What Happens to Your Timeshare and Timeshare Debt in Bankruptcy?

Keeping a timeshare in bankruptcy isn't easy because timeshares are considered luxury items. Unless the timeshare is worthless, you will likely lose it or need to pay to keep it. However, if you'd like to get rid of a timeshare, you can agree to give up your interest and erase or "discharge" your responsibility for most related debts. Below, you'll learn about timeshare options in bankruptcy, including what you must do to keep or let go of it and what will happen to timeshare-related debts.

Letting Go of a Timeshare in Bankruptcy

If you're tired of your timeshare, filing for bankruptcy can usually eliminate your responsibility to pay for it. In your bankruptcy paperwork, you'll indicate that you don't wish to retain your timeshare interest, and the bankruptcy case will end all contracts relating to the timeshare.

Warning. If you purchased the timeshare with a home equity loan, this approach will eliminate only maintenance contracts on the property, not the home equity loan. Because a home equity loan is secured by your house, you must continue paying it or risk losing your home. This is discussed further below. Learn about your house in Chapter 7 bankruptcy.

Keeping a Timeshare in Bankruptcy

Keeping a timeshare in bankruptcy is more challenging than getting rid of one because bankruptcy law doesn't usually protect unnecessary luxury items—and a timeshare isn't considered something people need to live. However, it's possible if you know the ins and outs of keeping property in bankruptcy.

You'll start by determining whether you can protect all or some portion of the timeshare using bankruptcy exemptions. It's an analysis you'll do for all of your property before you file.

Bankruptcy Exemptions Protect Property Interests

The property you can protect and, therefore, keep with bankruptcy exemptions varies depending on the state you live in because almost every state has its own set of bankruptcy exemption laws used in Chapters 7 and 13.

If a bankruptcy exemption fully protects your interest in a property, the property is "exempt" and yours to keep. If not, the property is "nonexempt." You'll lose it in Chapter 7 bankruptcy or have to pay to keep it in Chapter 13.

Example. When Caitlyn filed for Chapter 7 bankruptcy, she owned a small remote cabin that she rented when she wasn't using it for vacation purposes. Because her state didn't have an exemption covering the cabin, the Chapter 7 trustee sold it and recovered $60,000 for creditors after deducting sales costs and the trustee's fee.

Example. Assume the same facts as above, but Caitlyn filed for Chapter 13 bankruptcy instead. Because the Chapter 13 trustee doesn't sell property, Caitlyn would have to pay Chapter 13 creditors the same amount they'd receive had she filed for Chapter 7—an amount equal to the nonexempt portion of the cabin's equity, minus sales costs and the trustee's fee. She'd need to pay $1,000 monthly for 60 months, or $60,000, assuming she paid into a five-year Chapter 13 plan. If Caitlyn can't prove she can afford $1,000 monthly, plus other amounts required in Chapter 13, the bankruptcy court won't approve or "confirm" a Chapter 13 plan.

Other options. Before filing for Chapter 7 or 13, Caitlyn could consider selling the cabin and using the funds for necessary expenses or priority debts such as unpaid tax or domestic support obligations. However, she'd want to discuss the strategy with her bankruptcy attorney and proceed transparently to avoid a fraud accusation.

Protecting Timeshares With Bankruptcy Exemptions

States typically don't have bankruptcy exemptions covering timeshares, although you'll want to confirm this by reviewing your state's exemptions. Your state might offer a "wildcard" exemption that will cover some portion of a timeshare or allow you to use the federal bankruptcy exemptions, which offer a more generous wildcard exemption than what is available in most states.

When evaluating your timeshare interest, you'll want to determine whether you have an actual ownership interest or an interest structured more like a lease. Either way, you must protect the value of your interest with an exemption. The only exception would be if you have a lease interest that isn't transferrable. A nontransferable lease has no value to creditors, so you won't lose it.

When You Can't Protect Interest in a Timeshare in Bankruptcy

If you can't protect your timeshare interest with a wildcard exemption, it's nonexempt. However, even if your interest is nonexempt, keeping the timeshare is possible because the bankruptcy chapter you file determines how creditors get paid. Although you'll lose the timeshare in Chapter 7, you can pay your creditors an amount equal to your interest in Chapter 13 and keep the property.

Nonexempt Timeshares in Chapters 7 and Chapter 13

Because Chapters 7 and 13 are structured differently, creditors receive the same amount for nonexempt property but in a different way. Here's the rundown:

• In Chapter 7, you lose the property. The Chapter 7 trustee responsible for your case sells nonexempt property and distributes the proceeds to creditors. Creditors receive an amount equal to the nonexempt equity minus sales costs and the trustee's fee.
• In Chapter 13, you keep the property. Instead of losing the property, you pay the Chapter 13 trustee money to cover the nonexempt portion and the trustee forwards the funds to creditors. You can deduct sales costs and the trustee's fee from the nonexempt value because you're only obligated to pay creditors what they'd receive in Chapter 7 for the property, not more.

Example. Harry met with a bankruptcy lawyer to learn whether he could keep his timeshare in bankruptcy. The lawyer explained that it would depend on whether the timeshare could be sold or transferred and if so, its value. After reviewing the timeshare paperwork, the lawyer determined that Harry owed $26,000 on a transferrable timeshare worth $40,000, giving Harry $14,000 of equity. The lawyer explained that Harry's state didn't offer a timeshare exemption. Still, Harry could protect $2,000 with a wildcard exemption, leaving $12,000 of nonexempt equity. Whether he could keep the timeshare would depend on the chapter Harry filed.

• If Harry filed for Chapter 7, the Chapter 7 trustee would sell the timeshare and give Harry the $2,000 exemption amount, leaving $12,000 for creditors before sales costs and the trustee's fee.
• If he filed for Chapter 13, Harry would keep the timeshare because Chapter 13 trustees don't sell property. However, he would need to pay $12,000 (minus sales costs and the trustee's fee because he's only required to pay as much as he would in Chapter 7) through the Chapter 13 plan, plus any other required payment amounts. If Harry couldn't prove his income was sufficient to support the plan, the bankruptcy judge wouldn't confirm it.

Harry knew he didn't want to keep the timeshare and liked the idea of severing his responsibility to pay for it. His lawyer explained that the Chapter 7 trustee would sell his timeshare interest and use the sales proceeds to pay off a tax debt he couldn't erase or discharge in bankruptcy. After learning he'd benefit from the timeshare sale, Harry decided that filing for Chapter 7 was right for him.

Learn about priority debts the trustee must pay first in Chapter 7 bankruptcy.

If You're Still Paying for Your Timeshare

Even if you can protect your interest in the timeshare with an exemption, what will happen to it in bankruptcy also depends on whether you're still paying for it. Specifically, you'll lose the timeshare if it serves as collateral for the loan and you don't continue paying as agreed.

When the Timeshare Serves as Collateral

Often, when you purchase a deeded interest timeshare, you take out a loan and give the lender a "lien" against the timeshare. If you don't pay, the lender can sell or "foreclose" the timeshare and use the proceeds to pay down your debt.

In bankruptcy, you can let the timeshare return to the lender and erase your responsibility to pay for it. If you want to keep the timeshare in Chapter 7, you must be caught up on payments when you file (to prevent the lender's foreclosure) and be able to protect the equity with a bankruptcy exemption (to prevent the trustee from selling it for creditors).

Because bankruptcy will automatically eliminate your agreement with the lender, you can reaffirm the debt by agreeing to remain liable for it after you get the bankruptcy discharge.

If you later default on the debt, you'll lose your timeshare. You'll also likely be liable for a "deficiency" balance or the difference between the amount you owe and the amount received after selling the timeshare. If you want to reaffirm a loan, consider learning about reaffirmation hearings.

If you want to keep the timeshare in Chapter 13, you'll need to prove you can afford the monthly payment, catch up on any arrears, and pay for any nonexempt equity through the Chapter 13 plan. Learn how to calculate a Chapter 13 payment.

When You Secure Financing With Your Home

When you buy anything with a home equity loan, you secure the purchase with the home, not the property you bought. When you give the lender a lien against your house, not the timeshare, the lender can foreclose on your home if you don't pay.

Therefore, if you bought the timeshare with a home equity loan, you guaranteed the loan with your home, not the timeshare itself. In your bankruptcy case, you won't be able to erase the home equity debt by declaring your intention to return the timeshare. You must continue paying the home equity loan regardless of what happens to the timeshare. Otherwise, the lender can foreclose on your home.

Additionally, you'll own the timeshare outright for bankruptcy purposes, which isn't especially helpful. To keep the timeshare from the Chapter 7 trustee, you'll need to protect its entire value with a bankruptcy exemption. You can't reduce the equity value by subtracting the amount owed on the home equity loan.

To keep the timeshare in Chapter 13, you must prove you can afford to pay for the nonexempt portion through the plan. Again, because you can't deduct the home loan from the equity, you'd have to demonstrate you could afford to pay its entire value.

If the Lender Forecloses Your Timeshare

If the lender foreclosed on your timeshare before you filed for bankruptcy and couldn't sell it for what you owed, the balance remaining would be a deficiency. A bankruptcy discharge erases deficiency balances.

If the lender didn't foreclose before bankruptcy, it might ask the bankruptcy court to allow it to proceed with foreclosure. Because the lender's lien against the timeshare ensures the lender will be paid fully before other creditors receive anything, the bankruptcy judge will grant the request in Chapter 7 if the equity will cover only what's owed to the lender.

If the timeshare is worth more than the amount owed to the lender, the bankruptcy judge will deny the lender's request and allow the trustee to sell it in Chapter 7. The trustee will pay the lender fully out of the proceeds, deduct sales costs and the trustee's fee, and distribute the remaining funds to other creditors.

In Chapter 13, the court would allow the foreclosure to proceed if the filer didn't want the timeshare or couldn't afford to pay for it through the payment plan. In Chapter 13, the filer would need to be able to pay the monthly payment, arrears, and the value of any nonexempt equity to keep the timeshare. If the filer couldn't prove the ability to do so, the bankruptcy judge would allow the foreclosure.

Discharging Annual Maintenance Dues and Other Fees

Most timeshare owners must pay annual maintenance fees and other dues. If you fall behind on these payments, whether you can discharge the debt in bankruptcy will depend on whether you keep the timeshare and when you incurred the fees.

You Incurred the Fees Before Filing for Bankruptcy

If you give up your timeshare in bankruptcy, any annual maintenance fees and other dues incurred before filing for bankruptcy will be erased by the bankruptcy discharge.

You Incurred the Fees After Filing for Bankruptcy

If you keep the timeshare and incur the fees after your bankruptcy, you'll be responsible for paying them. These are called postpetition fees. However, not all jurisdictions follow the same rules. Your local bankruptcy lawyer will be in the best position to explain your responsibilities after bankruptcy.

Consult a Bankruptcy Lawyer

Because of the many variables involved in bankruptcy and that laws that apply to timeshares can vary by state, it's prudent to meet with a local bankruptcy attorney before moving forward. Learning your options, including what will happen with property, is worth the consultation cost—and many lawyers offer a free initial meeting.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help. Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.