A common concern for new clients is understanding how their joint debts will be treated in Chapter 7 bankruptcy and Chapter 13 bankruptcy. This will often be a determining factor in whether or not they will even file, so it is worth taking a little time to discuss over my next two posts.
Most joint debts are "jointly and severably liable". This means if you and another person both sign on a loan that defaults, the creditor is allowed to go after one of you, both or you, or neither of you (not often!) for the full amount. The creditor is not limited to only going after half of the debt from both debtors. The creditor can collect 90% from one, 10% from the other, or any other combination.
This can be very important in situations where the joint debtors have large differences in income and assets, or are not on good terms. When there is a large difference in income and assets, the creditor is permitted to go after the assets of the wealthy signer on the loan, even if they hardly benefited from the credit. Unfair as this seems, this is entirely legal. I have had many clients co-sign on loans for their children or spouses get sued on those debts despite never enjoying any of its benefits. If you think about it, most cases with joint debtors will be unbalanced for this reason. The whole reason for applying for joint debt is that one individual has much better credit than the other.
Joint debts are also a big issue when the debtors are not getting along. This is frequently the case in divorces, where joint debts must be negotiated as part of the marital property settlement. In some cases, a joint debt you have agreed to assume through a marital property settlement will NOT be discharged in bankruptcy. I'll elaborate on this situation in my next post, but you will want to speak to an experienced Pittsburgh bankruptcy attorney to account for this situation. Regardless, when joint debts go bad, the debtors are often not willing to cooperate on dealing with the consequences.
Joint debts come in many forms. Credit cards are the most common. Cars and mortgages are also common situations. An individual wanting and needing a car will often not have the credit to finance one. This is when a parent or spouse will co-sign on the loan. "Co-signing" makes this parent or spouse jointly and severably liable. So, if further down the road, the car is repossessed, the creditor can go entirely after the co-debtor who never even used the car, but was only trying to be helpful, for the deficiency. This is actually a quite common issue.
These joint debts can be eliminated through bankruptcy. Unfortunately, there are not many legal alternatives to otherwise avoiding a joint debt, unless you can prove your co-debtor committed fraud.
The important thing to understand is that if you are a joint debtor on the loan, you are as much on the hook as your co-debtor, even if you only co-signed to be helpful. In my next post, I'll talk about how joint debts are treated in bankruptcy, which is sometimes the only way to deal with them when they have gone bad.
Contact us with any questions about your joint debt!