Do you have jointly owned real estate? The bankruptcy estate is all the property owned by the debtor at the time of filing bankruptcy. The bankruptcy estate can include property that the debtor sold or transferred just prior to filing and some property that the debtor has a possible right to after the case is filed.
If you have a house with your mother and did not get full payment back in that transaction the transfer is either a fraudulent transfer or a preferential transfer. A Chapter 7 trustee is paid on a sliding scale for any money he can recover and give to creditors.
If you have a home that has a substantial amount of equity but you jointly own the property at the time of filing, you both are allowed to use exemptions to keep the property.
Kentucky the bankruptcy case and the federal exemptions
Kentucky uses federal bankruptcy exemptions. For a home in 2023, you keep about 27,900 in real property equity for a principal residence. If the property is not your home this federal exemption is reduced by half giving you a 13,950 wild card exemption.
Some states use their own state exemptions instead of federal exemptions. State law usually has lower state exemptions but some states like Florida and Texas allow much higher property exemptions for a home. You have to live in a state for the majority of the prior 2.5 years and four to six months of the prior 180 days to use the higher bankruptcy exemption of the state you move to.
Jointly owned real estate: converting the nonexempt property to exempt property.
Bankruptcy generally does not affect your spouse. If your spouse did not file for bankruptcy then your bankruptcy should not appear on his or her credit report. If you have joint title to property the bankruptcy trustee will attempt to sell the property if he can recover a significant amount of non-exempt property.
To decrease the risk of loss you may want to avoid filing jointly. If you file jointly then joint ownership of property makes it easy for the bankruptcy court or the trustee to take a co-owners property.
Keeping your joint-owned real estate
Valuable non-exempt property should often be sold off prior to filing a joint petition. The proceeds from a sale of a nonexempt auto could always be used for the maintenance of a home or car. Doing maintenance on your home or auto does not increase its value. And updating kitchen cabinets is better than giving away a 10,000 dollar car to the trustee.
The exemption for household goods is large about 14,500 per person. Buying clothes, major appliances or furniture is also another way to convert a non-exempt asset into an exempted property. Each person has his or her separate property and under the bankruptcy code, the spouse’s property is not an asset normally subject to becoming part of the bankruptcy estate.
File bankruptcy wrong and lose joint property how is joint property treated?
The goal of, bankruptcy is to discharge as much debt as possible and to keep the property. If you have an ownership interest in any property, it is part of the bankruptcy estate, unless you can exempt it. The trustee in Chapter 7 is the same as a creditor with a judgment lien on all of your property.
The goal of the Chapter 7 trustee is to discover the property you own and sell it for the benefit of creditors. He is generally prevented from selling a property you can exempt but if you give the property away you cannot use your exemptions. On a sliding scale, he earns about 10 to 25% of anything he can sell.
The Basic Rule — Larger Joint Liability For Joint valuable nonexempt property
If you file individually, a Bankruptcy Trustee will look at 50% of a joint bank account as the bankrupt’s share. Only your share is subject to the bankruptcy trustee. But all jointly owned property is at risk if you file jointly. To protect jointly owned property either:
- use the property to the point that the property is no longer valuable to the trustee. Spending it down. or
- Convert the property from nonexempt to exempt property. For instance, you can take 5000 in a bank account and invest it in a 401k which is usually exempt from creditors.
- Assets can only be protected if they are in your name and exempt. Do not transfer assets. Or remove your name from an asset. If you remove your name you do not own it at the time of filing. You cannot use the exemption to keep any part of it unless you own it.
The Bankruptcy Court and joint owners when only one spouse files
If you file a bankruptcy petition without your spouse then a jointly-owned home is harder to sell than if you filed bankruptcy jointly. Also, remember only married couples can file a joint petition.
When one spouse files by himself it becomes harder to sell the property. The other spouse can fight and cost the trustee so much time and effort that a sale becomes unprofitable. A bankruptcy attorney should review your petition so well that you know before you file if a property is at risk.
In Chapter 13, the home equity that exceeds the exemptions will normally increase the repayment plan payment. A Chapter 13 must repay as much as a Chapter 7 would. So if you have 100,000 too much equity above your exemptions, then your plan would have to repay perhaps 80,000. Just because you have 100,000 in equity does not mean that you repay 100,000. Instead, that sale would have had real estate closing fees and real estate salesman fees which would reduce the proceeds.
Chapter 13 and Jointly owned real estate
Filing under Chapter 13 avoids the risk of losing property. You can always dismiss Chapter 13 but you cannot dismiss Chapter 7 bankruptcy without the bankruptcy court’s approval. And you cannot generally convert from a Chapter 7 to a Chapter 13 without trustee and court approval. For those reasons, you need to file as a Chapter 13 if there is a high probability of losing property.
The common concern and bankruptcy law issues if you file separately.
Never title assets jointly if the other partner has financial problems. A co-owner always increases your risk.
If your bankruptcy appears on your spouse’s credit report you probably have a credit reporting lawsuit. Your spouse is only responsible for their credit and debts, not yours unless they co-signed a debt with you.
A Bankruptcy filing only looks at your assets or joint assets. It does not look at the spouse’s assets. A bankruptcy does look at your joint income to determine if a Chapter 13 is feasible.
Community Property states are different from common law property states
If you live in a community property state understand all property and debt tends to be joint property. Common law property states only treat the property as co-owners if both parties are on the deed or car title. The entire property normally belongs to a spouse if she holds it solely in her name in common law property states.
In community property states each spouse is a joint owner regardless of which party is on the deed. Kentucky where I practice is a common law property state.
