Can Bare Legal Title keep my property out of bankruptcy?

By Daisy Rogozinsky
/
September 20, 2022

Under the U.S. Bankruptcy Code, a bankruptcy trustee has the right to liquidate all of a debtor’s assets and distribute the proceeds to the debtor’s creditors. This can lead to potential confusion when a person is named on the title to a bank account or property that they don’t actually have any equitable ownership in practice.

For example, a person may name a member of their family on the title of an asset for convenience purposes. This way, it can be more easily passed on in the event of their death or managed for the benefit of an older family member. 

But when you own an asset only in name and you file for bankruptcy, will that asset be liquidated? In this article, we’ll explore the issue of how something called “bare legal title” can save a property from liquidation. 

What Is Bare Legal Title?

Bare legal title is when a person’s ownership interest in an asset is purely legal, but not equitable. This means that they hold the title in their name but haven’t done anything to contribute to the value of the asset. Under these circumstances, a person can be found to hold no equity in an asset that they technically own. 

It is important for debtors to understand the bare legal title doctrine because it might prevent them from taking potentially damaging action in preparation for bankruptcy. The desire to avoid having an asset liquidated might motivate a debtor to transfer a property out of their name before filing. 

However, this transfer will be scrutinized and can potentially lead to legal action as it may be labeled a fraudulent transfer. The debtor can fight this, but the ensuing adversary proceeding will cost unnecessary time, money, and stress when the asset could have been protected under bare legal title all along.

How Bare Legal Title Affects Bankruptcy

What often happens when a debtor owns a bare legal title asset is that the asset is not liquidated as part of the bankruptcy estate. 

For example, let’s say that a person named Linda only holds bare legal title to her parent's bank account and has never made a deposit into it. In this situation, Linda’s parent’s bank account will not be seized as part of her bankruptcy. 

Let’s look at another example. Suppose a man named David buys a house for his parents. He deposits a down payment and makes all of the mortgage payments on the house. However, for convenience purposes, he keeps the house under his parents’ names. In this case, David’s parents hold the bare legal title of the house, but David was the one who paid for it. If David’s parents file for bankruptcy, their trustee should not be able to sell the house to pay their creditors.

Exceptions to Bare Legal Title

One important exception to the bare legal title doctrine is gifts and inheritance. Assets obtained by gift or inheritance do not count as a bare legal title as the owner was intended by the donor to have all rights and privileges associated with that asset now or in the future.

There are also situations in which the bare legal title argument for why a debtor should not have an asset liquidated will fail. Essentially, if the holder of a legal title did actually help its “real owner” obtain or improve the asset, the asset will be liquidated in the event of their bankruptcy. 

For example, let’s say a teenager named Rachel bought a car with her parents serving as co-signers for her car loan. Rachel paid the down payment and all of the loan payments on the car herself. 

If Rachel’s parents were to file for bankruptcy, they may try to use the bare legal title defense to claim that they do not have equitable ownership of the car and, therefore, it should not be seized and sold as part of their bankruptcy state. However, because they co-signed on the loan, they helped Rachel obtain the car, meaning they contributed their credit in order to allow her to buy it. In this case, the bare legal title claim is likely to fail. 

Speak to an Attorney about Bare Legal Title

If you are planning to file for bankruptcy and have any properties that you believe might qualify as bare legal title, it is important to speak to a bankruptcy lawyer in order to understand how to proceed. They will be able to carefully analyze the doctrine and determine whether or not it is applicable to your property.

Related Posts

Chapter 12 Bankruptcy: How it Works
James ParkerAugust 25, 2021
Bankruptcy Overview
Daisy RogozinskyJune 28, 2022
Attorney At Law is changing how clients connect with lawyers. By providing an innovative platform to lawyers who want to expand their practice’s reach, AAL is bringing law practices into the future.
+1 (888) 529-9321
6142 Innovation Way
Carlsbad, California 92009
© 2022 Attorney at Law | All rights reserved
Some of the content of this website may be considered attorney advertising under the rules of certain jurisdictions. The information on this website is for general information purposes only. Nothing on this site should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute an attorney-client relationship.
crossmenuchevron-up linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram