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.
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.
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.
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.
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.