If your spouse's credit card debt is headed south and the debt collectors are calling, there is a good chance that your assets are at risk, too.
According to a July 2009 report by The Tower Group, the net charge-off rate for the top 100 credit card companies in the United States reached an historic 7.65 percent in March. You may not be in the equation, but if your spouse is, you need to sit up and pay attention.
If your spouse defaults on credit card payments, responsibility for the debt isn't necessarily yours if you're not a joint cardholder. However, you still may have to pay up once that debt goes into collections. When phone calls and letters from creditors stop because they have been unsuccessful in collecting, their next move could be a court date and a judgment to pay up or pay the consequences. Here's what you can expect during the collection process, along with tips to help protect your assets when your spouse's credit card debt goes to court.
Pay attention to the warning signs
Lachelle Rhodes from Elberton, Ga., never uses credit cards, but her husband has a history of charging excessively and ended up with a wage garnishment -- deductions from his paychecks to reimburse the credit card company. "When we were dating, I noticed that he always used his credit card when we went out to dinner or to do something fun, even if it was after payday and he had cash," says Rhodes.
When they got married two years later, she wanted no part of that credit card and it stayed in his name alone. Besides, she had her own card to use for emergencies only. Rhodes thought that they would balance each other out, until her husband's bill was so high he couldn't afford the minimum payments.
"He just stopped paying the bill every month and dodged the credit card company's calls and letters. Receiving a summons to go to court finally caught his attention, and he was embarrassed that his employer found out," says Rhodes. The couple has no savings account and lives paycheck to paycheck. The end result was a valuable lesson -- a wage garnishment that barely allowed them to pay their living expenses. "The debt is almost paid in full, and we are going to go out to dinner -- and pay cash -- to celebrate when it's over," says Rhodes.
Let the collections begin
If your spouse has been ignoring credit card bills, here's what may be coming.
"The creditor can only get a judgment against the person who is on the card, so they would not get one against the spouse. However, in collections, they might be able to go after the assets of the spouse," says John H. Graves, an attorney in Moore, Okla. Here's an example: If a Jet Ski is sold for $3,000 and the money is deposited into a spouse's account, the creditor may be able to go after it, even in an "equitable division" state, where creditors generally cannot touch a spouse's separate assets.
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Most states are equitable division states. Nine states, however, operate under a different legal theory on spousal assets and debts -- community property.
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), a spouse's assets are fair game if those assets were acquired during the marriage. "In California, once creditors receive a judgment, they can collect against either spouse because we're a community property state," says John G. Stein, an attorney in Elk Grove, Calif.
In both types of states, property and debt brought into the marriage remain separate until they become comingled, such as if one spouse used money saved before the marriage to buy a kitchen table.
Creditors can take money (known as a garnishment) from bank accounts. "If it's a jointly owned account in an equitable division state, you should be able to keep the funds of the nonliable spouse," says Lesley Hoenig, an attorney in Mount Pleasant, Mich. She adds that the amount of the garnishment can be objected to by proving how much money was earned by the other spouse, but sometimes debtors are not informed in time to protect those funds. Social Security income, by the way, is protected from garnishment. She recommends keeping a separate account just for Social Security payments that is not intermixed with other funds or income.
Yours, mine, ours or theirs?
Material items that are jointly owned can be seized by creditors in most situations and states. "If there is property that everybody understands is joint, it's fair game," says Graves.
Vehicles can't be taken in most states and instances during collections, and there's more. "Generally, what you will find in a lot of states is that many qualified retirement plans are protected," says Wade C. Vose, a managing partner with Vose Law Firm in Winter Park, Fla. Insurance and annuities -- both the cash values and proceeds -- are also protected during collections. In addition, "in Florida, there are what we call constitutional homestead protections that protect your primary residence if you own it," says Vose. There are homestead protections and exemptions in other states as well.
Couples can co-own property as a single legal entity in some states with protection from creditors with what's called a tenancy by the entirety. "It's an ownership where the wife doesn't own it, and the husband doesn't own it. If the husband has a judgment against him, or the wife has a judgment against her, the creditor is not able to reach the asset," says Gary J. Stern, shareholder attorney at Chuhak & Tecson, P.C. in Chicago.
He adds that there would need to be a judgment against both spouses in order for a creditor to get the property. Many states allow this type of ownership for primary residences -- some also include other types of legal protection for real estate, and a few even include protection for cash, partnerships, certificates of deposit and other assets. In addition, couples from any state may be able to put all of their assets in a tenancy-by-the-entirety trust in Florida or Delaware, says Stern. For example, a couple who lives in a state where a tenancy-by-the-entirety ownership is not available can place their bank accounts and real estate in a tenancy-by-the-entirety trust in Florida or Delaware.
And if you think you can transfer assets to, say, a family member before collections begin, think again. That would be considered fraudulent conveyance, which "prohibits you from specifically doing something to hurt an existing creditor," says Stern. So, does this mean that you can move assets or put your home in a tenancy by the entirety or a tenancy-by-the-entirety trust as long as your spouse hasn't been slapped with a judgment? Not necessarily -- there is a "look-back period" in which activity is considered fraudulent and it varies by state.
An ounce of prevention ...
Paying off excessive debt -- voluntarily or by a court order -- may be a short term solution to a permanent problem. Not only is there a 12-step program for alcoholics, there's a program for debtors, too, and the first step to get started is to make an effort to stop incurring unsecured debt one day at a time.