Does spouse’s debt settlement affect your credit?
“The man who never has money enough to pay his debts has too much of something else.”
-James Lendall Basford
If you or your spouse are seeking debt relief assistance, much more than the financial aspects of the relationship are in peril.
Financial problems are difficult in any relationship. However, if your spouse has accumulated debt irresponsibly that you already need to negotiate a debt settlement with creditors. This would be on top of any marital repairs you need to look into. There are different types of debt and community property laws in every state. Each of them can affect your spouse’s debt settlement can affect your credit score.
When Debt Settlement Lowers Credit Scores
The creditor accepts less than the total debt owed under a debt settlement agreement. In return, the creditor receives a lump sum payment of the negotiated amount. Creditors typically do not agree to a debt settlement. This is unless the account holder is grievously behind in payments and appears to be near to declaring bankruptcy. A bankruptcy provides the creditor nothing.
A settlement by a spouse does not necessarily have to impact your credit score, however. Having a debt settlement on their credit report will have a negative effect on your spouse’s credit and result in lowering their credit score for the next seven years.
What About Debts Acquired Prior to Marriage
As CNBC shares that creditors always come before heirs, spouse’s debt acquired before the marriage does not make it your responsibility. This is unless you agree in writing to help. That debt should not appear on your credit report.
Debt Acquired During Marriage or Through a Joint Account
However, if the spouse incurs debt through a joint account, such as a credit card, car loan or home mortgage in both of your names, settling that debt will lower your credit score as well.
Even if the debt is accrued during the marriage, it will not affect your score as long as you did not sign the debt agreement. However, be aware that though your credit score will not be affected, your finances still can be, because creditors can pursue a judgment against marital assets to satisfy the debt.
Can a Debt Settlement Affect My Credit Score Indirectly
Note that if you live in a state that provides for community property between a married couple, and each spouse files separate (rather than joint) tax returns, you may still qualify for innocent spouse relief. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin as explained in the IRS Publication 971.
Yes, it can affect a spouse’s credit score.
Let us be clear. Your spouse’s debt settlement can indirectly damage your credit score. According to the IRS, forgiven debt is taxable income to be reported on Form 982 attached to the tax return. If the amount is over $600, the creditor is required to report it using a Form 1099. In case you and your spouse are like the others, you probably file jointly. That means you will be responsible for paying income taxes on that income. Not only that, you can be subject to the same tax liens, asset seizures, and garnishment of wages used by the IRS to collect past-due taxes. If the agency files a tax lien against your home, credit bureaus will lower your credit score. If their collection efforts impact your ability to pay other creditors, your credit score can also be affected.
The IRS does provide for relief from joint tax liabilities for “innocent spouses” (Form 8857) when one spouse files an erroneous return. If you can establish that at the time you signed a joint tax return with your spouse, you were not aware and had no reason to know that your spouse provided information that understated the tax due, you can be relieved of the tax liability.
Similar exemptions from payment of taxes are available through “separation of liability” and as “equitable relief”. Each of these provisions takes into account the totality of circumstances surrounding the erroneous tax return. This will determine if it would be unfair to make the innocent spouse pay the overdue tax.
Are Debt Settlement Programs a Viable Solutions for Finding Relief
A spouse seeking debt settlement has problems that have usually been growing for some time. This debt solution is often a last chance solution before bankruptcy. It’s likely those problems have already impacted your credit score if you’ve had to delay paying your own debt obligations in order to cover his or her shortfalls.
If your spouse’s debt requires debt settlement, it can be the first step towards rebuilding both your credit scores. Not only that, even your financial foundation for the long term.