My Name is on Title to Real Property, But I Don’t Own the Home! Can I file for California Bankruptcy Holding Bare Legal Title?

Posted by on Jan 15, 2013 in Chapter 7 Bankruptcy Issues | 2 comments

Be careful if you are contemplating a bankruptcy and you hold title to real property.  Even if you don’t believe you have any equitable interest in the home, a bankruptcy trustee may disagree with you.

A common scenario is where you take title to a residence your relative owns.  Imagine your parents want to leave their home to you as a probate avoidance device.  Well, perhaps they should have executed a trust or will, but they didn’t.   They transferred title to you.   You never paid the mortgage, you never lived there at the home, you never had anything to do with it.  You believe you just hold bare legal title.

Now imagine you file chapter 7 bankruptcy.    All your assets get put into the bankruptcy estate.  Does your parent’s home go into the estate?   That’s a tough question to answer.   Perhaps if you can prove your parents transferred title as a probate avoidance device (resulting trust anyone?), you can convince the trustee you have no equitable interest in the property.   However, are you certain you will be able to convince the trustee?   If you aren’t sure, it is probably unwise to file chapter 7 bankruptcy where you can’t risk the uncertainty of having your parent’s lose their home.

The bankruptcy trustee has the status of a hypothetical bona fide purchaser for value under 11 U.S.C. § 544(a) (3) – this says that a bankruptcy trustee takes free of any interest in real property that could be avoided by a hypothetical bona fide purchaser.  In California, a prudent purchaser analysis is required whereby it is critical to determine who is in possession of the property, among other things.  So where the persons living in the property are not the same as the title holder, this could be construed in some cases as constructive knowledge on the part of a hypothetical purchaser, and in turn, the bankruptcy trustee.   However, if you are contemplating bankruptcy and live in a home in which you claim you only hold bare legal title, this could represent an insurmountable issue for one to overcome.

Bare Legal Title arguments are complicated and fact intensive.  Each case turns on the facts and laws of each state.   Be careful when filing bankruptcy if you hold legal title to real property or any property that you do not actually believe is yours.  If you hold bare legal title, work with a knowledgeable attorney to ensure you have a chance of keeping such property out of the estate.  Otherwise, prepare for trouble if you don’t do so.








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