Does my son’s bankruptcy affect our jointly owned home?

Posted on: October 2, 2018

by Jason King

I bought a house jointly with my adult son, but he has incurred a lot of debt and wants to file Chapter 7 bankruptcy. Will the house be affected if he files?

Short answer: Maybe, if the house can be sold for more than the balance of any liens against it plus sale- related costs.

Explanation: If your son has a substantial amount of debts that he is unable to pay, then bankruptcy may be a way for him to start over financially. If he files chapter 7 bankruptcy, then, as the “debtor,” he is required by law to list all of his debts and all of his assets on his bankruptcy petition. The bankruptcy system is designed to convert his assets into money that is paid to his creditors. In each case that is handled by an independent, court-appointed Trustee. So, the house you own with your son would have to be listed on his bankruptcy petition and could be sold by the Trustee in order to pay his creditors.

One question is whether the jointly owned house is worth more than the balance of the mortgage. Some debts may be secured by property, such as a mortgage loan or car note, while others may unsecured, such as unpaid credit card and medical bills.  The secured debts are a lien against the property, meaning the creditor has the right to sell the property if the debt is not paid as agreed. Property that has a lien against it may have a market value of more than the debt secured by the lien. If the jointly owned house is worth more than the amount required to pay off the mortgage, then the Trustee may be interested in selling it.

In reality, if the Trustee cannot generate much money from the sale of the house, there will be little reason for the sale. This is especially true where your son is the partial owner of the house. In the event of a sale, the Trustee would have to pay you your percentage of ownership in the house, in addition to the sale-related costs, leaving less money to pay your son’s creditors. If the house is also your son’s principal residence, then he has the right to receive payment of $5,000 for his homestead exemption, or $7,500 if his spouse also files, or, $25,000, if he has custody of at least one minor child.[1]

Depending on how much money would be available to distribute to the creditors, after payment of any liens against it, realtor commission, closing costs, and the debtor’s homestead exemption (in the case of his principal residence), joint ownership could further deter the Trustee from seeking a sale.

However, in the strong real estate market experienced by much of Middle Tennessee at this time, many bankruptcy filers who own real estate find themselves faced with the dilemma of having a significant amount of equity in the property. If you think this might be the case with the jointly owned house, then there are a couple of things you can do to get a better idea of whether the it will be sold if your son files chapter 7 bankruptcy.

You should seek out a realtor whom you trust for advice about the current market value of the property. Ask a realtor who has knowledge of recent sales of properties that are comparable to yours. If there is a mortgage on the property, or any other liens, be sure to obtain a payoff by contacting the secured creditor(s). You and your son may decide that selling the property and using his share of the sale proceeds to pay off some or all of his debts is the best idea. Before making a final decision, consult with a bankruptcy lawyer about the facts that are specific to your case.

[1] T.C.A. § 26-2-301(a), (f)

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