Spouses Without Income, The CARD Act, and Bankruptcy

Non-working spouses and others without their own source of income are finding new difficultly when applying to open credit card accounts. This difficultly arises from regulatory amendments that went into effect on October 1, 2011 as a result of the recent CARD Act, requiring only independent ability to pay be considered in credit card applications. The change will likely have consequences in bankruptcy cases down the road, some positive and some negative.

Regulation Z was amended in section 226.51 to require that in opening an account, "the card issuer considers the consumer’s independent ability to make the required minimum periodic payments . . . based on the consumer’s income or assets and current obligations." Requiring independent ability is a change to this regulation. In the past, card issuers could, and frequently did, consider the total household income when evaluating credit card applications. By including spousal income in ability to pay, card issuers routinely granted credit lines to a spouse who was not himself or herself employed. Many households had found this to be of considerable benefit, as it allowed more convenient access to credit for the non-working spouse, who could maintain a favorable credit history.

The prevailing recommendations to consumers being denied credit cards by this new regulation are to either (1) open a card in the name of the working spouse, adding the non-working spouse as an authorized user or (2) open a joint credit card account. Both require the working spouse to open the account, and the second adds joint liability on all charges. It remains to be seen if card issuers will proactively suggest joint accounts in greater numbers than before. Traditionally, many credit card lenders appeared to favor the quick assent of a lone applicant over the added collections possibilities gained from having both spouses apply.

The possibility of greater amounts of joint debt is a significant downside to future bankruptcy debtors. Notably, outside of bankruptcy, joint creditors can seek to recover from the value of a home owned jointly in a tenancy by the entirety. Many martial homes in North Carolina are held in such a tenancy. Inside bankruptcy, the effectiveness of tenancy by the entirety as an exemption is impeded by the presence of joint creditors. Given that tenancy by the entirety can protect property worth far more than $35,000 per debtor allowed by North Carolina's homestead exemption, joint credit cards can be very consequential for individuals with equity in their family home. Furthermore, joint debt reduces the options for a single spouse filing bankruptcy, which today is relatively common when debt difficulty is concentrated in one spouse's accounts.

There is an upside, in that it is clear that far too many credit cards have been issued in the past without due consideration of whether or not the consumer will be able to repay them. The new regulation should reduce this practice, and will restrict availability of credit, which in turn limits the need for bankruptcy. However, an outright ban on consideration of indirect income, which excludes credit cards from non-working spouses, is a relatively harsh way to achieve this result.