Joint Tenancy Title Among Non-Spouses Can Lead to Disaster in Bankruptcy

Problems with Joint Tenancy Title in BankruptcyI’ve written before about the problems joint tenancy title in the estate planning context. Today, I want to focus on the potentially disastrous consequences joint tenancy between unmarried people can cause in bankruptcy. Several years ago I defended a woman in a bankruptcy litigation case in which the Chapter 7 trustee had sued to take away her home under the “strong arm” powers afforded Chapter 7 trustees under Bankruptcy Code §544(a)(3). My client had not filed for bankruptcy, mind you. Her son-in-law had.

Several years before, my client had been going through a divorce after twenty-some years of marriage. At the time, the spouses owned a home in Santa Clara, California, with approximately $200,000 of equity (this was in the early part of the last decade, when people in the Bay Area actually had equity in their homes). As part of their marital settlement, my client and her ex-husband agreed that she would buy him out of his half of that equity for around $80,000. The only hitch was that she could not qualify on her own to refinance the property in order to take out the equity necessary to complete the buy-out for the divorce. As she was somewhat desperate to keep the home of nearly twenty years, in which she had raised her children, she had to seek a co-signer for such a refinance.

Enter the son-in-law, who agreed to co-sign on the refinance. He also agreed to move in to the home with my client’s daughter, where they would live together and split the monthly mortgage payment. Note that the son-in-law contributed nothing to the closing costs for this refinance. He merely co-signed the loan and verbally agreed to help his mother-in-law with the payments. The mortgage lender’s escrow company, as is typical with escrow companies, made no attempt at all to ascertain the parties’ intentions or to advise them to get legal advice about the consequences of various forms of legal title, and slavishly prepared a new grant deed for my client’s home on which she and her son-in-law became co-owners of the property as unmarried joint tenants. Under California law, joint tenancy title creates a rebuttable presumption of equal fifty percent co-ownership between two joint tenants. This legal presumption can lead to disastrous consequences if one of those joint tenants later files Chapter 7 bankruptcy.

The daughter and son-in-law lived up their commitment to live with my client and help her with the mortgage payments for less than one year. After helping pay toward only a handful of monthly payments, they quarreled with my client and moved out. In order to keep her home my client took on a second job and made all her monthly mortgage payments on her own thereafter.

Fast forward five years.  The son-in-law files Chapter 7 bankruptcy.  In his Chapter 7 petition, he discloses that he has a joint tenancy interest in my client’s property.  And, of course, that triggered the Chapter 7 trustee to assert that the Bankruptcy Estate was now the owner of a fifty percent interest in my client’s property, leading to the bankruptcy law suit against my client so that the Chapter 7 trustee could seize the property in order to sell it.

The Bankruptcy Court in that case remained obstinately deaf to any of our arguments, that, for example, the presumption of fifty percent ownership imparted by joint tenancy title was rebutted by the actions of these parties, that underlying California partition law would allow for all manner of equitable apportionment of fractional interests based on the facts of this case, and that the Chapter 7 trustee had a duty to inquire whether the equitable title of the parties may have differed from the bare legal title per the case In re Weisman, 5 F.3d 417 (9th Cir. 1993). And so, the Bankruptcy Court allowed the Chapter 7 trustee to take my client’s home and sell it. Most reasonable people would rightly view this result as absurd and tragic.

Before unmarried people take title to an asset as joint tenants, they should always seek the advice of a competent attorney. If their intention is to own the asset together as anything other than fifty-fifty co-owners, they should memorialize this understanding in a binding written agreement. And before taking title as joint tenants, they should always remember that if their co-owner gets into financial trouble in the future, that asset could be seized and sold by a Chapter 7 bankruptcy trustee.

This entry was posted in Bankruptcy in General, Chapter 7 Bankruptcy, Chapter 7 Trustee, Joint Tenancy Title and tagged , , , , , . Bookmark the permalink. Both comments and trackbacks are currently closed.