Filing Bankruptcy With Financial Ties to a Relative

Bankruptcy

Bankruptcy (Photo credit: phil dokas)

A Personal Bankruptcy Situation Spawns Question

The wife of a married couple, considering filing bankruptcy, recently blogged on a bankruptcy forum website making this statement and asking this question in the blog: “I have an LLC which generates close to no money, I am an officer in my brothers company and I am listed as a trustee on my mothers property. How will all this play into personal bankruptcy, and will the bankruptcy court trustee go after my mother’s property and my brother’s business?”

This debtor, looking into filing a Chapter 7 bankruptcy, shared these facts about her personal bankruptcy story:

  • both husband and wife are in serious debt;

  • their home was foreclosed on in 2007;

  • the second mortgage remains on credit report as a bad debt;

  • they owe deficiency on the home;

  • total debts including house is about $14,000;

  • They owe on 2 cars they want to keep because of work and small children; and

  • the husband has tax lien from before marriage of $11,000.

Assuming the blogger and husband qualify to file a Chapter 7 bankruptcy, the debtor has asked a good question with three parts.

Part 1- How will all of the facts play into personal bankruptcy?

Determining whether to file a Chapter 7 bankruptcy jointly or individually should be one of the main concerns for this couple. If the woman files individually, the husband will be viewed by the bankruptcy court like any other relative under some circumstances. Knowing if the couple reside in a community property state and how their assets are owned, individually or jointly, will help them determine whether they should file jointly or individually to protect the couple together or the husband as a relative.

Learning and understanding what their state’s exemption laws are will help the couple determine whether or not they are an asset case. Once learned, they can then make a decision on how they want to proceed.

Part 2 – Will the bankruptcy court trustee go after the mothers property?

Just because your are a trustee of the property which belongs to a relative does not necessarily mean a bankruptcy court can come after the property. The executor or trustee of an estate has certain legal rights that have been determined by prior laws, mostly state.

Unless the trustee of the property has a personal interest in the estate like an inheritance or fee for administering the property, there will be nothing for a bankruptcy court trustee to go after. The property of the mother will remain hers until the property of the estate has been legally adjudicated.

Part 3 – Will the bankruptcy court trustee go after the brothers business?

The answer to this question all depends on what type of business it is and whether the filing debtor owns assets in the business. You can serve as an officer in certain types of business without owning assets within a company, but a bankruptcy court trustee might come after your assets if you own an interest in the company of a relative you are currently serving as an officer.

Before this debtor files a Chapter 7, she should consult with an experienced bankruptcy attorney to help her answer all three parts of the question she raised.

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