What Are Legal And Equitable Titles, And How Do They Affect My Bankruptcy?
In the real world, we either own stuff or we don’t. But it’s not that simple in the bankruptcy world. In bankruptcy, there are actually two ways to own things: Equitable and legal.
Legal Ownership – What is It?
Legal ownership is ownership that can be readily identified and that the law recognizes. For example, your name is on your bank account, so you legally own the money in that account. Your car is titled in your name, so you are the legal owner of that property. You may be the legal owner of a business.
Anything that is legally yours is part of the bankruptcy estate when you file for bankruptcy. That doesn’t mean you will lose that property, it just means that the property is “in play” and needs to be protected by bankruptcy exemptions to avoid being lost.
Equitable Interests in Property
But sometimes, there are equitable interests in property. With certain property, the court will look to see who is the owner of property “in practice.”
For example, let’s say that you open an account for your son. Your son uses the account, deposits money into the account, uses the account for his expenses, and has a debit card in his name for the account. Yet, the account is titled in your name (or your and your son’s name, jointly).
Do you own that account? You may have legal ownership, but you may not be the equitable owner, and thus, if you file for bankruptcy, the court may not be able to touch the account. The account is yours “in name only.”
Imagine that your adult kids live in a home that is titled in your name. The kids live there, have keys, and pay expenses related to the home. The house may be yours, legally—but you actually do very little for the property and you derive little, if any benefit from the home. You may only have bare legal title to the property, and your kids may be the true equitable owners.
Fighting Attempts to Take Property
Usually, a bankruptcy court will not take property if you are only the legal owner, and someone else (who is not filing for bankruptcy) is the true equitable owner. Of course, a bankruptcy trustee may try to take your property—you will have to show proof to the trustee as to who uses the property or pays expenses on the property, to show that in fact, you derive no benefit from the property.
If property is your only in name only (only legal title), you don’t have to bother protecting it with an exemption, because it isn’t yours, and usually will not be taken. That can free up exemptions to use for other property, that really is yours, and which could be taken.