Three people co-own property with a co-signed mortgage. One of these owners files for Chapter 7 bankruptcy. The co-owners cannot legally prevent this other owner soon to be the debtor from filing bankruptcy or Chapter 7. While the bankruptcy process proceeds from the filing into the hearing by the trustee, the co-owners will learn that they are listed as co-signers of the mortgage on the list of assets required by bankruptcy law. This situation on the house and mortgage must be clearly, completely, and truthfully 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 may allow if the house is the debtor’s home must all be a part of this detail. Once this list is sufficiently defined, vetted, and acceptable to the trustee, the trustee will hold the “341” hearing, the hearing given this name because it is required by section 341 of the federal bankruptcy law (FBL). At this hearing the trustee will interview 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 co-owners were listed as a co-debtor on the asset list, those co-owners may be summoned for the “341 hearing”. If the co-owners get the notice of the “341” hearing, but not a summons, then the co-owners have the option to attend or not. Imagine co-owners getting the notice (not a summons), getting a lawyer, and appearing at the “341” hearing. It would be a classic if the co-owners decide to attend and are allowed to question the debtor about the asset list and debt. Consider that the co-owners may know information about assets owned by the debtor. Prosecution awaits abuse or fraud on the FBL.
A mortgage with co-ownership of the property gets a little bit spicy when one owner decides to file bankruptcy under Chapter 7, even more so if filing under chapter 13. In the Chapter 7 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 co-owners 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 it, the co-owners would have to be able to buy out the debtor’s ownership in the property from the court at an established fair market value. They will 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 this asset. People just cannot expect to receive a substantial discount. It is very likely that the co-owners will have to refinance to clear the debtor’s name off of the deed and the mortgage.