Can Filing Bankruptcy Affect a Co-owner of Your Home?
Homes can be owned jointly by married couples or by people who have no other relationship than partnering on the investment of a home. There can be co-ownership by a couple to unlimited numbers of owners in a property. The ownership can be divided equally amongst the co-owners or it can be unevenly distributed by investment. So, what happens to the others when one of the co-owners files for bankruptcy? Will bankruptcy affect the co-owner of a house?
The answer to the question can be multifaceted, depend on the relationship of the co-owners, and the type of bankruptcy filed. There are basically two types of bankruptcies most individuals can file- a Chapter 7 or a Chapter 13.
A Chapter 7 bankruptcy, commonly called liquidation of your assets, is normally the simplest and quickest form of bankruptcy. A trustee that is appointed by the court will gather and sell your non-exempt property, and he will use the proceeds from the sale in order to pay your creditors.
A Chapter 13 bankruptcy, commonly called a wage earner’s plan, enables individuals with regular income to develop a plan to repay all or part of their unsecured debts over three or five years.
For the most part, one of the advantages for filing a Chapter 13 is to provide protection for co-debtors. In this case, the filing would have no affect to the co-owners of the mortgage as long as the filing owner makes timely payments to the plan. With timely payments, the other co-owners are protected by the automatic stay of the bankruptcy court, and their credit scores are not affected.
If a Chapter 7 bankruptcy is filed by one of the co-owners, the filing could affect the other co-owners in a variety of ways. The filing could cause the beginning of the foreclosure process on the house, it could eventually affect the credit scores of all co-owners, or the bankruptcy court trustee could seize the property and sell it for the percent of ownership in the equity, if there are multiple non-related co-owners.
The way a deed on a co-owned home is titled defines how real property is held and plays an important part in how the property is subjected to judgments and bankruptcy laws. Homestead, federal and exemption laws are all affected by how the deed of title reads. As an example, if a home is jointly owned by a married couple, the trustee could use all the non-exempt equity in the home to pay the spouse’s creditors. If a deed of a home is titled to non-related entities, the trustee may have to satisfy other state laws before seizing the property to satisfy creditors.
The affects of bankruptcy can be varied and complicated. Common sense indicates you might want to consult with a bankruptcy lawyer in order to help you understand how these complex laws might apply in your particular situation.