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Ex-wife files bankruptcy on joint account - are you still liable?

An ex-husband recently asked a bankruptcy advisor columnist a question that we thought was rather interesting, so we thought our Lakewood, Colorado, readers might be interested also. The question surrounds a joint account for a loan on a motorcycle. The ex-husband has been making every payment since the loan originated, and their property settlement in their divorce states he will receive the title at the end of the loan.

The problem is, since his wife has filed for personal bankruptcy the creditor has suspended online access to the account and no longer sends him statements. He is not sure what his risks are in terms of continuing to make payments, and getting credit for those payments, or would it make more sense to voluntarily surrender the bike back to the creditor.

The answer is, that since his ex-wife filed for bankruptcy well after their divorce he would still be liable for the loan, but she would not. That is to say, just because she is no longer liable for the loan does not discharge both parties from its payment obligations. One option is to surrender the bike to the creditor; however doing so may not be in your best interest. Here's why:

If the motorcycle is worth less than you owe, and you surrender it to the bank, meaning they repossess it, then they turn around and sell it, the bank will bill you for the difference in the amount owed and the resell price. Not to mention you will have the repossession on your credit report. If the motorcycle is worth more than you owe, you could sell the bike, pay off the lender and avoid any negative marks on your credit.

Now, the issue of not receiving statements or being allowed access to your account online is troubling. Because you are still 100 percent liable for the balance on the loan, why are you being treated like you stopped making timely payments. The answer to that question seems to be that banks just don't have the sophisticated enough technology that would allow them to separate a joint account.

The lender received notice of the bankruptcy filing, which in turn triggers the account to be placed in bankruptcy status and thus all collection activity stops. The reason for that is simple, once a person files for bankruptcy protection all creditors listed in the filing must cease all collection efforts by law. The bank cannot seem to differentiate between which of the joint account holders it can still collect on.

Source: Fox Business, "Ex Filed Bankruptcy. What About My Motorcycle?," Justin Harelik, May 15, 2012

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