When you co-sign a loan for a loved one, you bear the burden of paying your loved one's debt if he cannot. Lenders have as much right to sue nonpaying co-signers as nonpaying borrowers and will occasionally pursue a co-signer for payment before pursuing the borrower herself. Co-signers, however, aren't the only individuals on the hook for someone else's debts. In some states, lenders can pursue a borrower's spouse for debt the borrower incurred whether or not the spouse co-signed for the debt.
Community Property States
Nine states are community property states. In a community property state, assets that either spouse accrues during the course of the marriage belong to both spouses equally. Unfortunately, the same is often also true of debt.
If you live in a community property state, a lender can sue you in an effort to force you to resolve your spouse's unpaid debts--regardless of whether you co-signed for the debt or not. An exception to this rule exists if your spouse incurred the debt prior to your marriage. In community property states, any assets or debts an individual holds before getting married belong to that individual alone. If you do not live in a community property state, the lender does not have the right to sue you if you did not co-sign for the debt.
Lawsuit Risk
Just because a lender has the right to sue you, that doesn't mean it will. All lenders' policies differ, but companies typically weigh the cost and effort of legal action against the potential gain. Thus, if your spouse's debt is small or you have solid legal grounds on which to contest the lawsuit, the lender may drop its claim against you.
Your spouse's lender has a limited amount of time in which to sue either you or your spouse for the debt before doing so is no longer legal. This time period is known as the statute of limitations for collection and varies in each state.
Consequences
If the lender wins a lawsuit against you, you face the same consequences that would befall either your spouse or a co-signer on the account. What your lender can and cannot do is contingent on your state's specific collection laws. After a lawsuit, a lender may have the right to file liens against your property, garnish your wages and bank accounts and seize nonexempt assets.
Lawsuit Effects
The effects of a collection lawsuit are similar regardless of which spouse a lender decides to sue. Wage garnishment and bank levies detract from the income of the entire household while a lien can attach to a home or car even if both spouses' names are on the title. Only the spouse who faced the lawsuit, however, suffers credit damage as a result. The length of time that a lender's court judgment will remain a derogatory credit feature varies depending upon how long the couple's state gives the lender to enforce its judgment.
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