What can happen to my sister if she fraudulently applied for credit cards and is not able to pay them back?

She should be okay. Hire a very experienced BK lawyer. I would suggest a Chapter 13, but I would need more information. Good luck!

As a general rule, debts incurred through fraud are not dischargeable in bankruptcy. However, it's not fraud if it's unintentional and a mentally ill person might not be capable of having malicious intent. That's a question for a psychiatrist not a bankruptcy lawyer, if her psychiatrist will testify that she's not capable for forming malicious intent, then those debts would be dischargeable. As to whether she can get a loan modification to keep the house, I can't see it. Generally, 25% to 30% of your income is considered reasonable for a mortgage payment which on an $1850 monthly income would be $460 to $550 a month. Loan modification usually can reduce monthly payments by 5% to 20%, even 20% would still leave her with $1,300 mortgage payment. To buy the house she's got, she should be making $50,000 a year and she's only making $22,000. I just don't think that's going to happen.

Mental illness can be a defense to a crime, but the fact that someone suffers from a mental illness does not mean they will not be charged with a crime. You will want to discuss this matter with an attorney in the area of criminal defense, not bankruptcy. Filing bankruptcy may just be waving a red flag in front of an angry bull, especially when there has been recent use of a large amount of credit.

Bankruptcy alone cannot solve these problems. It's basic math: if your sister gets $1850 a month from disability, pays $1600 a month for her mortgage and has a $600 car payment, she cannot afford either the house or the car. If she gives those up, she will be "judgment-proof" because the creditors will not be able to garnish her disability. Sounds like she should move into a group home where she can get some care and some protection from herself and predatory lenders. If she were to file bankruptcy, the credit card issuers could object to her discharging their debts on the grounds of fraud. That would just create more problems for her. Without the car and the home, she would most likely be eligible for medicaid and food assistance.

Some debts are not discharged in bankruptcy. Taxes, student loans, and domestic support obligations are generally not automatically discharged. Other debts, such as debts incurred by the use of false financial statements, and debt incurred with the use of fraud are not discharged if the creditor files an objection to discharge and proves that the debt is not discharged.