If you own a timeshare and are considering Chapter 7 bankruptcy, you may have questions about what will happen to your timeshare (can you keep it or will you lose it?) and whether bankruptcy will get rid of any debt you owe on the timeshare. The answers to these questions largely depend on the type of timeshare you own.
When you file for Chapter 7 bankruptcy, you ask the court to discharge some or all of your debts (some types of debts cannot be wiped out by bankruptcy). In return, you may have to give up some of your property. The bankruptcy trustee (the person appointed to administer your case) will sell this property and use the proceeds to repay your creditors. If your property is “exempt,” however, you get to keep it. (Learn more about how bankruptcy exemptions work to help you keep property.)
Timeshares raise two issues in bankruptcy:
In bankruptcy timeshares are usually classified as luxury items. For the most part, this means that they are not exempt, so that if you want to keep your timeshare you’ll have to reaffirm the debt (see below). How the timeshare is treated depends on what type of timeshare it is. There are three main types of timeshare. Here’s what happens to each type in bankruptcy.
Most deeded timeshare programs divide ownership of a vacation unit into weekly shares. You buy an ownership interest in the unit for a specific week. This means you have an actual ownership interest in the real estate.
Bankruptcy treats fractional interest timeshares like other real estate that is not your primary home. That is, assuming it is not exempt, the trustee can sell the timeshare and use the proceeds to repay your creditors.
In a right to use ownership arrangement, you buy only the right to use the unit during a specific week for a period of years. It is typically structured as a lease, which means you don’t have any actual ownership interest in the real estate.
Bankruptcy usually treats a right to use timeshare as a lease. The trustee has the ability to assume the lease (take it over and continue it in force) or reject (terminate) the lease. (Learn more about what happens to leases in Chapter 7 bankruptcy.) In rare cases where the lease is not transferrable and therefore has no real value, you may get to keep the timeshare. You may want to have an attorney review your timeshare documents to find out what will happen to yours.
A points based system is similar to a right to use ownership arrangement. Usually you buy a number of points that you can trade each year to use a vacation unit in the development. Normally you don’t have an ownership interest in a particular unit, nor do you have an ownership interest in the development in general.
Bankruptcy often treats a points based timeshare as a lease. Sometimes, however, points based timeshares are treated as personal property. As with other personal property, if it’s not exempt the trustee can sell it for the benefit of your creditors. However, if the points have no transferable value, you may get to keep your timeshare.
If you want to keep the timeshare, you can reaffirm the debt. When you reaffirm a debt in bankruptcy you essentially agree that you will still be liable for the debt even after you get the bankruptcy discharge. In exchange, you get to keep the property securing the debt (in this case, the timeshare). Keep in mind that if you later default on the debt you could lose your timeshare and also be liable for any deficiency (see below for more on deficiencies). For more information, see Reaffirming Secured Debt in Bankruptcy.
Often when you purchase a deeded interest timeshare, you take out a loan to pay for the timeshare. Your lender will have a security interest (mortgage) in the timeshare, which means that if you don’t pay, the lender can foreclose on your interest in the timeshare.
Many people take out a home equity loan to pay for their timeshare. In this case, the lender has a mortgage on your home, not on the timeshare. That loan is not connected to the timeshare, and is treated like any other mortgage in bankruptcy. (Learn more about what happens to home loans in bankruptcy).
If you borrowed money to purchase a right to use timeshare, your lender will not have a mortgage on any real estate interest, and the debt is normally considered to be unsecured. Like other unsecured debts, you can discharge it in bankruptcy.
In a points based system, the lender may have a security interest in the points themselves. In this situation, it would be treated in much the same way a car loan or any other secured loan is treated in bankruptcy. (Learn more in Secured Debts in Chapter 7 Bankruptcy.)
When you take out a timeshare mortgage, you give the lender the right to foreclose your timeshare if you fail to repay the loan as agreed. Bankruptcy can affect the foreclosure process depending on when you file.
If the lender has either not begun the foreclosure process or is in the middle of the foreclosure process, you must list the lender and the debt as part of your bankruptcy. The lender will likely ask the bankruptcy court for permission to foreclose the timeshare. Any equity in the timeshare will go to the trustee to be distributed to your creditors. If, however, you owe more on the mortgage than the timeshare is worth, the difference is called a deficiency. Your bankruptcy discharge will wipe out your obligation to repay the deficiency.
If you lose your timeshare in foreclosure before you file for bankruptcy, any deficiency is unsecured debt. It will be wiped out in the bankruptcy
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 depends on when you incurred the fees.
If you give up your timeshare in the bankruptcy, any annual maintenance fees and other dues that you incurred before filing for bankruptcy will be wiped out by the bankruptcy discharge.
What happens to fees you incur after you file for bankruptcy? Most (but not all) jurisdictions treat timeshare maintenance fees and dues like homeowners association (HOA) fees. In Chpater 7, you cannot discharge HOA fees that you incur after you’ve filed for bankruptcy (these are called postpetition fees). If your jurisdiction treats timeshare fees like HOA fees, then you’ll probably be on the hook for them after bankruptcy. This area of the law is unsettled, however, so you may want to consult with an experienced bankruptcy attorney in your area to find out how courts in your jurisdiction treat these types of fees.