New York Spousal Liability for Debt
- Debts are usually the responsibility of the person who incurs them.
- One spouse can be held financially liable for the other spouse's debts, in community property states.
- Don't default on a debt, without a plan in place for dealing with the collection efforts.
If my spouse defaults on credit card debt, will it hurt my credit rating?
My spouse plans to default on his credit cards. They are in his name only. If he defaults, will it affect my credit rating? I am planning to buy a vehicle.
Thank you for your question about one spouse’s plan to default on his credit card debt and how it affects the other spouse’s credit rating.
If cards are held separately, then the payments are the cardholder’s financial responsibility. The payment histories for accounts that are held separately only appear on the credit report of the responsible party. The spouse that is not listed on the account should not have his or her credit rating harmed from delinquencies the other spouse incurred.
Spousal liability in community property states
Who is responsible for the debt becomes more complicated if community property issues are involved. If the spouses now live in a community property state, or lived in one at the time the consumer debt account (such as a credit card account) was opened, the non-signing spouse may have incurred liability without signing a credit contract as co-debtor. If the debt incurred during a marriage was used for the benefit of both members of the marriage, liability may accrue to the non-signing spouse in community property states. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin.
Regarding a non-signing spouse's liability IF the parties are living in a community property state AND the debt was incurred during their marriage for the benefit of both spouses, AND a spouse is sued and a judgment is rendered for a specific amount owed, the judgment can be collected by wage garnishment against any defendant included in the judgment order singularly or simultaneously. The garnishment amount is normally 25% of net income (that is, after withholding) but this varies from state to state. The creditor does not have any duty to "even out" the judgment liability between the spouses. A creditor has the legal right to collect 100% from either spouse. Only if a judgment were entered against the non-signing spouse would it appear on that person’s credit report, potentially affecting applications for loans or credit.
Even in community property states, many creditors do not go to the trouble of suing both spouses, as doing so tends to complicate the legal process involved in obtaining a judgment. However, this does not mean that a particularly aggressive creditor will not pursue all of its available rights to collect a debt.
One important disclaimer: Community property laws are unique to each state -- no two states share the same laws. The discussion above regarding spousal liability is meant to provide general information about community property as a theory. Your state's laws may vary from the general theory. Therefore, it is important to consult with an attorney in your state who can review the details of your situation and give you accurate and precise advice about your rights and liabilities under your state's laws.
Spousal liability in non-community property states
Generally speaking, if the spouses never resided in a community property state, and only one spouse signed the loan contract (such as a credit card agreement), then the signatory-spouse is liable for the debt. Conversely, the non-signatory spouse does not share in his or her spouse's liabilities in non-community property states.
You mentioned that your spouse plans to default on his credit card accounts. Does he have a plan in place to deal with the collection efforts that will ensue? You did not mention the size of your spouse’s debts. If they are over $10,000, I recommend that your spouse speak with a debt settlement firm. Debt settlement, also called debt negotiation or debt resolution, is a process where settlements are negotiated with your spouse’s lenders where they agree to forgive a part of your spouse’s balance, frequently saving between 40% to 60% of what’s owed (results vary widely, however). Your spouse then only has to pay the new agreed-upon sum. In some cases, the settled balance is paid out over a number of monthly payments. In others, the settlement requires a lump-sum payment. If debt settlement is not the right approach for your spouse, then he should consider filing for bankruptcy or a credit counseling program.
Did you know?
Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q4 2022 was $16.91 trillion. Auto loan debt was $1.55 trillion and credit card was $0.99 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Each state has its rate of delinquency and share of debts in collections. For example, in Ohio credit card delinquency rate was 4%, and the median credit card debt was $412.
Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.