Navigating "Pair Loans" and Mortgages in Japanese Individual Rehabilitation: What Happens When Both Spouses Have Housing Debts?

In Japan, "pair loans" (ペアローン - pea rōn) and other forms of co-borrowing for residential mortgages have become increasingly common, allowing couples or family members to combine their financial capacities to purchase a home. However, when one of the co-borrowers faces financial distress and seeks Individual Civil Rehabilitation (個人再生 - Kojin Saisei) to restructure their debts while aiming to keep the shared home, complex legal challenges arise. This article delves into how Japan's Kojin Saisei system, particularly its "Residential Mortgage Special Clause," addresses situations involving these intertwined housing debts.

Understanding "Pair Loans" and Co-borrowing in the Japanese Mortgage Context

"Pair loans" typically involve two individuals (often spouses, but sometimes a parent and child) each taking out a separate loan from the same or different lenders, with both loans collectively financing the purchase or construction of a single property. The property is then usually co-owned, and often, each individual's loan is secured by a mortgage that encumbers the entire property, including the co-owner's share. This creates a web of interconnected financial obligations and security interests.

Variations include:

• Joint and Several Liability: Both borrowers are fully liable for the entire mortgage amount, even if it's nominally divided.
• Separate Loans with Cross-Collateralization: Each borrower has their own loan, but both are secured by mortgages on the entire jointly-owned property. This was the scenario in an illustrative case involving a petitioner and his father-in-law who co-owned and co-financed a two-family house.

When one co-borrower becomes insolvent and needs to restructure their other unsecured debts (e.g., credit card debt, personal loans), the primary concern is whether they can do so without triggering a default on their portion of the mortgage or, critically, causing the non-insolvent co-borrower's mortgage to be jeopardized, potentially leading to the loss of the home for everyone.

The Challenge: Applying the Residential Mortgage Special Clause with Interconnected Housing Debts

The Residential Mortgage Special Clause (住宅資金特別条項 - Jūtaku Shikin Tokubetsu Jōkō; Arts. 196-206, Civil Rehabilitation Act) is the key provision in Kojin Saisei that allows a debtor to continue paying their housing loan (possibly with modified terms) while other unsecured debts are significantly reduced. However, its application in "pair loan" or similar co-borrowing situations is complicated by a crucial proviso.

Article 198, Paragraph 1 of the Civil Rehabilitation Act generally permits the inclusion of this special clause in a rehabilitation plan. However, its proviso states that the clause cannot be used if the debtor's residence is subject to a security interest (other than the mortgage securing the debtor's own housing loan) that secures a non-housing loan debt of the debtor or any debt of a third party, and the enforcement of that other security interest could lead to the debtor losing ownership or use of the residence.

The Core Problem:
From the perspective of the individual filing for Kojin Saisei (the "petitioner"), the mortgage securing the non-petitioning co-borrower's housing loan can appear to be an "other security interest" on the shared property. While it secures a housing loan for the co-borrower, it is not the petitioner's housing loan. If this interpretation were strictly applied, it could disqualify the petitioner from using the Residential Mortgage Special Clause for their own mortgage, thereby undermining their ability to save the home.

Navigating the Legal Hurdles: Court Practice and Evidentiary Requirements

Japanese courts, particularly key jurisdictions like the Tokyo District Court, have developed a pragmatic approach to these situations, recognizing the social importance of home retention and the realities of modern mortgage financing. The strict application of the Art. 198(1) proviso is often tempered by an assessment of the actual risk of the petitioner losing their home due to the non-petitioning co-borrower's mortgage.

The Evolving Court Practice:
Courts may permit the petitioner to use the Residential Mortgage Special Clause even if a co-borrower's mortgage also encumbers the property, provided that it can be convincingly demonstrated that the non-petitioning co-borrower's loan is stable and not at risk of default, and therefore their mortgage is unlikely to be enforced in a way that would dispossess the petitioner.

Key Factors Considered by the Court and any Appointed Rehabilitation Trustee/Supervisor (Saisei I'in - 再生委員):

1. Financial Stability of the Non-Petitioning Co-borrower:
   • Income and Employment: Is the co-borrower employed with a stable income sufficient to continue their mortgage payments? Evidence like pay slips, tax documents, and employment verification may be required.
   • Other Debts: Does the co-borrower have other significant debts that could jeopardize their ability to service their mortgage?
   • Overall Financial Health: A general assessment of their financial stability.
2. Payment History and Future Prospects of the Non-Petitioner's Loan:
   • Has the co-borrower consistently made their mortgage payments without delinquency?
   • What are their future income prospects (e.g., retirement plans, pension forecasts)? In one illustrative case involving a father-in-law co-borrower, his pension projections and expected employment until age 65 were key pieces of evidence.
3. The Mortgage Lender's Stance on Both Loans:
   • What is the position of the bank(s) holding the mortgages? Are they aware of the petitioner's Kojin Saisei filing?
   • Crucially, will the lender seek to accelerate or foreclose on the non-petitioning co-borrower's loan simply because the petitioner has filed for Kojin Saisei?
4. Nature of Co-ownership and Residency: The specifics of how the property is owned and occupied.
5. Contractual Terms: The terms of both mortgage agreements and any associated guarantee agreements.

Demonstrating "No Risk of Foreclosure" from the Co-borrower's Loan:
The burden is on the petitioner (and their lawyer) to provide compelling evidence that the non-petitioning co-borrower's mortgage does not pose a material threat to the petitioner's continued ownership and residence. This typically involves:

• Voluntary Disclosure from the Co-borrower: The non-petitioning co-borrower usually needs to cooperate by providing their financial information.
• Communication with Lenders: The petitioner's lawyer often needs to communicate with the mortgage lender(s) regarding both loans to understand their policies and intentions. Obtaining a formal written agreement from the lender stating they will not enforce the co-borrower's mortgage as long as the co-borrower remains current can be ideal, but is often difficult to secure. Lenders may be hesitant to provide such binding written assurances.
• Evidence of Lender's Operational Practice: If a formal agreement is unobtainable, evidence of the lender's standard operational practice—for example, that they do not accelerate a performing loan of one co-borrower due to the insolvency of another, as long as their own loan is current—can be presented. This was a key strategy in one case study where the lender, while unwilling to provide a formal letter, described their internal policies to the petitioner's lawyer, which was then reported to the court and the saisei i'in.

The Role of the Rehabilitation Trustee/Supervisor (Saisei I'in)

In jurisdictions like the Tokyo District Court where a saisei i'in is appointed in all Kojin Saisei cases, this trustee/supervisor plays a critical investigative and advisory role, especially in complex pair loan scenarios.

• Heightened Scrutiny: The saisei i'in will closely examine the stability of the non-petitioning co-borrower's loan and the potential risks.
• Requests for Information/Agreements: They may initially request formal agreements from lenders or detailed financial undertakings from the non-petitioning co-borrower.
• Opinion to the Court: Ultimately, the saisei i'in will provide an opinion to the court on whether the Residential Mortgage Special Clause can be appropriately applied, considering all risk factors. In one illustrative case, the saisei i'in initially noted the need for a clear agreement from the lender but later accepted the lawyer's report on the lender's operational practices as sufficient to deem the risk of foreclosure low.

Strategic Steps for the Petitioner's Lawyer

Successfully navigating a Kojin Saisei with a pair loan requires proactive and thorough legal work:

1. Detailed Fact-Finding: Meticulously investigate the financial situations of both the petitioner and the non-petitioning co-borrower.
2. Early Lender Communication: Engage with the mortgage lender(s) early to understand their position on both the petitioner's and the co-borrower's loans in light of the Kojin Saisei filing.
3. Evidence Gathering: Compile comprehensive evidence of the non-petitioning co-borrower's financial stability and the lender's operational policies if formal agreements are not available.
4. Clear Presentation to Court and Saisei I'in: Present a well-reasoned argument, supported by evidence, demonstrating why the co-borrower's mortgage does not pose a disqualifying risk under Art. 198(1) proviso. This often involves submitting detailed written reports and declarations.
5. Coordinating with the Non-Petitioning Co-borrower: Their cooperation is usually essential.

What if Both Co-Borrowers are Insolvent?

If both individuals in a pair loan arrangement are insolvent and wish to save the home, they would typically each file for Kojin Saisei concurrently. In such cases, courts (like the Tokyo District Court) are generally amenable to both petitioners utilizing the Residential Mortgage Special Clause for their respective (or joint) mortgage obligations, provided the overall plan is feasible.

Specific Issues in Two-Family Homes or Co-Owned Properties

When the property is a two-family home or involves distinct living spaces for co-owners (as in Case 9, where the petitioner and his family lived on one floor and his in-laws on another), an additional requirement for the petitioner to use the special clause for their housing loan is that the portion of the building they primarily use for their own residence must constitute at least half of the total floor area of the building (Civil Rehabilitation Act Art. 196(1)(i)). This requires careful measurement and presentation of floor plans to the court.

Conclusion

Navigating Individual Civil Rehabilitation (Kojin Saisei) in Japan when "pair loans" or other co-borrowing mortgage structures are involved presents unique legal and practical complexities, primarily centered around the application of the Residential Mortgage Special Clause. While the presence of a mortgage securing a non-petitioning co-borrower's debt on the shared property can initially appear to be a barrier, Japanese court practice, particularly in major jurisdictions, has shown a willingness to permit the use of the home-saving clause if it can be robustly demonstrated that the co-borrower's loan is financially stable and poses no realistic threat of foreclosure that would undermine the petitioner's rehabilitation. Success in these intricate cases hinges on thorough factual investigation, proactive engagement with all stakeholders (including the non-petitioning co-borrower and lenders), strong evidentiary presentation to the court and any appointed Rehabilitation Trustee/Supervisor, and expert legal representation. For co-borrowing homeowners facing financial distress, this provides a critical, albeit complex, avenue to protect their shared residence while addressing their unsecured debts.