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Jointly Owned Homes in Bankruptcy: What Happens?

housedividedA house divided against itself cannot stand.  

— Abraham Lincoln (assassinated 150 years ago yesterday)

ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

My sister and I are joint owners of a home left to us by our parents. I live in the home and pay for the taxes and upkeep. There is no mortgage. My sister recently filed for Chapter 7 bankruptcy.  She and I are barely on speaking terms. 

Here’s the problem. I got a letter from the bankruptcy trustee telling me that if I want to keep the home, I have to buy my sister’s share of the home. If I don’t, the trustee will sell the house. The home is worth $200,000, and I don’t have $100,000 to fork over to the trustee. 

Can the trustee do this?  

Yours truly, 

Jim

Dear Jim,

Most likely the bankruptcy trustee will be able to sell your home if you can’t come up with the money. But once the home is sold, the trustee will turn over half of the proceeds to you.

(I am assuming that your parents did not create a legally binding directive permitting you to remain on the property. If they did, you should immediately get a lawyer to respond to the trustee.)

What Happens to Property in Bankruptcy

Your sister’s Chapter 7 bankruptcy filing automatically created a bankruptcy estate composed of all her assets. A bankruptcy trustee was appointed to administer the assets in her case. Like everyone filing for bankruptcy, she can keep certain property if it is “exempt.” However, homes in which you don’t live are usually not exempt. (Learn more about how Chapter 7 bankruptcy works and why the trustee sells property.)

If an item of property is not exempt, the trustee can sell it and use the proceeds to repay creditors. Even though your sister owns only half of the property, the equity in her half is a nice chunk of money that could go to her creditors.

When Can a Trustee Sell Co-Owned Property?

A trustee can sell a piece of property even if the debtor (your sister) doesn’t own the whole thing. But in order to do so, the trustee must meet the following criteria:

  • It’s not practical to divide up the property. A large tract of land might be subdivided to sell just the debtor’s share, but a single house and lot can’t be sawed in half to do that.
  • Selling the debtor’s undivided interest would bring in less money than selling the entire parcel. In your situation, it is unlikely that anyone else would buy your sister’s half of the property for what it is really worth, because the buyer would still have to deal with you.
  • The benefit to the bankruptcy estate from a sale of the entire property outweighs the detriment that will be faced by the other owners.
  • The property is not used for the production of energy.

In your situation, it’s extremely likely that the trustee will be able to sell the home. But keep in mind, once the trustee does so, he or she will have to give you half of the proceeds from the sale. So, if the sale nets $200,000, you will get $100,000 and the bankruptcy estate will get the other $100,000 (which will then be used to pay your sister’s creditors).

Coming Up With Money for the Home

If you have decent credit and you can afford to make payments on a $100,000 mortgage, consider getting a home loan and using the money to buy your sister’s share from the bankruptcy estate. In that way, you’ll become a 100% owner of the home.

–Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer. 

Find Leon on Google+

 

KOSKINEN LAMENTS STATE OF THE IRS

Some highlights from Commissioner Koskinen’s recent speech to the National Press Club:

-IRS “absolutely deserved” the criticism is has been receiving for things like overspending at conferences and inappropriate scrutiny of some applications for tax exempt status.

-IRS suffers from “brain drain,” in that more than half of its workforce is over 50, and by next year more than 25% will be eligible to retire, and there just isn’t enough money available for hiring and training of enough younger replacements.

-Taxpayer “service” is suffering due to budget cuts, resulting in the level of telephone assistance to taxpayers registering below 40% – more than six out of every 10 folks who call simply cannot reach a human being to help resolve their problem.

GOOD NEWS FOR ESTATE TAX FOES

House action last week caused at least a “baby step” to be taken relative to repeal of the estate tax.  The House Ways and Means Committee, by a vote of 22 to 10, passed H.R. 1105, the “Death Tax Repeal Act of 2015.”

If/when it ever reaches Obama’s desk, veto is likely, but at least some in Congress are heading in the right direction.

If passed, the act would not only repeal the estate tax, but also the GST tax for estates of decedents dying after the date of enactment.

The bill would retain the gift tax with a top marginal rate of 35%, and basis rules would remain unchanged (carryover basis for gifted assets; fair market value step up for inherited assets.)

 

DON’T CALL – GO TO IRS WEBSITE FOR ANSWERS

The continuing IRS budgetary problem is making the days of calling them (by telephone) almost obsolete – indeed, at the very least, frustrating and often fruitless.

Taxpayers are therefore shifting their patterns of inquiry to the IRS website for answers.  Indeed, according to recent IRS stats, visits to www.irs.gov have increased by 11 percent compared to the same time last year.  In the week ended March 20 alone, there have been 15 million new visits!

Check the site for, among other things:

  • Procedure for obtaining your account transcript
  • To request an electronic filing PIN
  • Finding answers to your tax questions
  • To check the status of your amended return

 

New FMLA Regulations Expand Definition of “Spouse” to Include Same-Sex Spouses in All States

LGBT flagLate last month, the Department of Labor issued a final rule that expands the definition of “spouse” for purposes of taking leave under the Family and Medical Leave Act (FMLA). The FMLA is a federal law that requires employers with 50 or more employees to provide up to 12 weeks of unpaid leave to eligible employees for certain medical and caretaking reasons. Among those reasons, employees may take leave to care for a spouse with a serious health condition, care for a spouse seriously injured in the military, or attend to certain needs that arise from a spouse’s call to active military duty.

When the Defense of Marriage Act (DOMA) was still intact, “spouse” was defined as a husband or wife of the opposite sex. However, after the U.S. Supreme Court struck down the the portion of DOMA that defined marriage as between one man and one woman, the DOL revised its regulations. In 2013, the DOL revised the definition of “spouse” to include same-sex couples, but only if they lived in states that recognized same-sex marriages (called a “place of residence” rule).

But, this rule meant that same-sex couples were treated differently under the FMLA depending on what state they lived in. To correct this unequal treatment, the DOL issued a new rule last month to move to a “place of celebration” rule. Under the new rule, a spouse includes a same-sex spouse, as long as the marriage was valid in the place where it was entered into. In other words, as long as the marriage took place in a state that recognizes same-sex marriages, an employee can take leave to care for a same-sex spouse, regardless of what state the employee currently lives in.

A similar rule applies to spouses who were married in foreign county: The marriage must have been valid in the country where it was entered into. But, there’s an additional requirement: The marriage must also be capable of being entered into in at least one state. In other words, if the marriage would have been illegal in all 50 states, the couple will not be considered spouses under the FMLA.

The DOL regulations are scheduled to take effect on March 27, 2015. This means that employers in states that don’t recognize same-sex marriage will need to adjust their company policies. As long as an employee is legally married in any state, the employer will have to provide FMLA leave for the employee to:

  • care for a same-sex spouse with a serious health condition
  • care for a same-sex spouse who suffered a serious injury or illness while on active military duty, and
  • attend to certain needs arising from a same-sex spouse’s call to active military duty.

For more information on the FMLA, check out The Essential Guide to Family and Medical Leave, by Lisa Guerin and Deborah England (Nolo).