Posts Tagged ‘vacation home’

In bankruptcy it is not uncommon for a debtor to own real property (a house or land) jointly with another person who is not filing. An example of this would be if you own your home with your spouse and your spouse is not filing bankruptcy. While this does not present a major problem for most debtors, there are situations where joint ownership could present a problem. In this article, I will discuss the situations where a debtor jointly owns property with someone else and the ramifications bankruptcy will have on that property.

The Homestead Exemption

When a person files bankruptcy, you are entitled to keep certain types of property up to a certain value. The property you get to keep is known as “exempt.” An example of exempt property is your residence, known as a “homestead.” In Massachusetts, if you own a home, you are entitled to an exemption in your homestead. As of March 2011, Massachusetts residents are entitled to an automatic homestead for $125,000. This means that if you have less than $125,000 in equity in your home, it is automatically exempt and you can keep your home in a bankruptcy. If you have more than $125,000 in equity, then you need to actually file a document at the registry of deeds in the county that your home is located known as a “declaration of homestead.” Filing this document will increase your homestead and protect the equity in your home up to $500,000.00.

However, if you have more equity in your home than $500,000, then your home could be soled in the bankruptcy to repay your debt. For example, if you have $600,000 in equity in your home, then $100,000 is not exempt and your home can be sold to satisfy your creditors. After the sale you will get $500,000, but the other $100,000 would be used to repay your creditors. In bankruptcy there are certain debts that a homestead will not protect you from, and your homestead is limited if you have not owned you home for at least 40 months. For more information on the limitations of a homestead in bankruptcy, you should consult with a qualified Massachusetts bankruptcy attorney.

The Trustee’s Power to Sell

What happens if you jointly own property with someone else and the property is not exempt? In Bankruptcy, the Trustee who is overseeing your case has the authority to force a sale of the entire asset, including the co-owner’s interest; even when the co-owner is not filing bankruptcy. See 11 U.S.C. 363(h).

However, the Trustee does not have the power to act independently and cannot simply sell the property. The Trustee must seek the Bankruptcy Court’s approval by filing a lawsuit in the Bankruptcy Court, known as an “adversary proceeding.” In this adversary proceeding, the co-owner will have the ability to present evidence to the court that the detriment that they will suffer is greater than the benefit to the creditors. Many times, the co-owner will be given the opportunity to purchase the debtor’s interest in the property at a discounted rate. If the property is sold, then the co-owner will be paid back their fraction of the ownership interest in the property after the Trustee’s expenses are paid.

Real Estate Ownership Scenarios

In bankruptcy, we typically see three situations where a debtor owns real estate jointly with someone else: home ownership with a spouse, co-ownership of a parents home, and co-ownership of investment property.

Home Ownership With a Souse

If you own your home with your spouse, chances are, you either own it as Joint Tenants with Rights of Survivorship (“JTROS”) or as Tenants by the Entirety. This means that both you and your spouse each own the whole home, as compared to you having ½ ownership and your spouse having ½ ownership. Then if you or your spouse dies, the other spouse automatically owns the whole.

There are clear advantages to owning your home with your spouse as Tenants by the Entirety, because it prevents once spouse’s creditors from interfering with the other spouse’s right of possession. This is also beneficial in bankruptcy in Massachusetts, because any interest that the debtor has as a tenant by the entirety is exempt “to the extent that such interest … is exempt from process under applicable non-bankruptcy law.” 11 U.S.C. § 522(b)(2). This means that in Massachusetts the debtor’s interest in their home that is owned with a spouse as tenancy-by-the-entirety is subject to attachment but not subject to levy or execution at this time and, so, the debtor’s right to possession cannot be interfered with unless and until the property is sold, or debtor and their spouse are divorced, or the debtor survives her spouse, in which event the trustee will be free to enforce his interest in the debtor’s real estate.

However, as I stated earlier, filing a declaration of homestead on your residence will protect up to $500,000 of the equity in your home, regardless of how you hold title with your spouse; therefore, it is always a good idea to go to your local registry of deeds and have one recorded. The declaration of homestead may be in either spouses name and will protect all the family members. It is also important to remember that a homestead is not available for investment property and can only protect property that you either live in, or you intend to make your home and permanent residence. You should contact a qualified bankruptcy attorney for more information on how a homestead can protect your home.

Joint Ownership of a Parent’s Home: The “Poor-Man’s” Will

It is not uncommon for elderly parents to decide to add their children to the deed of their homes for estate planning purposes. Typically, in order to save on the expense of paying an attorney to properly prepare a will, parents transfer title of their property to themselves and their children, as joint tenants. While this is an effective method of transferring property and avoiding probate upon the parents’ death, it can have undesired consequences because the parents’ property can be attached and seized by their children’s creditors. Moreover, as I discussed earlier in this article, if one of the children files bankruptcy, the bankruptcy trustee can sell the parents’ home to repay creditors.

If your parents have added you to the deed of their home, it is important to inform your bankruptcy attorney before your case is filed. A qualified attorney should be able to ensure that your parents’ property is properly protected.

Co-Ownership of Investment Property

There are very few exemptions that are available for investment/vacation property. Therefore, co-ownership of both investment and vacation property is nearly impossible to protect in bankruptcy unless there is no equity in the property. (the value of the property is equal or less than the amount owed on the mortgage.) If you file bankruptcy and you co-own investment or vacation property that has equity; you can be assured that the bankruptcy trustee will take the steps to sell the property.

Conclusion

Co-ownership of real estate presents numerous complex issues if one of the co-owners decides to file bankruptcy. If you co-own property with a spouse, parent or partner and you are facing financial difficulties, you should seek a qualified bankruptcy attorney for advice. A good attorney will be able to advise you of any potential issues that may arise, and take steps to ensure that you and your loved ones can keep your homes. Under no circumstances should you decide to try to transfer property out of your name, without advice from an attorney, because such a transfer could be seen as a fraudulent and would make it easier for a Bankruptcy Trustee to seize the property.

Judge William C. Hillman, United States Bankruptcy Judge for the District of Massachusetts, recently issued a ruling that a Debtor’s Chapter 13 plan cannot be confirmed if a portion of the Debtor’s income is used to pay monthly expenses associated with a vacation property or second home. This opinion does not apply to investment properties, such as rental properties.

Judge Hillman ruled that a Debtor’s income that was dedicated to paying expenses for a vacation property (such as a mortgage) are not permitted and should be used to pay unsecured creditors; thus allowing the Chapter 13 trustee’s objection to a Debtor’s Chapter 13 plan.

In a Chapter 13 bankruptcy, a Debtor is permitted to deduct certain expenses from his income (such as food, clothing, utilities, etc.). The amount of money left over after all allowed expenses are paid is known as disposable monthly income. The disposable monthly income is paid to the Chapter 13 trustee who pays the money to the Debtor’s unsecured creditors. (for a more detailed explanation, visit our chapter 13 information page).

This ruling means that if a Chapter 13 debtor owns a vacation home; he/she is not permitted to include any of the expenses associated with associated with that property (such as utilities, taxes and mortgage) because the expenses are not reasonable and necessary. This ruling likely will apply to all types of vacation property, including time shares.

A vacation property is viewed as a luxury, and cannot be retained by a debtor in a Chapter 13 proceeding. The property must be liquidated and proceeds must be turned over to creditors, or surrendered in the bankruptcy proceeding. In other words, Chapter 13 debtors in Massachusetts will not be able to keep their vacation homes unless their creditors receive a 100% dividend/payout.