It is not unusual in these days with so many people struggling to make ends meet and having bumps and bruises on their credit that some are turning to family members to borrow money to buy a home. Not everyone can be so lucky or blessed to have a family member with the financial means to loan that much money out even to a member of their own family, but some do. But if a bankruptcy becomes necessary for one or more of the family members involved in the loan, it can complicate matters greatly, even for those not declaring bankruptcy. This article goes into some of the repercussions of a family member declaring bankruptcy and ownership of a home.
Family Bankruptcy Example
For purposes of this article, assume there is a family where Family Member A wants to buy a home but she cannot afford to purchase it. Nor does she have a high enough credit score to obtain a home loan through traditional means, such as borrowing money from a bank. Therefore, she borrows money from Family Member B. When the home is purchased using Family Member B’s money, the home is placed in the name of Family Member C.
For several years, Family Member A is happy living in the home and making payments back to Family Member B as repayment of the loan. But Family Member C has run into financial difficulties and is considering filing bankruptcy.
What will happen to the home if Family Member C declares bankruptcy?
In general, if Family Member C declares bankruptcy, because the home is in the name of Family Member C, the home will be considered an asset of Family Member C and will be included in the bankruptcy proceeding.
In bankruptcy cases where someone has a traditional home loan from a bank, the loan is used as security for the money loaned to buy the home. In such a case, the person declaring bankruptcy may be able to keep the home so long as he continues to pay the bank the monthly amount owed. Otherwise, the bank may foreclose on the home to sell it. The sale of the home would be used to satisfy the money owed to the bank. Any remaining funds from the home sale might be distributed to other creditors by the bankruptcy court.
In the case of the example we are using here, Family Member B is effectively the bank. How a bankruptcy by Family Member C treats the home held in their name may depend in part on if a formal promissory note was created to secure Family Member B’s interest in the property.
If such a promissory note exists, the bankruptcy court may allow Family Member B to claim the house using the interest secured by the note, much as is the case when a bank as a note secured by a home. Family Member B can then continue to allow Family Member A to live in the house.
If a promissory note was not created, the bankruptcy court may consider other evidence to determine if Family Member B has a claim to the property. But this could vary by state, as each state has its own bankruptcy laws.
If Family Member C attempts to use a quitclaim deed or other legal document to transfer ownership in the property to Family Member A or anyone else, it is likely the bankruptcy court would view such a transfer as an attempt to shelter the value in the home from the bankruptcy. If so, the bankruptcy court would likely reverse the transfer and make the home part of Family Member C’s bankruptcy.
Remember the information about is general in nature and should not be considered legal advice. You should consult a bankruptcy attorney about your individual legal matters.
Obtaining Legal Representation
If you are experiencing a situation where you or a family member are considering filing bankruptcy and you have questions, you should call the telephone number located at the top of this page or complete the form below. A bankruptcy attorney who is familiar with the bankruptcy laws of your state will contact you to provide guidance on your unique situation. The initial discussion is completely free and does not mean you have to hire an attorney.
And remember the conversation is completely confidential, so you have every reason to make the call and get the help you need today.
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