I believe you said the bank will force the borrower to sell of his fully paid house 2 to pay for the loan outstanding for house 1 after auction.

Which ..kenji is right..the bank cant do so.

House 2 is not part of the colleteral of loan 1. Hence bank has no power over house 2.

Its an option for borrower whether to sell house 2 to cover loan for house 1. If he dont want to ..bank just declare him bankrupt and its up to the OA to sell the house to cover all liabilites of borrower.

There...settled.

Next...

I deleted the rest just to answer this..

OK..once a person is made a bankrupt ..OA (Insolvency Office) steps in and manage all the bankrupt's asset and liabilities.

So say the house is incumberance free...OA can sell the house provided the house is the bankrupt's 100%. No issues.

However, when it comes to re-payment of the creditors, the OA cannot just pay the bank back 200k and ignore the rest of the creditors. That will end up as preferential payment.

So, OA will redistribute the asset after liquidation equally to all the creditors.

TLDR = Bank cannot sell the house ..as bankruptcy act does not allow the bank to do so.