Can One Spouse’s Debt Settlement Hurt The Other Spouse’s Credit?
Debt settlement has the potential to bring down credit ratings as a result of defaults, lower payments to eliminate the debt and the inability to pay the full amount of the loans. When a spouse decides to settle debts the relationship is sometimes affected due to concerns about whether it will influence both credit scores.
Settlement and Bad Credit
Credit relief in the form of settling the debts often leads to a poor credit score. The main cause of a poor credit rating is that the debt is usually in default. This is the case before considering the settlement as a method of managing the situation.
Most companies are not willing to consider debt settlement for less than the principal amount on the account unless they worry that the individual is likely to file bankruptcy and thus will not pay any money on the account. Defaulting on payments is a common situation that leads companies to feel that bankruptcy is a likely debt solution.
The fact that in debt settlement, the settled account will also show up on a credit report as settled is also a negative mark. According to Experian, it stays on your report for seven years.The credit score is reduced when settlement is completed, but the effects are often minor if the individual has already struggled to pay the debt.
If a personal debt is settled it will not affect the credit score of both individuals. This means that if the spouse has incurred debts before marriage or on a personal account after marriage, the other individual is not responsible for the payments and thus does not have an impact on his or her credit score.
The only person responsible for the personal debts that do not have his or her spouse’s name on the account is the individual who incurred the debts. Credit relief through settlement in this particular situation will not result in directly decreasing credit scores of both individuals in the relationship.
A spouse’s decision to settle debts will not directly influence the husband or wife’s credit. However, that is the casen if it is a personal account. A joint account is subject to different rules.
Any settled debts that are in both individuals names will have an impact on both credit scores. For example, a credit card that is signed and used by both individuals who are enrolled in the settlement program will result in decreasing the credit score of both parties.
Most debt settlement programs are only able to influence certain debts. That is why many joint loans and responsibilities a couple is likely to own are not possible to settle. For example, a couple who has a joint mortgage will not be able to settle the home loan. This is because it is secured with the property and the couple can sell the home to pay the debt.
The amount of savings on any settled account is subject to income tax as explained by the IRS.
If a couple files jointly, this means paying more taxes as a result.
If the full amount of the tax is not paid, it can have an indirect impact on credit ratings. This goes for both individuals in the relationship. This applies if the couple files for taxes jointly. It does not pay the tax on the amount saved from the settlement.
When loans and credit cards get out of control, settling the debt provides relief. If one spouse decides to settle debts, it does not always influence the credit score of the other individual. The situation determines the impact to the couple’s credit history.