How Bankruptcy Affects Joint Accounts: What You Need to Know

Filing for bankruptcy can feel like a lifesaver when you’re drowning in debt, but what happens when your finances are tied to someone else’s through joint accounts? I’ve experienced this firsthand, watching my partner file for bankruptcy while our money was tangled together. The stress and uncertainty were suffocating. But here’s the thing: knowledge is power. Understanding how bankruptcy affects joint accounts can help you navigate this tricky situation with more ease. So, let’s dive in and demystify this murky topic, one step at a time.

What Happens to Joint Accounts When One Account Holder Files Bankruptcy

Filing for bankruptcy is a tough decision. But sometimes, it’s the only way out from under crushing debt. I’ve seen firsthand how it can provide a much-needed fresh start. However, if you have joint accounts or loans with someone else, things get tricky.

Joint Checking and Savings Accounts

Let’s say you have a joint checking account with your spouse or business partner. You file for bankruptcy, but they don’t. What happens to that bank account? In most cases, the bankruptcy court can seize the entire account – even money belonging to the non-filing account holder. Yikes. Bankruptcy law allows the trustee to take all the funds, unless you can prove what portion belongs solely to the other person. It’s a huge headache.

Credit Card Accounts

Joint credit cards are another sticky situation. If one joint account holder files bankruptcy, their liability on the debt is erased. But the other person? Still 100% on the hook, even though they didn’t file. Creditors will hound them for payment. It’s not fair, but that’s how it works under bankruptcy law.

I once had a client who cosigned a personal loan for her son’s business. When the business tanked and he filed bankruptcy, she was left holding the bag. She was retired and on a fixed income. Suddenly being solely responsible for his $20,000 loan nearly broke her. Bankruptcy offers no protection for cosigners and joint account holders on personal loans, only the filing party. It’s heartbreaking.

Car Loans

What about joint car loans? If one person files bankruptcy, the lender can usually repossess the vehicle – even if the other person has been making payments. The automatic stay that stops collections doesn’t apply to cosigners. And the debt doesn’t get discharged for the non-filing borrower. I always advise couples to have car loans in only one name if possible. Avoid joint auto debt like the plague if bankruptcy is on the horizon for either of you.

How Bankruptcy Affects Authorized Users on Joint Accounts

It’s a common question I get. How does bankruptcy affect joint accounts if you’re just an authorized user, not a full account holder?

Difference Between Joint Account Holder and Authorized User

First, let’s define the difference. An authorized user has permission to use the account but isn’t legally responsible for the debt. Joint account holders are equally liable. The account appears on both credit reports and both are on the hook for paying.

Protecting Your Credit Score

If you’re just an authorized user, good news – your credit score is safe. The bankruptcy filing of the primary account holder doesn’t go on your credit report. But joint account holders aren’t so lucky. The account will likely be reported as included in bankruptcy on your credit, which means a major credit score drop.

Removing Yourself as an Authorized User

Even though your credit is protected as an authorized user, it’s smart to remove yourself from the account ASAP when the primary files bankruptcy. You don’t want to be associated with a bankrupt account. Contact the creditor and ask them to take you off immediately.

Dealing with Joint Debts in Bankruptcy

Figuring out how to handle joint debts in bankruptcy can be a nightmare. Let’s break down how different types of bankruptcy treat them.

Chapter 7 Bankruptcy

In Chapter 7, the filing person’s debts are discharged – but joint debts are still owed by the non-filing co-borrower. There’s no protection from creditors for the person who didn’t file. They’re open to collections, lawsuits, wage garnishment, you name it.

Chapter 13 Bankruptcy

Chapter 13 is a bit better for joint debts. The automatic stay extends to co-debtors for the life of the repayment plan. As long as the filing person keeps up with plan payments, creditors can’t come after cosigners. But if the plan fails, the co-debtor is back on the hook.

Reaffirmation Agreements

In some cases, signing a reaffirmation agreement can protect a cosigner. It’s a voluntary agreement to exclude a debt from discharge and keep paying. But be very cautious. If the filing person defaults later, the creditor can sue them and the cosigner. I rarely recommend reaffirming joint debt.

Codebtor Stay

For non-filing spouses, the codebtor stay in Chapter 13 can be a lifesaver. It stops collections against them for joint consumer debts like credit cards and medical bills. But it’s only temporary. If the bankruptcy case is dismissed or converted to Chapter 7, the codebtor stay is lifted. Creditors can resume collections against the spouse.

Steps to Take When Your Joint Account Holder Files Bankruptcy

So your spouse, business partner or cosigner filed bankruptcy. Now what? Here are crucial steps to take ASAP.

Separating Your Finances

The #1 priority is damage control. Immediately separate your finances from the bankruptcy filer. Close joint bank accounts and credit cards. Remove them as an authorized user on any accounts. Establish separate individual accounts moving forward.

Monitoring Your Credit Report

Keep a close eye on your credit report during your account partner’s bankruptcy. Make sure their filing doesn’t erroneously end up on your credit history. If you see the bankruptcy on your report, dispute it immediately with the credit bureaus. It can be a pain to fix, but it’s essential.

Seeking Legal Advice

Don’t navigate the minefield of joint debts in bankruptcy alone. Consult an experienced bankruptcy attorney to understand your rights and obligations. A good lawyer can advise you on how to minimize your liability, protect your credit, and deal with aggressive creditors. It’s well worth the cost.

Frequently Asked Questions About Joint Accounts and Bankruptcy

Q: Can I file bankruptcy on joint debts only? A: No, when you file bankruptcy you must include all debts, both individual and joint. You can’t pick and choose. 

Q: What happens if I’m a cosigner on a car loan and the primary borrower files bankruptcy? A: The automatic stay doesn’t apply to cosigners, so the lender can still repossess the car and come after you for the balance owed. 

Q: How can I protect my credit if my joint account holder files bankruptcy? A: Separate your finances ASAP. Remove yourself as an authorized user, close joint accounts, and monitor your credit report closely for errors. 

Q: If my ex files bankruptcy on joint debts, am I still liable? A: Yes, unless you file bankruptcy too, you’re still fully responsible for joint debts, even if your ex’s liability is discharged. 

Q: Can I voluntarily pay joint debts after my account partner files bankruptcy? A: You can, but you’re not required to. Continuing to pay protects your credit and assets from collections, but it’s a personal choice. The bottom line? Joint accounts and bankruptcy are a tricky combination. Get expert legal advice to protect yourself financially before, during and after your account partner files.

Conclusion

Bankruptcy and joint accounts – it’s a complicated mess, isn’t it? But here’s what you need to remember: communication is key. Talk to your account partner, separate your finances if needed, and don’t be afraid to seek legal advice. It’s not going to be a cakewalk, but you can get through this.

It’s crucial not to allow the fear of bankruptcy to trap you in a never-ending loop of debt. Occasionally, it’s the optimal path to begin anew. Now that you understand how bankruptcy affects joint accounts, you’re well-prepared to choose the right course of action for your distinct situation.

You’ve got this. Keep your head up, stay informed, and remember – there’s a light at the end of the tunnel. Brighter days are ahead, my friend. If you need me, you can request an appointment here.