Co-Ownership in Homestead Implications for Bankruptcy

In the annals of bankruptcy law, special rules have come to dictate how certain property—from homes to cars to household items—is categorized and dispensed post-filing. Specifically, most states have some sort of homestead exemption that protects some or all of the equity in the debtor’s home from the clutches of creditor claims.  The Bankruptcy Code provides debtors with a homestead exemption—an exemption that is doubled for joint owners.

But issues can arise in a bankruptcy’s homestead protections when a non-resident co-owns the home, such as when a parent co-signs with an adult child to help subsidize the child’s first home.

In this situation, where parents purchase a house for a child (not uncommon in these tough financial times) and are also on the deed as co-owners of their child’s home, and the child or even the child and parents then later face credit problems and are considering bankruptcy, questions can arise as to whether a Chapter 7 filing by one party would affect the other’s interest in the home.

In one particular case, the jointly-owned house qualifies for unlimited homestead protection under current bankruptcy rules. For example, if the child files for Chapter 7 bankruptcy placing his partial interest at issue, in most cases the bankruptcy trustee has no interest or rights relating to the parents’ interest in the home. In addition, the child’s ownership interest in the home, as his or her primary residence, is also protected under bankruptcy’s homestead exemption.

In the other scenario, wherein the non-resident, co-home owning parents are the insolvent party who file for bankruptcy, their bankruptcy trustee may have a claim against the their interest in a child’s home because the parents do not live in the home and are therefore not protected under the homestead exemption.  While the bankruptcy trustee could not force the sale of the homestead while the child is using the home as his or her primary residence, the trustee could instead place a lien on the parents’ interest in the home, payable upon the sale or refinancing of the home.

Depending on whether the child pays all of the taxes on the home, all of the mortgage payments, takes care of all other home expenses and exclusively uses the property, the parents can attempt to keep the trustee’s hands off of the home altogether by arguing they have no equitable interest in the house subject to the bankruptcy estate; in short, all beneficial interest in the house has been transferred from parents to child. To further substantiate this “hands-off-the-home” argument, the parents can provide written evidence in the form of a gift tax return or other written documents supporting their intent to “gift” the homestead to the child.

Regardless of whether the parent or child is the bankruptcy bound party, the above scenarios provide further examples of why parties should tread cautiously when considering joint-ownership of assets.

Because of the intricacies of joint ownership, the homestead exemption and/or bankruptcy law, getting to know a qualified bankruptcy attorney is your first best step down the right path to conquer your creditors and face your financial fears, yielding the right kinds of support, information and insights—at a low cost— for a viable and secure future. The bankruptcy experts at the Law Offices of John T. Orcutt offer a totally FREE debt consultation and now, more than ever, it’s time to take them up on their offer. Just call toll free to +1-833-627-0115, or during the off hours, you can make your own appointment right online at www.billsbills.com. Simply click on the yellow “FREE Consultation Now” button.