A mortgage and bankruptcy together is the combination people fear most. The central question: will the flat be taken? The answer is nuanced — the law does not protect mortgaged property, but there are real ways to keep it.

Why a Mortgaged Flat Is Not Protected

Article 446 of the Civil Procedure Code prohibits seizing a debtor’s sole dwelling — but makes an explicit exception for mortgaged property. The bank holds a pledge over the flat, and its rights as a secured creditor take priority over the debtor’s right to housing. This applies even if:

the mortgaged flat is the family’s only home;
minor children are registered at the address;
the mortgage is almost fully repaid.

What Happens to a Mortgaged Flat in Bankruptcy

Once asset liquidation begins, the flat is included in the bankruptcy estate and the financial trustee arranges an auction.

The flat is put up for auction — typically at or below market value.
80% of the proceeds go to the pledgee bank against the mortgage debt.
10% goes to first-priority creditors (child support arrears, compensation for personal injury).
The remaining 10% covers court costs and the trustee’s fee.
Any shortfall — the part of the mortgage debt not covered by the sale — is discharged when bankruptcy concludes.
The debtor vacates the flat and is deregistered.

Can You Keep a Mortgaged Flat in Bankruptcy?

Yes — but it requires active steps. There are three workable options.

Option 1. Debt Restructuring Within Bankruptcy

The court may introduce debt restructuring instead of liquidation. The debtor proposes a repayment plan for up to 3 years. If the bank agrees to the new schedule, the mortgaged flat is not sold.

Requirement: the debtor must have a stable income sufficient to service the mortgage under the new terms.

Option 2. Settlement Agreement With the Bank

At any stage of bankruptcy proceedings, the bank and the debtor may conclude a settlement agreement. If the bank agrees to refinancing, a payment deferral, or other terms, the bankruptcy case is terminated and the flat stays with the debtor.

In practice, banks agree to a settlement when they see a realistic prospect of recovering the debt without litigation costs.

Option 3. A Relative Buys the Flat at Auction

If the debtor has a relative willing to buy the mortgaged flat at auction, this is technically lawful. The flat is sold at market price, the bank receives its money, and the relative becomes the new owner. The flat can later be transferred back.

Important: the financial trustee may challenge such a transaction if it was at a below-market price or shows signs of collusion. Legal advice is essential.

What Happens to the Remaining Mortgage Debt After the Sale

If the auction proceeds do not cover the full mortgage balance, the shortfall is discharged when bankruptcy concludes. This means the debtor is not required to pay the difference.

Example: mortgage balance — 4,000,000 roubles; flat sold for 3,200,000 roubles. The bank receives 80% = 2,560,000 roubles. The remaining 1,440,000 roubles of mortgage debt is written off.

Children Registered at the Address Do Not Block the Sale

A common misconception: if minor children are registered at a mortgaged flat, it cannot be sold. This is false. Children’s registration does not prevent the sale of pledged property. Child welfare authorities cannot block the auction of a mortgaged flat in bankruptcy proceedings.

The family must vacate after the sale. The question of temporary accommodation is handled separately.

What to Do If the Mortgage Is Your Only Problem

If the mortgage is your main debt and other obligations are small, bankruptcy may not be the best solution. Consider alternatives first:

Refinancing — reduce the monthly payment through another lender.
Mortgage payment holidays — Russian law allows a deferral of up to 6 months when income falls.
Direct restructuring with the bank — negotiate without going to court.

Bankruptcy with a mortgage makes sense when debts across multiple creditors are unmanageable and the mortgage payment is just one part of a larger problem.

Frequently Asked Questions

Will a mortgaged flat be taken in bankruptcy? Yes, unless restructuring or a settlement agreement is reached. A mortgaged flat is pledged property and is not protected under Article 446 of the Civil Procedure Code.

Will the remaining mortgage debt be discharged if the flat sells for less than the balance? Yes. The shortfall between the debt and the sale proceeds is written off when bankruptcy is completed.

Can I file for bankruptcy and keep paying the mortgage? In principle, yes — if the bank agrees to restructuring within the bankruptcy framework. In practice, this requires court approval and the lender’s consent.

What happens to a husband’s mortgage if his wife files for bankruptcy? If the flat was purchased during the marriage, it is jointly owned. The debtor-spouse’s share is included in the bankruptcy estate — the flat may be sold and the non-debtor spouse will receive their share in cash.

Bankruptcy With a Mortgage: What Happens to Your Flat