Joint Debts
Joint debts/liability
When you borrow money jointly with someone else, it is normally borrowed ‘jointly and severally’. This means that you are both liable for the whole amount. It is a common misconception that you each owe half of the amount but that fact is, that if one party is unable to pay, or dies, the other borrower will have to pay the whole amount – not half, as many people think.
The same principle applies to household bills, like council tax, gas and electricity, which are in joint names. So, both named parties are equally liable and, if one person is unable to pay or moves out, the full amount will still have to be paid by the other bill-payer.
It’s important to note that, even if you are not named on the council tax bill, you may still be liable to pay it. You are jointly liable for council tax if you are married, cohabiting, or in a civil partnership. So, if one of you is unable to pay council tax arrears, the other will be liable.
Debt solutions & joint debts
How your joint debts will be treated depends on the debt solution.
Bankruptcy (sequestration in Scotland, including MAP)
Firstly, it’s important to understand that bankruptcy is an individual solution. All your debts would be included in the bankruptcy – including the full amount of any joint debts – but, whilst you may be discharged from your liability to pay the debts, your partner won’t. Of course, if your partner also applies for insolvency, their liability would be discharged as well.
Debt Relief Order
As with bankruptcy, a DRO is an individual solution. Whilst the full amount of your joint debts will be taken into consideration within your debt limit, your partner will remain liable for the joint debts after you’re discharged.
Individual Voluntary Arrangement/Protected Trust Deed
As the name suggests, this is an individual solution, but it is possible to link two IVAs together so you would both be discharged from liability for your joint debts at the same time.
Debt Management
You can enter a debt management plan as a couple if you have joint debts or are otherwise financially linked. The plan would make repayments to all debts, including joint debts, until they are repaid in full. This means that you’d both be debt free at the same time.
If you’re thinking about a debt solution, you’ll need to discuss it with your partner and see how their financial position will be impacted by your decision and how much of the debt burden will shift to them. They may need some debt advice as well.
Joint bank accounts and overdrafts
If you have a joint bank account and you’re planning to enter a debt solution, there are some things you should consider.
If you declare yourself bankrupt, or enter a DRO, your joint account will be frozen whilst the official receiver looks at your transaction history. After that it may be closed and, if there is a balance in the account, they may refund half of this to the joint account holder. Alternatively, the bank may remove your name and allow the joint account holder to continue using it.
For joint accounts with overdrafts, the overdraft is a debt, just like your other unsecured debts. In some solutions, such as bankruptcy, or a debt relief order, it is compulsory to include overdraft debts, and this means that your account will be closed to prevent the debt increasing.
You will be able to open a new, basic, bank account which doesn’t have an overdraft. These are available from most banks. It’s a good idea to do this before entering a solution to make sure that your household bills aren’t disrupted.
If your overdraft is on a joint account, you are ‘jointly and severally’ liable for the overdraft debt. This means that if you can’t pay it back, the other account holder will have to pay the whole lot. You could:
If you choose a debt management plan (DMP), you can choose to exclude the overdraft however, you should still close your bank account to prevent the debt increasing, but payments can be made to the debt as part of your DMP so there is less pressure on the other account holder. Opening a new bank account can also give you a more positive outlook because you won’t be starting and/or ending the month in a negative position. It’s not a good idea to have debts that you continue to pay outside of a DMP because you may not be able to afford to maintain the payments to your plan, to your other lenders, or worse, to your essential household bills. The lenders in your plan may consider you paying some debts directly as preferential treatment, and they may reject your DMP repayment offer.
Your DMP provider is within their rights to refuse to open, or to close, a debt management plan if they feel that it is not in your best interests because you haven’t included all of your debts.
Your credit file
If you open a joint bank account or take out credit together, like a mortgage or loan, your credit files will be linked.
The person you share credit with will be recorded on your credit file as your financial associate, how they manage their debts could affect you. So, if your partner has trouble repaying their debts, a lender may refuse you credit (even if you have a good credit score) because your partner’s problems may affect your ability to pay; and vice versa.
If you think a financial association is wrong, or out of date, such as an ex-partner who you no longer live with or have credit with, or a guarantor for a debt that you no longer have, you can ask the credit reference agency to remove the association.
If you have joint debts, any difficulties repaying the debt/s will be recorded on both parties’ credit files.