This chapter extends the dynamic leverage ratio model of of Hui et al. to the two‐firm case so as to study the implications for default correlations and joint survival probabilities. The two‐firm model has been proposed by Zhou, who extends the one‐firm model of Black and Cox to the two‐firm situation. The chapter reviews the techniques used by the authors to solve the first‐passage‐time problem: the method of images and the time varying barrier technique for dealing with time‐dependent parameters. The chapter presents the numerical results for the impact on joint survival probabilities and default correlations across a range of different scenarios, for example, different correlation levels, drift rates, volatilities and initial leverage ratios.