Sometimes it’s convenient to add the name of a parent, child or sibling to property or a bank account. Usually done for estate planning purposes, co-ownership of property allows title of the asset to pass seamlessly from one person to the other upon death, or allows a younger person in the family to manage cash or securities for the benefit of an elderly parent or grandparent.
Under the U.S. Bankruptcy Code, a trustee has the power to liquidate or sell all the debtor’s NON-EXEMPT assets for the benefit of creditors. Frequently when planning a bankruptcy, clients want to know whether they should take someone’s name off property or a bank account before filing, and that answer is NO. Definitely get legal advice before you transfer any property to anyone else, or take someone’s name off a bank account or house or car, or any property.
A certain amount of property owned by everyone is EXEMPT from creditors and Bankruptcy Court Appointed Trustees. The law allows everyone a certain amount of property to keep to start their financial lives over again. Any property that exceeds those limits can be taken by a creditor or if you file a bankruptcy, can be taken by the Chapter 7 Bankruptcy Trustee, and sold for the benefit of your creditors. That is why we must know everything you own before we can say it is safe to file a Chapter 7 type bankruptcy.
However, often people don’t realize that they are on title to an account or a home, and questions come up when first meeting with an attorney to discuss the possibility of filing a bankruptcy. This property is likely (though not always) saved from liquidation or sale by the Bankruptcy Trustee under the principal of “bare legal title.”
Bare legal title occurs when someone has a purely legal, but not equitable, ownership interest in an asset. If a person holds title in their name but has done nothing to contribute to the value of the asset, that person may be found to hold no equity in the asset.
(Of course, assets obtained by gift or inheritance don’t count, because the person was intended by the donor or by operation of law to have all rights and privileges with respect to that asset, either now or in the future. ) It’s usually clear that if a child has never made any deposit into a parent’s bank account and has never withdrawn any funds for their own use, that child only holds bare legal title to the account and the trustee won’t be entitled to seize that money in the child’s bankruptcy. Similarly, if a child deposits the down payment on a house and makes all the mortgage payments, if the child keeps the parent’s name on the house for convenience purposes then the trustee in the parent’s bankruptcy shouldn’t be able to sell the house and pay the parent’s creditors.
On the other hand, sometimes the holder of legal title does help the “real owner” of the asset obtain or improve the asset, and when that happens the “bare legal title” defense will fail. A common example occurs when a parent agrees to co-sign a loan for the child to buy a house or a car. The child puts up the down payment, makes all the loan payments, pays all maintenance and is in sole possession of the vehicle. This seems to be a good case for the parent to claim that her title of the vehicle is legal only. When the parent files for bankruptcy she will argue that the trustee should not be allowed to sell the car. This argument is likely to fail because the parent exposed her credit in order to allow the child to obtain the vehicle. Although the parent has not contributed any cash, use of the parent’s credit is enough to defeat a claim for bare legal title to the vehicle.
Recognizing that an asset is protected under the bare legal title doctrine may prevent someone from taking potentially damaging action in preparation for bankruptcy. Transferring property out of your name on the eve of bankruptcy will draw scrutiny as to an individual’s good faith and could lead to litigation seeking to deny a discharge. Losing a discharge because of a pre-bankruptcy transfer of property of no value to a debtor would be a disastrous result. Even if victorious, defending that lawsuit will be expensive and time-consuming and even stressful.
A better solution is to have your experienced bankruptcy attorney carefully analyze whether the bare legal title doctrine is applicable in your circumstances, and if so, disclose the asset in the bankruptcy paperwork, stating as such. Usually, the Bankruptcy Trustee will leave that property alone. Alternatively, if the Bare Legal Title Doctrine does not apply in your circumstances, you might want to file a Chapter 13 type bankruptcy, or try to work out settlements with your creditors.