[FreedomCalls]

I don't see why they can't declare bankruptcy. (Although I don't know how much has changed with the new rules.) They can let the bank foreclose on the property and then declare BK after the bank comes after them for the remainder OR they can just go ahead and declare BK ahead of time and save the foreclosure hassle. (With bankruptcy, you usually aren't allowed to have more than X in equity in your home, which wouldn't be the case in this situation.)

Doesn't the new federal bankruptcy law change all that?

[conservative cat]

Somewhat. You must make less than the median income for your area to declare chapter 7. If both are unemployed, that would be the case. If not, they would need to declare chapter 13 (reorg of debts), and would be screwed.