What do the bankruptcy laws say about the sale of jointly owned property?

Sale of Jointly Owned Property in Bankruptcy

It is not unusual for debtors, specifically married debtors who file for bankruptcy protection separately, to co-own property. If you co-own property and intend to file for bankruptcy, you need to be aware that the trustee has the authority to force a sale of the entire asset including the co-owner(s) interest. See 11 USC 363(h). This is true even where the co-owner is not filing for bankruptcy.

Before a sale can take place, the trustee must take the following actions. The trustee must determine whether the property can be partitioned, separating the debtor’s interest from the remaining co-owner(s). If the property can be partitioned, only the debtor’s portion will be sold. In cases where partitioning is not possible, such as in the case of real estate, the bankruptcy court will approve a sale of the entire asset if doing so will result in significant gain to the bankruptcy estate.

However, before such a sale can take place, the court must find that the benefit to the bankruptcy estate outweighs any detriment to the co-owner. This can only be achieved through an adversary proceeding by the trustee against a co-owner and with the court’s permission. Bankruptcy Rule 7001(3). As with any adversary proceeding brought by a trustee, the co-owner(s) will have the opportunity to settle with the trustee and possibly purchase the debtor’s interest at a discounted rate. If no agreement can be reached, the court will decide whether the entire asset should be sold.

Consequently, if you co-own an asset which does not qualify as exempt, you should prepare your co-owner(s) for the possible ramifications of your bankruptcy filing. If you sell your portion of the asset before the bankruptcy filing, you need to be careful not to run afoul of the fraudulent or insider trading rules which permit a trustee to undue or seek restitution for such transfers. If faced with this possibility, it is always advisable to seek advice from a bankruptcy attorney in your area before taking any action which might endanger the interest of a co-owner.