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Here’s a question about marriage and money that I recently received:
I have a question about marrying someone who will go through bankruptcy BEFORE marriage. Other than having difficulty with getting a loan, what other effects should I expect in the future?
The bankruptcy had to do with a prior divorce, and ownership of more properties than one should own at any one time, so I’m not worried about his spending habits. What do you think?
This is a great question, and needs to be addressed from two different angles.
First, you each have your own credit history so his poor credit rating won’t impact your good credit score. Of course, if you apply for a loan together, his dark credit past is going to hurt you.
My suggestion here is for you to apply for big-ticket credit items like mortgages by yourself. You will get a better interest rate than if you apply with your fiancÃ©. But this leads to the second issue – assets.
You may try to keep your assets separate and, as long as you do so, you might be okay. But you have to be careful. For example, if your sweetheart doesn’t discharge all of his debt, you wind up marrying into a financial mess. Let me explain…
Let’s say he ends up with a tax lien and the two of you file a joint tax return. In that case, the IRS is going to want it’s money before it gives you any tax refund. And debt relief from the IRS doesn’t come easy. Are you ready for that?
And the problem doesn’t end with tax liens. The same goes for things like student loans or government loans. You’ll also have to pay close attention to the laws of the State in which you live. This is especially important if you live in a “community property” state like Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin.
Let’s say that you own your own home, but you commingle funds to pay expenses associated with the property. Your new husband helps pay the mortgage and utilities from your joint savings account, where he also deposits money.
The above fits the definition of commingling and, depending on the state in which you live, the property might then be considered partially his. If he hasn’t discharged all of his debts, his creditors could come after the property in that case. Not a good outcome for you.
This is why you might want to wait to tie the knot until his bankruptcy judgment is final. That way, you’ll know exactly what you’re stepping into. If your soon-to-be groom goes Chapter 13, he won’t discharge his debts. And even if he files Chapter 7 bankruptcy (which discharges most debt), not all debts are discharged.
After he’s been through the bankruptcy process, you’ll know which debts will be staying on the books. If you live in a community property state and he still has a lot of debt, you should definitely consult an attorney to determine if it’s possible to commingle while steering clear of risks associated his debts.
The bottom line is that it’s going to take this gentleman time to get out from under. That means the money he earns that should go toward building a future with you is going to his past creditors. Thus, even if everything else works out, you’ll be directly impacted by his debt problems for years to come.
Don’t forget the big picture
I would also recommend putting strict boundaries between your new husband and your own finances. With all due respect, this man has made some pretty serious errors in the past. Sure, divorces are devastating, and anyone who goes through one could end up in financial trouble. But the fact of the matter is that he wound up owning too many properties and he failed to plan for the future.
It’s fine to build a life with a wonderful person despite past indiscretions, but be very careful about letting him get to involved with your finances until he’s really proven himself. For example, he may be convinced that he’s got an unbeatable investment strategy but give it some time before you hand over any money.
One last thing… In case he doesn’t already know, you might want to ask him how his bankruptcy is going to impact his credit score. If he doesn’t already “get it,” encourage him to check it out himself.
What advice would you give this person?
If you were in her shoes, what would you do? Would you consider marrying someone who is going through extreme financial difficulties, up to and including bankruptcy?
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