If you are on title to a house owned by another person and you file for bankruptcy, what happens to the home and how it will affect your bankruptcy depends on whether you have bare legal title (no real ownership of the property) or both an equitable and legal interest in the property. If you do have an equitable interest in the property, then the home becomes part of your bankruptcy estate. Depending on the amount of your equity, the bankruptcy trusteemay be able to sell the home to repay your creditors in a Chapter 7 case. If you file for Chapter 13 bankruptcy, you may be required to pay a significant dividend to unsecured creditors through your repayment plan.
How your property is treated in bankruptcy depends on the type of case you file. (Learn more about what happens to your property in bankruptcy.)
Chapter 7 bankruptcy. Chapter 7 is called a liquidation bankruptcy because the trustee is able to sell your nonexempt property to pay back your debts. This means that if you can’t exempt all of your property, it may be at risk in Chapter 7 bankruptcy. (Learn about how exemptions protect your property.)
Chapter 13 bankruptcy. In Chapter 13 bankruptcy, you are allowed to keep all of your assets. But if you have nonexempt property, your repayment plan must pay your unsecured creditors at least an amount equal to the nonexempt value of your assets. (Learn about the best interest of creditors test in Chapter 13 bankruptcy.)
If you file for bankruptcy, you must disclose all of your real property interests on Schedule A of your paperwork. This means that if you are on the deed to someone else’s home, you must disclose it on your bankruptcy papers (even if you think that you have no ownership interest despite being on title).
In general, legal title represents the legal ownership interest a person has in a piece of property while an equitable interest refers to the beneficial ownership interest (such as the right to use and enjoy) in that asset.
In some cases, the “real owner” of the property may hold only a beneficial interest but not legal title. A common example is an asset that is held in trust for the benefit of someone else (called a beneficiary). If an asset is held in trust, the trustee typically has legal title to the property but can’t use or take the property for his or her own benefit.
If you believe that you only have a legal (but not equitable) interest in the home (also referred to as a bare legal title), you may be able to argue that the home should not be used to satisfy your creditors. But in many cases, this bare legal title argument may not work (discussed below).
If the home that you are on title to doesn’t have any equity (meaning that the balance of the mortgages and other liens on the property exceeds its value), then the trustee will not be interested in it.
If the trustee sells the home, he or she would have to use the proceeds to pay off the liens on the property before paying your unsecured creditors. If the home has no equity, the trustee will typically abandon it. But if there is equity, the home may be at risk in bankruptcy unless you can exempt its equity.
Exemptions protect your property in bankruptcy. In a Chapter 7, they allow you to keep a certain amount of assets by shielding them from the trustee. In Chapter 13 bankruptcy, they allow you to pay less to your unsecured creditors in your repayment plan.
How much property you can exempt in bankruptcy depends on the exemption laws of your state. To protect the equity in their homes, most debtors use a homestead exemption (if offered by their state). But you can typically only use the homestead exemption to protect the equity in your principal residence (your home). If you are on the deed to someone else’s home and it’s not your principal residence, you likely won’t be able to use the homestead exemption.
Some states offer debtors a wildcard exemption that can be used to protect any type of property. If your state has a wildcard exemption that allows you to exempt the equity in the home, the trustee can’t go after it. (Although usually wildcard exemptions are quite low -- ranging from $300 to $15,000 -- so it may not exempt most of your home equity anyway.) Otherwise, the trustee can argue that it’s fair game for your creditors.
If the home has nonexempt equity, the trustee will usually argue that it’s property of your bankruptcy estate and can be administered for the benefit of your creditors.
If you are only on title to the home for legal reasons but you don’t have any equitable interest in the property (for example, if your parents put you on the deed solely to avoid probate or for a similar estate planning purpose), you may be able to argue that you hold only bare legal title and that the home should not be used to satisfy your creditors. But the court may not agree with you.
If you have never made any payments on or improvements to the home or received any benefits from it, you may be able to argue that you hold only bare legal title and no real ownership interest that can be administered in bankruptcy. But even so, many courts have still ruled that the home is part of your bankruptcy estate.
In those cases, the court treated the bankruptcy trustee as if he or she were an innocent bona fide purchaser of the property (an innocent bona fide purchaser is someone who bought the property without knowing the circumstances surrounding the debtor’s property interest), and allowed the trustee to sell the home. Courts are particularly inclined to rule this way if the deed didn’t provide notice that a trust relationship existed.
This means that if you are on the deed to someone else’s home and file for bankruptcy, what will happen to the home will depend on many factors including:
How your legal ownership interest in someone else’s property will be treated in bankruptcy can be extremely complicated. Whether you lose the home will also depend on how your court treats these types of cases. Because you are putting another person's house at risk, you should talk to a local bankruptcy attorney before filing a case.