What Happens to Joint Debts in Bankruptcy?

Filing for Chapter 7 bankruptcy is generally seen as a way to gain financial relief and a fresh start. However, when debts are held jointly with another person, such as a spouse, family member, or co-signer, the situation becomes more complicated. 

Individuals considering Chapter 7 may wonder what happens to these joint debts once the bankruptcy case is filed. If you are faced with a similar situation, be prepared to seek legal representation from a trusted bankruptcy services firm as soon as possible.

What Are Joint Debts?

Joint debts are financial obligations that are shared by two or more parties. This typically means that each party has signed the agreement and is legally responsible for repayment.

Examples include:

• Joint credit card accounts.
• Co-signed loans, such as auto loans or personal loans.
• Mortgages signed by both spouses or partners.
• Medical bills for which multiple parties have signed responsibility.

When only one party files for Chapter 7 bankruptcy, the legal consequences can vary depending on the type of debt and who else is responsible.

Joint Debt Implications in Bankruptcy 

Debts Discharged for the Filing Debtor

When one person files for Chapter 7 bankruptcy, their personal obligation to repay the joint debt is discharged. This means that the creditor can no longer pursue the filing debtor for repayment.

Remaining Liability for the Non-Filing Co-Debtor

Although the filer is released from liability, the co-debtor remains fully responsible. Creditors can (and almost always will) pursue the non-filing party for payment of the debt.

For example:

• If a married couple has a joint credit card debt and only one spouse files for Chapter 7, the credit card company may continue to collect the balance from the other spouse.
• If a parent co-signed a student loan for their child, and the child files Chapter 7, the parent remains liable for the debt.

When spouses share joint credit in bankruptcy, one filer’s discharge may not fully eliminate the other co-borrower’s responsibility for repayment.

The Automatic Stay and Its Limits for Joint Debts

What Is the Automatic Stay?

When a bankruptcy petition is filed, an automatic stay immediately goes into effect. This court order prohibits creditors from pursuing collection actions against the filer during the bankruptcy case.

Protection for the Filing Debtor Only

The automatic stay applies only to the person who filed for bankruptcy. In Chapter 7 cases, it does not extend to co-debtors. This means creditors are free to continue collection efforts against the non-filing party.

Contrast with Chapter 13

In Chapter 13 bankruptcy, the automatic stay extends to co-debtors for consumer debts, offering broader protection. This is one of the key distinctions between Chapter 7 and Chapter 13 when dealing with joint debts.

Types of Joint Debts and How They Are Handled

Joint Credit Card Accounts

Credit card companies generally hold all parties on a joint account equally liable. If one party’s liability is discharged in Chapter 7, the creditor can still demand full payment from the other account holder. Authorized users are not legally responsible for repayment, but joint account holders are.

Co-Signed Loans

When someone co-signs a loan, they guarantee repayment if the primary borrower defaults. Chapter 7 may wipe out the primary borrower’s responsibility, but the co-signer becomes fully liable. For example, in a car loan co-signed by a parent for a child, if the child files Chapter 7, the lender can pursue the parent for full repayment.

Mortgages

If a mortgage is jointly held and one spouse files for Chapter 7, their personal liability for the loan is discharged. However, the mortgage lien remains on the property, and the non-filing spouse is still liable. The lender can foreclose if payments are not maintained.

Medical Bills

In Illinois and many other states, spouses may be jointly responsible for certain medical debts incurred during the marriage. If one spouse files Chapter 7, the other may remain liable.

Student Loans

Most student loans are not dischargeable in bankruptcy unless the debtor proves “undue hardship,” which is a high legal standard. If a parent co-signed, they remain responsible regardless of the child’s Chapter 7 filing.

Effects on a Jointly Owned Car in Chapter 7 

It is important to consider Chapter 7 effects on jointly owned vehicles. Illinois jointly owned car Chapter 7 bankruptcy affects both ownership rights and the loan obligations tied to the vehicle. If one co-borrower files for Chapter 7, that individual’s responsibility for the loan may be discharged, but the lender can still pursue the other co-borrower for repayment. 

In many cases, the lender also retains a lien on the vehicle, meaning that if payments stop, repossession is still possible. The bankruptcy trustee may also review the car’s equity to determine whether it can be liquidated for creditors. If the filer wishes to keep the vehicle, reaffirming the loan or redeeming the car at its current value are potential options, but both require careful consideration due to ongoing financial obligations.

Community Property vs. Common Law States

Illinois follows common law property rules, not community property rules. This means:

• Debts incurred by one spouse are not automatically shared by the other unless both signed the agreement or state-specific laws (such as for medical expenses) apply.
• In community property states, creditors may pursue community property assets, even if only one spouse files bankruptcy.

For Illinois residents, this distinction is important in understanding liability for joint debts. To learn more on bankruptcy issues in the state, check out these bankruptcy FAQs. 

Risks to Co-Debtors After Chapter 7 Filing

When only one person files for Chapter 7, the risks to the co-debtor include:

• Collection Calls and Lawsuits: Creditors may immediately turn to the co-debtor for repayment.
• Credit Report Impact: Missed payments or collection actions can harm the co-debtor’s credit score.
• Wage Garnishment or Asset Seizure: If the co-debtor cannot pay, creditors may pursue legal remedies.

Options for Managing Joint Debts in Chapter 7

Both Parties File Bankruptcy Together

Spouses often file a joint bankruptcy to discharge liability for debts they share. This prevents creditors from shifting collection efforts to the non-filing spouse.

Reaffirmation Agreements

A reaffirmation agreement allows a debtor to remain liable for a specific debt, typically to keep collateral such as a car. However, reaffirming a joint debt should be approached with caution, as it waives the bankruptcy discharge for that obligation.

Paying the Debt Voluntarily

Even if discharged, a debtor may choose to continue paying a joint debt to protect the co-debtor from collection efforts. This is voluntary and not legally required.

Negotiating with Creditors

Sometimes, creditors may agree to modify terms, reduce balances, or accept settlements to accommodate both parties.

Considering Chapter 13 Instead

If joint debts are significant and protecting the co-debtor is a priority, filing Chapter 13 may be a better option. Chapter 13 provides a broader co-debtor stay and allows debt repayment over time.

Things to Remember for Joint Debts in Bankruptcy

In Chapter 7 cases, joint credit accounts and joint loans may complicate the process because multiple borrowers remain legally responsible even if one files for bankruptcy. Late or missed payments on a joint loan can harm both credit histories and lead to a lower credit score or affect a co borrower’s credit score. 

While a credit card issuer may close a credit account or reduce a credit limit, authorized users can still see the impact on an authorized user’s credit report. Joint account owners must also consider monthly payments, credit utilization ratio, and the effect of higher credit limits. 

For secured debts, such as a joint loan tied to motor vehicle equity, the availability of a bankruptcy exemption may determine whether the vehicle is protected. Careful use of bankruptcy exemptions can shield certain property while helping filers manage monthly payments more effectively.

Our Illinois Bankruptcy Attorneys Can Strongly Represent Your Best Interests

At DebtPros, we know how overwhelming joint debts can become when considering bankruptcy. Our experienced Chicago bankruptcy attorneys provide:

• Careful evaluation of your joint debts and liabilities: Our attorney will thoroughly review all shared debts, including credit cards, loans, and mortgages, to determine the extent of your financial exposure and how Chapter 7 may affect both you and any co-borrowers.
• Legal guidance on whether to file individually or jointly with a spouse: Our legal counsel can explain the pros and cons of filing jointly or separately, helping you decide which option provides greater protection and debt relief.
• Targeted strategies to protect co-signers and family members from collection actions: Our skilled lawyers can develop approaches to shield loved ones from being pursued by creditors if you discharge your portion of a joint debt.
• Skilled negotiations with creditors to minimize liability: Our experienced lawyers may successfully negotiate settlements or payment reductions with creditors to lessen the financial burden on co-borrowers.
• Professional advice on whether Chapter 7 or Chapter 13 bankruptcy is the best option for your situation: Our legal team assesses your overall finances to recommend the most effective form of bankruptcy for eliminating or restructuring joint debt obligations.

If you are struggling with joint debts and considering bankruptcy in Illinois, it is time to get legal representation from our seasoned bankruptcy attorneys at DebtPros. To schedule your free consultation, call us at (312) 847-3475 or contact us online.