A married couple has decided that one of the spouses, the debtor, will file for bankruptcy, applying for Chapter 7. Or, maybe, one of the spouses has decided on his or her own to file for Chapter 7 bankruptcy, regardless of the opinion or feelings of the other spouse. Regardless, together they have a mortgage on a house. The non-filing spouse (nf-spouse) cannot legally prevent the other spouse (debtor) from filing. To say the least, unless both spouse agreed on the one spouse filing for bankruptcy, the bankruptcy process and the aftermath is going to be an emotional maelstrom and utter chaos. As the bankruptcy process proceeds along, the nf-spouse is listed as a co-signer of the mortgage on the list of assets required by bankruptcy law. The situation on the house must be clearly and completely detailed by the debtor for the trustee. The amount owed on the mortgage, the amount of equity the house may (or may not) have, the amount of individual exemption that the law allows must all be a part of that detail. Once the list is sufficiently defined and acceptable to the trustee, the trustee will convene the “341” hearing, the hearing so called because it is required by section 341 of the federal bankruptcy law. At this hearing the trustee will question the debtor, who will be under oath, about all of the information on the assets and liabilities list. Invited creditors will also be allowed to question the debtor, who will still be under oath. If the nf-spouse was listed as a co-debtor on the asset list, that spouse may be summoned for the “341 hearing”. If the nf-spouse gets the notice of the “341” hearing, but not a summons, then the nf-spouse has the option to attend or not. Imagine the nf-spouse getting the notice (not a summons), getting a lawyer, and appearing at the “341” hearing. It would be a classic if the nf-spouse decides to attend and is allowed to question the debtor about the asset list and debt.
A mortgage with joint ownership of the property gets a little bit spicy when one spouse decides to file bankruptcy under Chapter 7, even more so if filing under chapter 13. In this type of situation, it actually boils down to the amount of equity that this property currently has. If there is essentially little to no equity or even negative equity in the property, then the bankruptcy trustee assigned to liquidate the listed assets may just abandon the property as “no value”, thereby leaving the nf-spouse with full ownership of and monetary responsibility for the property. If there is a lot of equity in the property, then to hold on to the house, the nf-spouse would have to be able to buy out the debtor’s ownership in the house from the court at an established fair market value. One might get a better price in trying to do this with the court as the court will save time, effort, and expense by not having to retain a real estate agent to sell the property. Just do not expect to receive a substantial discount. It is very likely that the nf-spouse would have to refinance to clear the debtor’s name off of the deed and the mortgage. This would likely mean that the debtor will be sleeping elsewhere while the divorce is filed.
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