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Parents On Title To Child's Homestead: What Happens When Either Child Or Parents File Chapter 7 Bankruptcy

By Jonathan Alper

Homestead protection in bankruptcy gets complicated when there are non-resident co-owners of the debtor?s homestead. An example is when parents help an adult child buy a home and insist on placing their names as co-owners of their child?s house.

A caller from south Florida asked me how a Chapter 7 bankruptcy would affect his homestead owned jointly with his parents free and clear.  His parents purchased a house in Florida for their son. The house was titled jointly in the names of the son, who lives there, and the two parents. All three family members have credit card problems and are considering bankruptcy. The son asked me whether his Chapter 7 bankruptcy would affect is parents? interest in his house. The house qualifies for unlimited homestead protection under the bankruptcy rules.

If the son files Chapter 7 only the son?s partial interest in the house is at issue. The Chapter 7 trustee has no interest or rights relating to what the parents own including the parents? interest in the house (if any). The son?s ownership of the house would be exempt as homestead because the house is his primary residence.

The result is more complicated if the parents file Chapter 7. The parents? Chapter 7 trustee may have a claim against the parents? interest in their son?s house because the parents do not reside in the home as their own homestead.. The trustee could not force the sale of the home as long as the son resided there. The trustee could place a lien on the parents 2/3 interest which would be payable upon the sale or refinance, and the trustee could sell the lien on proceeds to an investor or to the debtor himself.

The parents could argue in their bankruptcy that they have no equitable interest in the house subject to their bankruptcy estate because they intended to transfer all beneficial interest in the house to their son. This position may be viable if the son has been paying all taxes, mortgage payments,  and other expenses and if the son exclusively uses the property. The parents? filing of a gift tax return or other written evidence of their intent to gift the property to their son would substantiate this position.  It is possible for the parents to have part of the bare legal title without them having any equity interest subject to their own bankruptcy trustee, but that position depends on the facts.

This is another example of why parents should not jointly own assets with their children for estate planning or any other reason.

 

Full post as published by Florida Bankruptcy Law on August 25, 2010 (boomark / email).