How People Get Caught by Joint Debts
Here is a common scenario: a couple splits up, gets a separation agreement and then one of them tries to apply for a loan. The lender says, "Sorry you don’t qualify because your credit bureau shows you have this other debt with someone else." The client replies, "What? That’s not my debt! That belongs to my spouse. We’re separated. We split up all the debts, and that debt belongs to my spouse. I have a legal separation agreement to prove it."
Even though a couple has a legal separation agreement, it does not absolve either person from the fact that both of them signed for the debt, and both of them are 100% responsible for the debt no matter what happens. A legal separation agreement does not change this. If the person who is supposed to make payments on the debt stops, then the other person will have to continue making the payments until the debt is paid off. Creditors have the legal right to pursue collection activities against either person or both people if a joint debt is not being paid as agreed.
If a couple separates and they want to separate their debts between them, they need to apply to each creditor to see if one person can qualify for the debt on his or her own merit. If a creditor refuses to drop the other spouse’s name from the debt, then the debt will have to remain in joint names until it is paid off. This means that if one person stops paying, the other person becomes responsible for making the payments or risks the creditor sending the debt to collections.
Joint debts can also cause problems for parents when they apply for a joint line of credit to help their child through college or apply for a joint credit card to help their child establish a credit rating. Again, when you are joint on a debt, you are 100% responsible for it. If your child stops making payments on the debt, the lender will demand payments from you, and if your child doesn’t always make his or her payments on time, it will most likely impact your credit rating negatively.
Joint debt also impacts one’s ability to obtain further credit. A parent could apply for a consolidation loan or a mortgage, and it is possible that they may not qualify because the lender doesn’t think that they have enough income to pay for both the child’s debt plus the proposed new debt. This can happen because a lender must assume the worst case scenario in their calculations. They may add your child’s debt payments to the rest of your payments to make sure you can afford the new debt if your child for some reason stops making payments on their debt.
Joint debt can be a great tool for family members to work together and help each other out, but it can also have some serious consequences if one person doesn’t live up to his or her end of the deal. Before signing for any joint debt, consider how things would be if the responsibility for this debt fell completely on your shoulders.
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