Mortgage co-borrower bankruptcy:
what’s the risk to your apartment and how to save it

A joint mortgage seems like a logical solution: combine incomes, come up with the required amount, and buy an apartment. The co-borrower signs the agreement equally with the primary borrower and bears the same responsibility to the bank. Everything goes smoothly until one of the parties encounters serious financial difficulties.

The bank makes no distinction between the parties to the agreement. Joint and several liability means that the lender has the right to demand repayment of the entire debt from any of the borrowers — in full, without splitting it into shares. The bank is not obligated to agree to any other arrangement, and is generally reluctant to do so.

When one of the debtors becomes insolvent, the court appoints a financial manager. The manager draws up an inventory of all assets, and the mortgaged apartment is automatically included in this list. The fact that the second borrower makes regular payments does not stop the process: the bank is obligated to file its claims and protect the funds it has lent.

New judicial practice offers a chance to save mortgaged property. Courts have begun approving local restructuring plans, under which an apartment is removed from the bankruptcy estate — provided there are no delinquencies on that particular loan. The remaining debts are then written off. However, this mechanism only applies to a single property: investment properties are auctioned without exception.

The apartment is sold at open auction. The mortgagee bank takes 80 percent of the proceeds, with the remainder going toward legal costs and the trustee’s fees. Experience shows that the bankruptcy of a co-borrower on a mortgage often becomes grounds for early recovery of the entire debt, leaving the principal debtor suddenly faced with the need to raise several million rubles in a short period of time. Only a few succeed.

The down payment, money for repairs, and years of paid interest — none of this is refundable in a forced sale. The losses fall on the person who paid regularly.

The other party’s credit history also suffers: records of late payments are reported to credit bureaus, making it significantly more difficult to obtain a new loan or refinance an existing debt.

What is the threat to the main borrower?

Banks monitor bankruptcy filings in the federal registry. If a creditor discovers a client’s name there, it is considered a breach of contract and is granted the right to unilaterally terminate the agreement. Accounts are seized, and payments are forcibly debited.

Guarantors are in a similar position: they are liable to the bank with their own assets, just like the principal debtor. If the guarantor is declared insolvent, the bank needs a replacement — and if one is not available, the early loan repayment mechanism is triggered automatically.

How to save your apartment

Lawyers identify several realistic ways to get out of this situation with minimal losses:

In all cases, a conversation with the bank should begin before filing a claim with the arbitration court. Concealing information is pointless — automated systems will sooner or later reveal the client’s status in databases. Open dialogue with the creditor increases the chances of a peaceful resolution.

Mortgage payments must be made strictly according to the schedule — in the name of the debtor who is not in bankruptcy proceedings. If their cards are blocked, any third party can make payments: simply indicate the loan agreement number in the payment details. This is legal and removes suspicions of using the bankrupt person’s hidden income.

Mistakes that accelerate home loss

The most common of these are attempts to retroactively transfer property ownership. Gifting a share to relatives, selling it for a pittance on the eve of a court hearing, or signing a prenuptial agreement at the last minute — the financial manager is obliged to challenge transactions dating back three years, and the courts are able to handle this.

It’s equally dangerous to stop making mortgage payments in the hopes that the debt will be written off along with the rest. This logic doesn’t work: mortgaged property is guaranteed to be repossessed if payments are late. Write-offs only apply to unsecured loans — consumer loans, outstanding promissory notes, and tax arrears.

A mortgaged apartment is collateral. While it’s collateral, the bank is stronger than any debtor. The only way to avoid losing your home is to avoid giving the lender any formal grounds for foreclosure.

In such a situation, discipline is more important than legal tricks. A timely payment eliminates more opportunities for seizure than any legal tactic.