Foreclosure's impact on spouse's credit
Making one spouse the fall guy for bad credit can backfire
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Dear To Her Credit,
If a married couple who uses joint accounts, thus potentially affecting each other's credit, has only one person on the mortgage, could they separate their accounts to separate their credit? Then if they went into foreclosure, would that only affect the one spouse's credit? -- Cari
You don't need to do anything to separate your credit. There is no such thing as a joint credit history, and the joint or separate status of one credit card or mortgage account does not affect the credit history of any other account or cause information from other accounts to somehow merge. Every account stands alone.
You could have a dozen joint credit cards with your husband, but if the mortgage is in your name only, the history of the mortgage account is on your credit history, not his.
A joint credit card account can affect another person's credit if the history of that account is a problem. For example, if you had an account on which you had missed a few payments before you met your husband, and then you added him as a joint account holder, that account shows up on his credit history and dings his credit score.
Going into foreclosure is a cause for concern to both of you, however, even if your mortgage is only in one of your names. Consider:
- If you live in a community property state and you stop making your payments, the bank may decide to collect from your husband. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states, and Alaska has opt-in community property laws. In those states, most assets and debts held by a couple are considered to belong to both of them. (There are exceptions, and the laws for community property states are not identical.)
- Foreclosure is generally accompanied by financial chaos and stress. If you are having trouble making payments, it may be hard to keep up with other payments, including some that belong to him.
- After foreclosure, the two of you need a place to live. Can you buy or rent a place based on his income and financial information alone? Will a landlord look askance at a foreclosure, regardless of whose name it was in? In this recession, foreclosure is losing some its stigma. Still, a landlord looking at two tenants may prefer the couple that didn't just default on a loan.
If it sounds like I'm trying to discourage going into foreclosure, I am. Almost any financial decision is better than foreclosure. I'm no fan of bankruptcy, but with a Chapter 7 or Chapter 13 bankruptcy -- which calls for a court-supervised repayment plan -- you might at least save your home. Other options include finding a way to salvage your financial situation and remain in your home, getting a loan modification, selling your home for whatever you can get for it (even if you have to bring a check to closing) or doing a short sale (selling your house for less than the mortgage balance, with an agreement from the bank that they will not collect the difference.)
I'd also discourage couples from the idea of keeping all the delinquent accounts in one spouse's name so they can preserve the other spouse's record perfectly clean. If one spouse already has a much higher credit score, it makes sense to do whatever you can to keep it that way. However, turning one spouse into the financial fall guy is a bad idea. It's not fair, and it feels too much like pitching one of you overboard. At some point, the spouse with the beaten up credit history is going to need a better credit score. And if -- perish the thought -- something happens to the marriage, that spouse can find himself or herself in a desperate situation.
Before you make any decisions with consequences as far reaching as letting your house go into foreclosure, please find a nonprofit agency affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. They can help you find a better way to solve your financial problems. Good luck!
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