Challenges Associated With Co-Owned Property and Bankruptcies
When a debtor files for bankruptcy under Chapter 7 or Chapter 13, the law automatically creates what is known as a bankruptcy estate. This estate includes all of the debtor’s property that is not otherwise exempt from bankruptcy under federal or state law. In this context, the debtor’s property, and thus the bankruptcy estate, also includes any “legal or equitable interests” the debtor may have in co-owned property.
Filing for Chapter 7 vs. Chapter 13
So what happens to co-owned property in bankruptcy? The answer to this question depends on many factors. First, it is important to understand the difference between a Chapter 7 and a Chapter 13 case. Under Chapter 7, a bankruptcy trustee takes possession of the bankruptcy estate and liquidates any non-exempt property to repay the debtor’s creditors. Under Chapter 13, in contrast, the debtor can typically keep the property in the bankruptcy estate, provided they pay back their creditors over time under a court-approved plan.
From the standpoint of a co-owner, Chapter 7 therefore is more likely to present problems. The trustee may initiate a lawsuit in bankruptcy court–known as an adversary proceeding–to force a sale of the entire co-owned property as part of the liquidation process. The co-owner would be entitled to their share of the sale, but they may not be in a position to stop the liquidation itself. That said, in many cases the trustee and the court and the trustee will grant the co-owners a “right of first refusal” to buyout the bankruptcy co-owner’s share.
How Florida Law Can Protect a Spouse’s Interest in Property
As noted above, the bankruptcy estate only includes a debtor’s non-exempt property. These exemptions are primarily defined by state law, and in many cases will fully protect a co-owned property. For example, Florida law provides a broad exemption for a debtor’s primary residence. Known as the homestead exemption, it can cover the debtor’s entire equity in a property. So if the debtor and their spouse co-own the house, it is unlikely to be liquidated under Chapter 7. (If there is a mortgage, however, it will still need to be paid back under Chapter 13 to avoid foreclosure.)
Married couples can co-own other forms of property as “tenants by the entirety.” This is a special form of co-ownership that protects the property from creditors when only one spouse files for bankruptcy. Florida law normally assumes that any real or personal property co-owned by spouses are held as tenants by the entirety.
It is important to emphasize that tenancy by the entirety will not protect property when both spouses jointly file for bankruptcy protection.
Get Advice from a Qualified Florida Bankruptcy Lawyer
Filing for bankruptcy can affect more than just your own financial and property interests. It may also have a significant impact on the legal rights of any co-owners with whom you jointly own property. It is therefore important to consult with an experienced West Palm Beach bankruptcy attorney before taking any formal action. Contact the offices of Kelley, Fulton & Kaplan at 561-264-6850 today to schedule a consultation with a member of our bankruptcy team.