When people fail to pay debts or act negligently, creditors and others who are directly affected can turn to the legal system to try and recover their money. By filing a legal complaint, credit card companies and other plaintiffs seek a judgment that legally binds an individual to a debt obligation. Many married couples, though, wonder how a judgment against one spouse affects the other spouse. By understanding the variables and the possible impacts, spouses can prepare for what's to come.
Credit Impact
If your spouse defaulted on a credit card or another financial obligation, the creditor cannot seek a judgment against you for the debt. The debt is owed by your spouse only as long as your spouse was the only person listed on the account. The impact is that your credit rating will not be affected by the judgment against your spouse. In the future, though, your spouse's damaged credit rating could force you to take on new debt as the signer or co-signer for a home or a credit card. If you agree to purchase a car or home or apply for a credit card, be aware that any irresponsible financial behavior by your spouse could affect your credit rating down the road.
Community Property States
In some states, property held by spouses falls under the community property heading. In community property states, properties obtained after marriage are considered jointly owned by each spouse. There is no separation of ownership, and, as a result, there is no limit to the percentage of a property or financial account that can be impacted. Essentially, a creditor has the right to collect a judgment by placing a claim on an entire property even though a spouse who does not owe the debt has ownership in the property. This differs from states that do not follow the community property rule of law. In states that have common property rules, a creditor can ask only to collect on the percentage of the property owned by the offending spouse. Generally, this is 50 percent of a property. Community property states include Arizona, California, Louisiana, Texas, Washington and Wisconsin.
Shared Assets
Most married couples share ownership of their homes, vehicles, bank accounts and investments. This joint ownership becomes a problem for both spouses when a court places a judgment on one spouse. Because that offending spouse owns a share of property, the other spouse faces potential hazard if the party collecting on a judgment seeks a claim against the shared property. A creditor could seek a court directive calling for the sale of the shared property or the disbursement of holdings in a financial account. In some states, the court can call for the plaintiff in a case to receive most or all of the proceeds from the sale of a property to cover the judgment amount.
Asset Protection
You can protect joint assets in a marriage by using an ownership designation known as tenancy in entirety. While many shared properties and accounts are designated joint tenancy assets, a tenancy by the entirety title to a home or other property protects one spouse's share from creditors seeking to cash in on a judgment against the other spouse. This designation must be listed on the title or with the title for the property or the financial account. In some cases, the title or deed company or bank will not offer this designation. If this is the case, you must draw up your own paperwork to be filed with the bank or title or deed company. If you file for this designation after a judgment has been issued, it could be construed as an attempt to hide assets, and you could be subject to fraud laws. A tenancy in the entirety should be established before a judgment.
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