Does a Non-Borrowing Spouse's Bankruptcy Affect a VA Home Loan?

A non-borrowing spouse's declaration of bankruptcy doesn't normally affect the other spouse's VA mortgage.


Sometimes a spouse not part of her mate's Veterans Administration-guaranteed mortgage declares bankruptcy. This may raise of the question of how the mortgage might be affected. Fortunately, the bankruptcy doesn't usually have any effect on the loan itself. It could, however, have an effect on other parts of her credit if she and her spouse live in one of nine community property states.


The VA guarantees home loans that veterans take out through private lenders specializing in making such loans. Because the loan is guaranteed, lenders are usually more flexible with credit history and the like. VA-guaranteed loans also don't require a down payment or private mortgage insurance. And except for a community property state like California, the credit of a non-borrowing spouse isn't a factor. The home loan will belong only to the person who signs it.


When a non-borrowing spouse declares bankruptcy, her credit score may suffer significantly. It could be hurt by up to 150 points--the exact damage will depend on other things in the credit report such as whether there were late payments prior to filing. And if the borrowing spouse is a co-signer on any of that debt he may become liable for it.


A non-borrowing spouse's bankruptcy also isn't entered on the borrowing spouse's credit record. The only exceptions have to do with bankruptcy declared in a community property state such as California. A creditor could be allowed to try to force the spouse who is not declaring bankruptcy to cover the bankrupt spouse's debt. But a creditor usually doesn't try to do so because it can make its collection case against the declaring spouse a bit more complicated.


The two most common types of bankruptcy are Chapter 13 and Chapter 7. The first is a financial reorganization supervised by a federal bankruptcy court. Chapter 7 is a liquidation of all unsecured debt. It's supervised by a trustee appointed by a federal court. Assets of the non-borrowing spouse not acquired during the marriage and not in a community property state aren't normally affected in either Chapter 13 or Chapter 7 bankruptcy. Bankruptcy rules can be very complicated in this regard, though.


Although any federally backed loan, including a loan from the VA, won't be affected by your non-borrowing spouse's bankruptcy, this still could be a stressful time for you. Bankruptcy often ranks high among life's most stressful events. By adequately preparing for it, though, you and your spouse can probably lessen the stress. This means working to understand what bankruptcy is and how it might affect your own credit in some cases.

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