A bankruptcy court in the Eastern District of Texas recently ruled that just because a debtor's name was on her dad's house, it doesn't necessarily mean that a bankruptcy trustee can sell the house to get at her interest in the house, to pay her creditors.
In the case of Weisbart, Trustee v. Momphard, Adv. Pro. No. 11-4187, U.S. Bankruptcy Court, Eastern District of Texas, the bankruptcy court found that one of the debtor's had helped her dad obtain a loan on his house. To do that, dad had to transfer one-half interest in the house to her name, because he didn't qualify for the loan on his own, credit-wise.
When the daughter filed bankruptcy, the Chapter 7 bankruptcy trustee tried to sell her interest, and sued dad in bankruptcy court to get the bankruptcy court's permission to sell the entire property, to get at the daughter's one-half interest.
The Bankruptcy Court denied the trustee's complaint on "summary judgment" or without a trial, finding that it was really dad's house, that he had paid all the payments on the loan, and had paid all the taxes, insurance and maintenance on the property. The court found that the home was held by the daughter under a resulting trust. A resulting trust is one implied by law from the acts and conduct of the parties and the facts and circumstances surrounding the transaction out of which it arises.
The Court went on to hold that the debtor had bare legal title only, and the bankruptcy estate only was entitled to receive what the daughter was entitled to receive:
Thus, the imposition of a resulting trust on the defendant's home in favor of the defendant requires the debtors — and the chapter 7 trustee as the administrator of their bankruptcy estate — to hold the home for the benefit of the defendant. The trustee would not be entitled to retain any proceeds of a sale of the defendant's home because the defendant is the beneficial owner of such proceeds. Consequently, the debtors' estate would derive no benefit from a § 363(h) sale of the defendant's home.
As a rule, we have not had clients have a problem with this, when it comes up. But by all means, make sure your lawyer is fully aware of all of these issues before you file a bankruptcy. In some cases where it is not so clear who owns the house, it may be better to not file bankruptcy, or to file a chapter 13 instead of a chapter 7. It just depends on the facts of each case.