WE WILL discuss the treatment of a bankrupt debtor’s property where title to the property is held by debtor with a joint tenant, or a co-owner, a tenant in common, or a tenant by the entirety. Don’t bother with understanding the legal differences between joint tenancy, co-ownership, and tenancy in common or tenancy by the entirety. What needs to be understood is that in all of these situations of owning property, debtor has an “undivided” interest in the property that he owns together with another person or other people. For instance, debtor owns his house as a joint tenant with his wife. Therefore, he owns half, his wife owns half, but the ownership of the house has not been divided in two, each one owning only 50%.
Look at clients’ situation. Mr. X and Mrs. Y are partners in a restaurant which they owned together for 20 years. Due to the current recession, the restaurant is no longer profitable, so they both decide to stop operating the restaurant. Both partners owe a significant amount of credit card debt which they used to operate the business while it was losing money. Further, both partners guaranteed the lease of the restaurant for the next 5 years. Both partners owe the unpaid lease for the next 5 years of $180,000. Both partners also own their residence as joint tenants. The house is currently valued at $400,000, with a first mortgage balance of $250,000. Mrs. X is 67 years old, and Mrs. Y is 66 years old. Both partners seek Chapter 7 bankruptcy relief as individuals. Is there a problem with protecting the residence as exempt property in Chapter 7? No, because each partner is at least 65 years old. Thus each joint tenant can exempt $175,000 of equity which covers the entire equity of $150,000. So, these two are my lucky clients because they get to keep their house with $150,000 of equity which they jointly own while they discharge all of their unsecured debts, including $180,000 of unpaid future rent of the restaurant.
But not all cases have a happy ending. In Re Judy Beck, a New York case, the Chapter 7 trustee sought the court’s permission to sell real property owned by the debtor and her husband (the defendant) pursuant to Section 363(h) of the bankruptcy code. That section states: “…the trustee may sell both the estate’s interest, under subsection (b) or (c) of this section, and the interest of any co-owner in property in which the debtor had, at the time of the commencement of the case, an undivided interest as tenant in common, joint tenant, or tenant by entirety, only if-
(a) Partition in kind of such property among the estate and such co-owners is impracticable;
(b) Sale of the estate’s undivided interest in such property would realize significantly less for the estate than sale of such property free of the interests of such co-owners;
(c) The benefit to the estate of sale of such property free of the interests of co-owners outweighs the detriment, if any, to such co-owners;
(d) Such property is not used in the production… distribution of electric energy…light or power.”
Since the property was not an electrical generating plant or office, the trustee went for the jugular. The house had been the husband’s family since 1928. Debtor and husband acquired title to the property in 1995 when husband’s mother sold it to them for $150,000, a lot less than the market value. The trustee said the appraised value of the Tudor style house was worth at least $530,000. It was subject to a secured claim of $74,000, a judgment lien of $6,000 and a real estate tax lien of $114,000. Husband argued that the sale would deprive their daughter of her home and that it’s been owned by his family for 83 years. The court sided with the trustee, finding that daughter lived permanently with her mother, and ordered the sale of the house.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.
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(www.asianjournal.com) (LAWeekend Nov.26, 2011 Sec C pg.04)
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