House value: 120K
Mortgage: 260K
Negative Equity: 140K
1. Yes all 3 of you are liable, so if someone decides not to pay, and cannot pay, then the others should pay. If the mortgage is not paid the bank will come after all 3 in theory, but in reality they will go after the one with the most money. And also generally they go after the easist target. Your MIL is right to be worried if she has a good income or assets. Even worse for her is that the rent doesn't cover the mortgage, your income is not able to subsidise this mortgage. And she's burying her head in the sand.
2. Depends, could you and your wife pay off a mortgage of 140K at the same interest rate and term as currently? I don't think you can based on the fact that you don't seem to be even paying the current rent towards the mortgage but I cannot be sure. What happens the excess of rent over mortgage of 275 Euro a month?
3. I don't understand. What is S94? How would your MIL then not be liable? If the bank allowed you to sell, and that gets MIL out of the loop, and your'e only left with the NE what's the problem. The bank cannot get the NE from you if you cannot afford it and they will have to write it off. If you were offered this and turned it down, if I were the MIl I wouldn't be speaking to you.
4. The bank will decide how much you can afford, kinda like a means test, based no doubt on what you fill out in the SFS. I don't understnad how you say you can pay something, yet you are not even paying anything now towards the mortgage other than rent. Do you have excess income. If there is no property, than the mortgage is not secured, so it will be an unsecured loan. To get this repaid the bank can go after your assets, get an instalment order on your income.