Don’t Panic: Bare Legal Title May Keep Property Out Of Bankruptcy
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 right to liquidate all the debtor’s 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 will depend upon the specific circ*mstances of the case. More often, however, clients don’t realize that they are in title to an account or a home, and questions come up when filling out the schedules (or getting ready to meet with the trustee) about how to deal with this property. This property is likely (though not always) saved from liquidation by the 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 ) It’s usually clear that if a child has never made any deposit into a parent’s bank account and has never withdrawn any funds for their own use, that child only holds bare legal title to the account and the trustee won’t be entitled to seize that money in the child’s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 a debtor from taking potentially damaging action in preparation for bankruptcy. Transferring property out of a debtor’s name on the eve of bankruptcy may draw scrutiny as to a debtor’s good faith and thereby 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 the debtor is victorious, defending that lawsuit will cause the debtor to waste needless time, money and stress.
A better solution would be for the debtor’s attorney to carefully analyze whether the bare legal title doctrine is applicable and if so, disclose the asset in the debtor’s schedules with a statement that the property is held in bare legal title. Usually, the trustee will leave that property alone. On the other hand, if the doctrine does not apply, the debtor may need to delay filing the bankruptcy, file a different chapter than they initially planned, or else try to settle with their creditors.
I'm well-versed in bankruptcy law and estate planning, holding a comprehensive understanding of the intricacies involved in property ownership and its implications, especially concerning bankruptcy proceedings in the United States. As an expert in this domain, I'll delve into the concepts and details referenced in the article titled "Don’t Panic: Bare Legal Title May Keep Property Out Of Bankruptcy."
The article elucidates several critical concepts:
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Co-Ownership and Estate Planning: Co-ownership of assets, such as property or bank accounts, serves purposes like seamless asset transfer upon death or aiding in managing finances for family members, often used in estate planning strategies.
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Bankruptcy Code and Trustee Rights: Under the U.S. Bankruptcy Code, a trustee holds the authority to liquidate a debtor's assets to repay creditors. Whether property or accounts are vulnerable to liquidation depends on specific circ*mstances.
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Bare Legal Title: This concept refers to holding legal ownership without equitable interest or contribution to the asset's value. It highlights scenarios where someone owns an asset but hasn't materially contributed to it, thus potentially safeguarding it from bankruptcy liquidation.
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Equity in Assets: Assets obtained through gift or inheritance are excluded from the "bare legal title" concept, as the recipient is intended to have full rights and privileges regarding the asset.
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Protection from Bankruptcy Seizure: Instances where a person, despite holding legal title, hasn't financially contributed or benefited from an asset may protect the asset from being seized during bankruptcy.
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Exception to Bare Legal Title: If the legal title holder contributes significantly to acquiring or improving an asset, the "bare legal title" defense may not hold. For instance, if a parent co-signs a loan, allowing a child to obtain a vehicle, the parent's credit involvement may nullify the bare legal title claim.
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Preventing Damaging Actions: Recognizing assets protected under bare legal title prevents debtors from potentially detrimental actions just before filing for bankruptcy. Transferring property out of a debtor's name at the brink of bankruptcy could draw suspicion and lead to legal disputes, possibly affecting the discharge.
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Debtor's Attorney Strategy: Attorneys need to thoroughly assess whether the bare legal title doctrine applies. If applicable, disclosing such assets in bankruptcy schedules with a statement clarifying their status as held under bare legal title may dissuade trustees from pursuing them during bankruptcy proceedings.
Understanding these concepts is pivotal for individuals navigating bankruptcy, ensuring compliance with legalities and maximizing protection for assets under specific circ*mstances.
