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.
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.
- 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.
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.