What Happens to Joint Debts in Bankruptcy?

When you file for bankruptcy, joint debts can become a significant concern, especially if you have a co-signer or joint account holder. Bankruptcy’s impact on these debts depends on the type of bankruptcy you file—Chapter 7 or Chapter 13—and how the debt is structured.

When considering bankruptcy and any joint debts you have, it is important that you understand:

• The difference between joint debt and authorized user accounts
• How Chapter 7 and Chapter 13 affect joint debts
• What happens to co-signers and their credit
• The impact of reaffirmation agreements
• Special considerations for married couples and credit unions
• How business debts and debt settlement compare to bankruptcy

Understanding Joint Debt vs. Authorized User Accounts

Before discussing bankruptcy’s impact, it’s important to distinguish between joint debts and authorized user accounts:

• Joint Debt: You and another person are equally responsible for repayment. Common examples include joint credit cards, mortgages, and car loans. This is also considered joint and several liability, which means the creditor can hold either party completely obligated on the debt. It also does not matter what order your names are listed on the account, there is no difference between the first person listed or the second person listed on the bill.

• Authorized User Account: You have permission to use someone else’s credit card, but you are not legally obligated to repay the debt. The account holder is solely responsible. An authorized user will typically have a card in their name, but the bill will arrive in only the account holder’s name.

Bankruptcy and Authorized User Accounts

If you are an authorized user on someone else’s credit card, filing bankruptcy will not discharge the debt because you were never legally responsible for it. However:

• The primary cardholder may remove you from the account, which could impact your credit score.
• The account may disappear from your credit report, affecting your credit history length and utilization ratio.
• If the primary cardholder defaults on the account, it won’t legally affect you, but it could damage your credit score if the account is still listed under your profile.

If you’re an authorized user, you should check your credit report after filing to ensure the account is properly reported or removed. You can dispute the account, if it is inaccurate.

Bankruptcy and Joint Debts: Chapter 7 vs. Chapter 13

If you and someone else share legal responsibility for a debt, bankruptcy affects both of you—but in different ways, depending on whether you file for Chapter 7 or Chapter 13.

How Chapter 7 Bankruptcy Affects Joint Debts

Chapter 7 bankruptcy eliminates your legal obligation to pay a joint debt, but it does not discharge your co-signer’s responsibility. The creditor can still demand full repayment from the co-signer or joint account holder.

Example: Joint Credit Card Debt in Chapter 7

Jane and her brother co-signed for a $10,000 credit card. Jane files for Chapter 7, which eliminates her liability. However, the credit card company now demands full payment from her brother. If he doesn’t pay, the creditor can sue him and report missed payments to the credit bureaus, hurting his credit score.

Risks to Co-Signers in Chapter 7

• Creditors may pursue your co-signer aggressively after your liability is discharged.
• If your co-signer misses payments, their credit score can drop significantly.
• The co-signer may struggle to qualify for new credit since they now owe the full balance alone.

What Happens to Joint Secured Debts in Chapter 7?

For secured debts like joint car loans or mortgages, Chapter 7 eliminates your personal liability, but the lender still has the right to:

• The creditor will repossess the car, if payments aren’t made.
• Foreclose on the home if payments stop.

Example: Joint Car Loan in Chapter 7

David and his father took out a joint car loan for $20,000. David files for Chapter 7 and stops making payments. His father is still legally responsible for the loan. If he can’t afford the payments, the lender may repossess the car.

Reaffirmation Agreements in Chapter 7

If you want to keep a secured asset like a car, some lenders may ask you to reaffirm the debt—which means you remain legally responsible for the loan even after bankruptcy.

• If only your co-signer continues making payments but you do not reaffirm, your co-signer is still on the hook, but you are protected from future liability.
• If you do reaffirm, you and your co-signer remain fully responsible, meaning if you default later, the creditor can sue both of you for the balance.

How Chapter 13 Bankruptcy Affects Joint Debts

The Co-Debtor Stay: A Key Protection in Chapter 13

Chapter 13 includes a co-debtor stay, which prevents creditors from collecting from a co-signer while you are in your repayment plan—as long as the debt is included in the plan.

Example: Joint Personal Loan in Chapter 13

Mike and his ex-girlfriend took out a $15,000 personal loan. Mike files for Chapter 13 and includes the loan in his plan. As long as he makes payments through his 3-5 year plan, the creditor cannot collect from his ex-girlfriend during the plan. After the plan, the ex-girlfriend may still have a balance to be handled.

What Happens If the Joint Debt Isn’t Paid in Full?

If your Chapter 13 plan does not fully repay the joint debt, your co-signer may still owe the remaining balance after the bankruptcy is complete.

Special Considerations for Married Couples

If only one spouse files for bankruptcy and you have joint debts, it may be smart to:

• Remove the non-filing spouse as an authorized user on credit cards before filing.
• Consider filing together if you both have substantial debt, to avoid leaving one spouse liable.
• Understand how jointly owned property (like a home) can be treated by the court as exempt under Virginia’s Tenants by the Entirety (TBE) exemption; it may be important to pay off joint, unsecured debts.

How Credit Unions Handle Joint Debt Differently

Many credit unions have a cross-collateralization clause, meaning your car loan may also secure a personal loan or credit card.

Example: Cross-Collateralization and Bankruptcy

Sarah has a $10,000 car loan and a $5,000 credit card with the same credit union. If she files for bankruptcy on the credit card, the credit union can repossess the car unless she continues paying both debts.

Additionally, credit unions often have membership rules that allow them to:

• Seize funds from your accounts to cover missed payments.
• Terminate your membership if they suffer a loss due to your bankruptcy.

To protect your money, move your funds to a different bank before filing.

Debt Settlement vs. Bankruptcy for Joint Debts

Some people try debt settlement instead of bankruptcy, but this can create problems for co-signers:

• Debt settlement doesn’t protect co-signers, meaning creditors can still pursue them for payment (unless the creditor agrees to settle for all parties)
• Forgiven debt can result in a tax bill, as the IRS considers it taxable income.

Final Thoughts: Protecting Yourself and Co-Signers

• Chapter 7 leaves your co-signer fully responsible.
• Chapter 13 protects co-signers (temporarily) but may not eliminate their liability.
• Reaffirming a loan keeps you responsible even after bankruptcy.
• Cross-collateralization can put your assets at risk.
• Debt settlement can harm your co-signer more than bankruptcy.

If you have joint debts and are considering bankruptcy, proper planning is crucial to protect yourself and those financially tied to you. An experienced Virginia bankruptcy attorney can help you develop a strategy that works for your unique situation.