How Bankruptcy Affects a Joint Mortgage

Bankruptcy will affect a joint mortgage differently, depending on whether one or both parties are declaring bankruptcy. While it is most common for two parties on a mortgage loan to declare bankruptcy jointly, it is also possible for one person to move forward with the process. This will change how your mortgage lender and your bankruptcy judge make decisions concerning the home.

Joint Bankruptcy

In this most common form of bankruptcy, both parties will be declaring bankruptcy as a family, or as a couple. In this case, the two persons are so intricately tied together financially; they share common debts and common assets. Their debt load has become too large for their income and asset base. They can no longer make payments on a joint mortgage they are both equally responsible for.

Both parties will be seeking to have their responsibility to continue to make mortgage payments removed through Chapter 7 liquidation. In a Chapter 7 proceeding, the assets of the couple will be sold off in order to pay for joint debts. Joint assets will cover joint debts, and individual assets may have to cover any separate individual debts. Since the two parties paid the mortgage jointly, they shared ownership in the home. When it is foreclosed on and sold, they will both be relinquished of their responsibility to pay.

It is also possible the borrowers are seeking a restructuring of debt with a Chapter 13 filing. With this option, both parties will have to determine their ability to continue making debt payments according to a new schedule, but the schedule must be submitted as a joint proposal. The mortgage company makes no distinction between the portion of the mortgage one person is paying and the other; instead, the mortgage lender is only concerned they get a check in the full amount each month.

Single-Filing Bankruptcy

Some couples maintain more financial sovereignty from each other. It is possible one person in a couple has a much greater debt load than the other, owing to student or business loans in particular. In this case, it is possible the one person can no longer afford to make debt payments while the other person can. Again, the mortgage lender does not care which borrower is writing the checks.

In this case, it is best to modify the mortgage to remove the person who will be declaring bankruptcy from the obligation. Mortgage modification can be difficult, and you may need to lower your monthly payments in order for one person to continue shouldering the burden. However, refinancing with a new mortgage may provide an option to move from a joint mortgage to a single mortgage.

This option allows the family to retain ownership of and continue living in the home once one person declares bankruptcy. That person will only be liquidating or restructuring individual debts. Since he or she will no longer be associated with the mortgage debt, the bankruptcy will have no bearing over the home loan or ownership.