Am I Liable For My Gambler's Debt?
One of the first things that spouses of gamblers tend to focus on first is thinking about how to protect themselves and their family from the financial hardship that typically accompanies problem gambling. Please note that I'm not a lawyer, and laws can certainly vary by State and country. However, here are some notes from what I've learned that can at least serve as food for thought as you research your particular situation.
- In States where marriage is considered community property (i.e. everything is equally owned by both of you), in its most basis sense, you are liable for the debts of your spouse. So even if you maintain separate bank accounts and credit cards, you can't assume that protects you from collectors coming after YOU for debt your spouse has accumulated. In other words, don't ignore these debts thinking that they'll just go away or won't affect you.
- In some cases if you can show that you had no awareness of certain debt, and did not benefit from it, you may be able to make a case that you're not liable for the debt. How hard this is to prove, and how to go about it is a completely different question though.
- Many people believe that if you ignore calls from your credit card company or debt collectors, that eventually they'll just "write it off" and go away. Depending on your State or country laws, some people will say it's around 7 years before they discharge the debt (i.e. leave you alone). This may or many not always be the case, and may largely depend on the amount of the debt. If it's a few thousand dollars, they may very well write down the debt and leave you alone. However, if it's tens of thousands of dollars, it may become worthwhile for them to sue you, and get a court order to garnish your wages. What that means is that the court will send your employer a letter that requires them to take a given amount of money from each of your paychecks, and send it directly to the debt collector. Most people will want to resolve this before it gets to this point.
- Keep in mind that you can always negotiate with debt collectors in a much more substantial manner than you might think. For example, you may be able to negotiate down from a
$50K debt to $5K or less. They'll typically have a floor below which they simply won't go, however, if you negotiate hard enough, you can usually find it. Also, some will allow you to enter into a payment plan, particularly if the non-gambling spouse is involved, and can demonstrate financial responsibility and control. Note, however, that you'll usually get a better deal (i.e. have to pay less) if you pay a lump sum immediately than if you go on a plan. This is due to the simple fact that a payment plan represents additional risk that you won't pay each month for the full term of the agreement. Thus, up front cash is considered king.
- If you do negotiate a payoff, get everything in writing, and ensure that your obligation to that debtor ends with that payment or payment plan, and that they can't later come after you for more. You'll also need to contact each of the credit bureaus to notify them that the debt was settled; this doesn't usually occur on its own.
- Keep in mind that after negotiating a settlement, they will send you a 1099 at the end of the year for the amount they wrote off. For example, if you owed $50K, and negotiated a $10K payoff, they'll send you a 1099 for $40K. This is considered income, and you'll have to pay taxes on that when you file your end of year taxes. Depending on the amount, your tax bracket, and youe State or country, this could be a substantial amount. For example, you could owe 20% of that $40K, or $8K. The IRS (or equivalent in your country), may allow you to go on a payment plan if you can't afford to pay it, however, they will charge you interest and penalty fees. So you should take this tax obligation into account when you're figuring out how much you can afford to pay for a settlement.
The key message here is not to ignore this debt, and just assume if you wait it out that the debt will disappear, and your credit will eventually automatically recover if you wait long enough. Check the laws where you live and determine your personal liability vs. that of your gambling spouse. Either way, it's going to affect your family unit, particularly if you stay together, so don't keep your head in the sand on this tough topic!