Joint debts – what happens in an IVA / DRO / bankruptcy

A reader asked:

I have received a letter saying we still owe £4,000 in council tax. The debt was included in my bankruptcy a few months ago but they are chasing my wife for the full amount, what should we do?

This article looks at what happens to joint debts which are unsecured, not mortgages or secured loans. It covers all three forms of insolvency – bankruptcy, DROs and IVAs – because the answers are much the same for unsecured debts in all of them.

Common types of joint debts

A joint debt is a debt which has two people’s names on it, where they are both responsible for the full amount of the debt. Common joint debts include:

• overdrafts on a joint bank account;
• loans (including guarantor loans); and
• council tax.

With overdrafts and loans, both people have to have agreed to the credit at the start. If your partner – or your ex – has taken out a joint debt with your name on it that you didn’t know about, or that you were pressured into agreeing to, you need advice on your options, ask at your local Citizens Advice.

The solvent person will be asked to pay the debt

Joint debts have to be included in insolvency. You can’t ask for a debt to be left out on the grounds that the other person will carry on paying it.

When a joint debt is included in an insolvency, the creditor will ask the solvent person to repay all the remaining debt – not just “their half”. For a loan, this can be just carrying on making the normal monthly payments.

In an IVA, the creditor will receive some payments, called “dividends”, from the IVA. These will reduce the amount of debt the other person has to repay. For example, if there is a joint loan with £4,000 outstanding, and the IVA is giving “25p in the £” to the creditors by the end, the lender will receive £1,000 from the IVA and the other person only has to repay £3,000.

In bankruptcy, creditors rarely get any money back. This usually only happens if there is a house with a lot of equity that is sold. Normally the creditors get nothing, so the other person has to repay the full amount of a joint debt.

In a DRO, the creditors will always get nothing as the person in the DRO doesn’t have to make any payments at all. So the other person has to repay all of a joint debt.

The solvent person’s options

It is always a good idea for someone to look at their own financial position if their partner opts for any of the types of insolvency. If they can’t easily manage their own debts, they need to consider their debt options, taking into account:

• that their “own debts” will include any previously joint debts that are going to become their full responsibility; and
• if their partner is having to make monthly payments, for example to an IVA, they may have to pay more of the household expenses than before, leaving less money to repay their own debt.

Small joint debts may not make much difference, but larger ones can tip what was manageable debt over into being unmanageable.

The reader who asked question at the start said his wife’s only income was disability benefits. She had some small credit card debt which wasn’t a problem, but the addition of the council tax arrears means she should probably look at the option of a DRO.

What about credit records?

With joint loans or an overdraft with someone who is going bankrupt, entering an IVA or a DRO, your credit records are “financially associated”  with your partner’s. So their insolvency is going to harm your credit score.

Perhaps you had already been paying a joint loan before your partner entered an IVA. Even though you carry on paying it afterwards, with no missed payments or defaults,  your credit rating will still be affected by their IVA.

The only way round this is for you to repay all the joint debts as quickly as possible – ideally before your partner’s bankruptcy, DRO or IVA starts! When all joint debts are settled, you can ask for the financial link with your partner to be deleted. See for example Experian’s form to request this.

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