Bankruptcy and shared property

My brother & sister in law and my husband and I went in on some investment property (land only). They are getting divorced & might file for bankruptcy. The property is in their name on the title due to an error we never corrected – but we each claim 1/2 on our annual tax returns. He was going to execute a quit claim to remove his name from the property – will it then be safe from being taken?

Asked on June 7, 2009 under Bankruptcy Law, Washington

Answers:

M.D., Member, California and New York Bar / FreeAdvice Contributing Attorney

Answered 11 years ago | Contributor

He cannot make a transfer of this kind; such transfers are not effective to put assets beyond the reach of creditors and bankruptcy trustees.  Worse, such action may lead to the denial of a discharge.   

A bankruptcy trustee can recover assets transferred within one year of the bankruptcy filing where the debtor did not get reasonably equivalent value for the asset, or where the transfer was made with intent to hinder creditors.  The "look back" period may be even longer under state law, giving the trustee more time to look back to recover assets.

What you could consider is having them quitclaim your 1/2 share to you.  If this transfer is challenged you could offer your tax returns as proof that you are co-owner of the land and that this transfer was legitimate.  Possibly this will work.  However even if it does under a Chapter 7, or possibly even a Chapter 13, an investment property would be taken over by the bankruptcy trustee regardless of your financial situation.  Unfortunately, there is no way to avoid this forced sale.  However, the Court will only be able to claim your brother and sister-in-laws share of the equity; the rest of the equity will be returned to the other partner - you.  However before that would happen, you would be able to make an offer to buy your brother and sister-in-law's 1/2 half interest in the property and this money would be offered to the trustee instead.

As I stated above under a Chapter 7 this would happen and possibly under a Chapter 13 as well.  But under a Chapter 13 there is also the chance that this might not happen.  If your family members have more assets than they can protect with the available exemptions, they could consider filing Chapter 13.  This is where the debtor can sometimes keep all of their property and "buy back" the non exempt value from the creditors through payments to the Chapter 13 trustee out of future income .

Since I don't know what type of bankruptcy is being considered here or any of the financial details of the case, you should consult with a bankruptcy attorney.  They will explain further what all of your options and how best to protect your interests.


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