My Husband Or Wife Is Filing A Bankruptcy… How Will It Affect My Real Property – Chapter-13

by Peter Orville, Binghamton Bankruptcy Lawyer

March 17, 2008

Unlike a Chapter 7, if your spouse files a Chapter 13 bankruptcy, your real property, even if it has exposed equity, will usually not be taken by the trustee.  As long as your spouse’s creditors get at least as much through the Chapter 13 case as they would have received if it was a Chapter 7 case, the property is protected.  This is called the “best interest of creditors test” or the “liquidation test”.

In fact, sometimes it is a useful strategy for only one of you to file the Chapter 13 if your jointly held real property has more equity than the allowable exemption.  This is because in a joint Chapter 13, the creditors would have to get paid a sum equal to all the excess equity in the property, whereas in an individual Chapter 13, the creditors would only get one-half of the excess equity.For example…if you have $40,000 equity in a jointly owned rental property (where no exemption would apply), in a joint Chapter 13 the unsecured creditors would have to receive at least $40,000, but in an individual Chapter 13, they would only have to receive $20,000.  This is because your portion of the equity is not in play.

This same concept applies to jointly owned property that is sold during the course of your spouse’s Chapter 13 case.  Only one-half of the net proceeds would have to be funded to the Chapter 13 trustee.  The other half could be kept by you, the non-filing spouse.

If your jointly owned real property was facing a foreclosure by your mortgage company, your spouse’s Chapter 13 filing will impose an “Automatic Stay”, which will stop the foreclosure dead in its tracks. If your spouse’s Chapter 13 plan includes repayment of all of the mortgage arrears (and accumulated legal fees), and if you can stay current with all of the post-petition mortgage payments, by the end of your spouse’s Chapter 13 the property will be current and out of foreclosure.

Occasionally a situation exists where there is a second mortgage on your jointly owned real property, but the second mortgage is only in your spouses name.  In today’s world of declining property values (or the very real fact that the bank giving you the second mortgage overstated the property value to justify the loan), often the true market value of the property is less than the amount of the first mortgage.  This brings up an interesting opportunity if your spouse files a Chapter 13 bankruptcy.  He (or she) can treat the second mortgage as totally unsecured in the Chapter 13, pay it off at a very low percent (say 5 cents on the dollar), with no interest, and by the end of the Chapter 13 strip the lien off of the property.  This will not work if the second mortgage is also in your name, and you aren’t part of the Chapter 13.  It also will not work if the second mortgage company can successfully show that there is at least one dollar of equity in the property above the first mortgage.  But it could save you thousands of dollars over the long run.

Next: How your spouse’s bankruptcy will affect your bank account.

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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: February 14, 2013