Filing Bankruptcy? Beware of the Unexpected.

by Peter Orville, Binghamton Bankruptcy Lawyer

March 27, 2013

This is a tale of two families who just wanted to protect their homes. The older couple wanted to protect their residence from the possibility that they might lose it if they had to go to a nursing home. Their daughter and her husband were having trouble paying the monthly mortgage payment on their home. They had incurred high medical and credit card debts and the husband’s employer had cut down on the hours that he could work each week.

The parents decided to put the deed to their home into their daughter’s name and keep a life use for themselves. They no longer had a mortgage on the property and were afraid that if they ever had to go into a nursing home, they would lose the home unless they got the property out of their names. By putting the house into their daughter’s name, they thought that it would be protected. They didn’t know that their daughter was having financial trouble. They also never told their daughter that they had transferred the deed to their home into her name.

The daughter and her husband had to do something to reduce their debt so they could afford to keep paying the mortgage payments on their home. They consulted with a bankruptcy attorney and decided that they should file a Chapter 7 bankruptcy. The plan was to file the Chapter 7 and discharge their medical and credit card debts. Even with their reduced income, they could then afford to keep making their monthly mortgage payments and keep their home.

On their bankruptcy schedules, the daughter and her husband listed all of their assets. They didn’t list the parent’s house, because they didn’t know that it was put into the daughter’s name. Because the parent’s property was in a different county from where they lived, their lawyer didn’t find the deed in her name when he conducted a search of the county clerk’s office. They filed their Chapter 7 bankruptcy case, and expected that it would be a “no assets” bankruptcy and that everything would go through smoothly. However, a few days before their meeting of creditors, her parents happened to mention that her name was on their property.

If you know anything about bankruptcy, you know that the daughter and her husband had a problem. They listed all the assets they believed they owned, and were able to protect all of their assets by taking exemptions. However, the parent’s property, now in the daughter’s name, created a huge problem.

The first problem was that they did not reveal all of their assets. If debtors intentionally “hide” assets, they risk losing their discharge, and even risk criminal prosecution. Of course they couldn’t reveal what they did not know, so they could probably remedy this problem by immediately amending their bankruptcy schedules and informing the trustee of the fact that she was on the deed to her parent’s house.

The second problem is that the daughter could not protect the value of the equity she had due to her ownership interest in her parent’s house. This was a more serious problem. The Chapter 7 Trustee would take over her ownership interest in the property. The Trustee could sell the home, subject to the value of the parent’s life interest. Needless to say, this would be disastrous for both the daughter and her parents.

Unlike a Chapter 13, a debtor in a Chapter 7 does not have an absolute right to get out of the Chapter 7 case.  She could try to negotiate with the trustee, but s/he is likely to want a significant payment.  She could try to convert the Chapter 7 case to a Chapter 13.  There is no automatic right to convert, but it can be done.  If the case were converted to a Chapter 13, the property would be safe, as long as the creditors were paid at least as much during the Chapter 13 as they would have received in the Chapter 7.

Be sure you know what you own.  Also, don’t transfer property to your kids, or anyone else, without first talking to them.

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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.

Last modified: March 27, 2013