Chapter 13 & Joint Accounts
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I have a mortgage with my mother. She has a second mortgage on our house. What is my liability if she files for Chapter 13?
I live in California. I moved in with my mom 6 years ago to assist her now that she's getting older. Prior to my moving in she had refinanced the house several times; remodel/updating, repairs, and paying off credit cards. On the last refi 5 years ago, she added me to the mortgage and title, so in case something were to happen to her, etc. The loan was for $250k.(chase) Shortly after that, she took out a 2nd-which is in her name only-for $50k.(citibank) Of course now, the home is not worth more than approx. $135k according to Zillow.com, but many home in this area have foreclosed, and in most cases sold for less than $100k. However, the home been in the family since '64 and I intend on keeping it. I am currently looking into modifying the first mortgage in the hopes of getting a payment I can be more comfortable with, when the time comes that I have to make the payment completely by myself...I also plan on filing a Homestead on the property very soon. My question is, my mom is considering filing BK to eliminate her credit cards debts, (she owes approx $40k on about 6 cards, and I'm the authorized user on two of them) and she is considering adding the second mtg. to the BK. Can she do that?! I don't think that is legal, but she seems to think it is due to the fact that she is retired and now living on a fixed income. My fear is that if she tries to do this, that: 1) The credit card companies will come after me for the cards that I am an AU on 2) The bank will try and attach a lien to the home for defaulting on the second mtg. 3) Her BK request will be denied, and then she will go into collections, etc. 4) And anything else you can think of! ; ) She is getting older,(76) and I am trying to be prepared so when the time comes for that transition, everything is in order. However when it comes to this I don't know what my legal grounds are since only one loan on the house is in my name. If she doesn't file BK on the 2nd, and the time comes when she is no longer here, will the lender for the 2nd mtg automatically put the loan in my name since I am on the 1st? Or will they simply roll it into the 1st mtg? I appreciate any advise you may have!
Your key issue surrounds the liability of one joint account holder when another files for bankruptcy protection. Here is a synopsis of my answer: "It depends."
Because this issue is somewhat complicated and very fact-dependent, my first and last thought in my answer is to recommend that anyone facing this issue should consult with an attorney. A seemingly minor fact may make the difference between liability and no liability, and the discussion here is by no means exhaustive.
Co-debtor liability
Generally speaking, if both debtors are jointly liable to a creditor, the bankruptcy of one does not relieve the other of paying the debt. Upon a bankruptcy, the creditor may look to the other debtor for payment, unless the bankruptcy case is under Chapter 13. If the debt is a consumer debt to be paid 100 percent through the Chapter 13 plan, the co-debtor may protected by the bankrupt-filing debtor's stay.
You may have noticed the use of several qualifiers in the above paragraph. This is intentional. Bankruptcy law is federal. However, each state is free to create their own exemptions that modify the bankruptcy law. In California, for example, consumers can choose one of two sets of state exemptions, or reject both an choose the default federal exemptions. Also, if the person filing bankruptcy is married, his or her spouse may be protected automatically, depending on their state of residence.
You mentioned being an authorized user on her credit cards. An authorized user has no liability to a credit card issuer if the debtor defaults on payments. The authorized user has no liability if the debtor files for bankruptcy. The credit card issuer may report the default or bankruptcy on the authorized user's credit report.
Your questions
- The credit card issuer has no legal basis to try to collect the unpaid balance of the credit cards where you are an authorized user.
- The second mortgage is a secured loan -- there is already a lien-like claim on the property. I am using incorrect legal terms to describe the encumbrance on the property, but am trying to match the terms you are using for the sake of clarity.
- Your mother should consult with a bankruptcy attorney to determine if she qualifies to file for Chapter 7 protection.
- You asked if it was "legal" for her to include the second mortgage in her bankruptcy. If she qualifies, yes, she may include the second in the bankruptcy. Whether she should is another question.
- It is not likely, though it is possible for the holder of the second mortgage to buy the first, thus combining their interests. The second mortgagee cannot unilaterally refinance the loan and add you as a party without your authorization. I cannot imagine a situation where you would do so, however.
Recommendation
Consult with an attorney in your state. If you visit an attorney with your mother, do not be surprised if the attorney stops the first meeting at the halfway point and recommends that one of you seek counsel elsewhere. You and your mother may have a conflict of interest that one attorney cannot resolve. As I mentioned, facts in your situation are complicated.
I hope this information helps you Find. Learn & Save.
Best,
Bill
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