How to protect co-owned real estate property if business partner files bankruptcy?

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How to protect co-owned real estate property if business partner files bankruptcy?

I co-own a house in WA as rental property with a friend with no mortgages. The title is clear under both of our names, and my proportion is 21%. Now all my friend’s houses in CA went into foreclosure (she hasn’t filed bankruptcy yet). We didn’t form any business entity, but she agrees to write a partnership agreement, and she wants to transfer her title under someone else’s name in order to protect our house. Would the creditor still be able to claim the house even if it is paid already? How can I protect my asset? What needs be included in our contract? Would it be different if I am an alien?

Asked on January 4, 2011 under Real Estate Law, Washington

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

1) If there are creditors of your partner/friend and she owes them a remaining balance even after her foreclosed properties are sold at foreclosure sale or auction, then they can go after your friend's interest in this home. They can, if they sue her and win, look to put a lien on it so that it can't be sold without paying them off--again, at least  up to her interest in the home. This sort of lien doesn't foreclosure or force a sale, but it could make selling difficult, since it's a cloud on title that must be satisfied.

2) Speak with an attorney, such as a real estate attorney, about what--if anything--you can do. It may be too late for  the friend to transfer title--doing so at this late time, after she's already in default on other obligations, could be seen as an attempted fraud on creditors and set aside. This is a complex situation--you need legal counsel.

3) In the future, own property through a business entity to protect it from a partner or shareholder's  personal defaults  and debts.


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