It’s not unusual, though, for someone who completes a Chapter 13 to get a competitive rate on a loan where there’s collateral, such as an auto loan, assuming he has a job, credit score expert John Ulzheimer said.

“Debt free plus employed equals not a bad risk, especially if they put down a decent down payment,” Ulzheimer said.

Q&A: Fixing your credit scores after a bankruptcy

Dear Liz: How do you repair credit scores after filing for bankruptcy? My husband and I are in this situation and are looking to reestablish credit and increase our credit scores. Also, how long do closed accounts appear on the credit report?

Answer: Filing for bankruptcy may have actually helped your scores. Researchers at the Federal Reserve Bank of Philadelphia found scores typically plunged in the 18 months before people filed for bankruptcy and rose steadily afterward. The average credit score before someone filed Chapter 7 was 538.2 on Equifax’s 280-to-850 scoring range. By the time filers’ cases were discharged, their average score was 620.3.

You can continue the upward trend with a credit-builder loan. These loans, typically offered by credit unions, put the money you borrow — usually $500 to $1,000 — into a certificate of deposit or savings account that you can claim once you’ve made 12 monthly payments. Your payments are reported to the credit bureaus, so you can build a decent credit history and your savings at the same time. If your local credit union doesn’t offer these loans, check to see if there’s a community development financial institution near you that does. You can find links to these at www.cdfifund.gov. Another option is Self Lender, an online company that makes credit-builder loans.

If you don’t already have a credit card, you can accelerate your scores’ rehabilitation with a secured credit card. You make a deposit, typically $200 to $2,000, with the issuing bank and get a credit line equal to that deposit. You should use the card lightly but regularly, being careful not to charge more than about 30% of its credit limit and paying the balance in full each month.

Another option is to wait until your scores are in the mid-600s and then apply for a regular credit card.

The bankruptcy will remain on your credit report for 10 years, but it will have less effect on your scores as time goes by as long as you continue to use credit responsibly.

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Tuesday’s need-to-know money news

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