If you file Chapter 7 bankruptcy and own a non-exempt real property jointly with a non-filing co-owner (including your spouse) the bankruptcy trustee can for the sale of the jointly owned property regardless of the co-owner’s objection. The trustee’s authority to liquidate the debtor’s jointly owned property falls withing Section 363 of the Code. The trustee would split the sales proceeds with the non-filing co-owner. An interesting situation arises when the subject property is the debtor’s homestead owned by the debtor and occupied by the debtor and his non-filing spouse. Homestead protection is different in bankruptcy than it is outside of bankruptcy. Outside of bankruptcy full homestead protection vests upon occupancy whereas in bankruptcy full homestead protection does not fully vests for two years or more after ownership and Florida residency are established. Florida law fully exempts the owner’s homestead equity, and Florida law provides the non-owner spouse with a protected life estate in the home.
A Florida bankruptcy court commented on a situation where a debtor and family moved to Florida, and the husband bought a house. The husband filed Chapter 7 bankruptcy; the wife did not file bankruptcy. Under the bankruptcy rules the debtor was not eligible for Florida’s homestead exemption because he had not lived in Florida for two years. At the same time, the wife’s homestead life estate were vested under Florida state law. The issue addressed is whether the bankruptcy could liquidate the debtor’s non-exempt homestead property over the objection of the non-filing spouse.
The court explained in a lengthy footnote that a trustee could not use Code Section 363 to sell the debtor’s jointly owned homestead because doing so would divest the non-filing spouse of her homestead rights under Florida law. The court explained that outside of bankruptcy the debtor could not sell or refinance the house without the non-owner spouse’s consent, and that the bankruptcy trustee has not greater rights to the homestead in bankruptcy than does the debtor himself outside of bankruptcy.
This analysis yields interesting planning opportunities for non-Florida resident. A current non-resident could move to Florida and buy a homestead with his spouse. One spouse files Chapter 7 bankruptcy within two years. The trustee could not sell the debtor’s house and the debtor has homestead protection prior to being in Florida for two years. However, even if the trustee could not sell the house the trustee still could claim as part of the bankruptcy estate the debtor’s interest in the house which is subject to the non-filing spouse’s homestead rights. In the event of a divorce or death of the non-filing spouse the trustee could sell the debtor’s home. So, what the trustee owns and what the trustee could offer for sale is a future interest in the homestead contingent upon the marriage and spouse’s life expectancy. How much would you bid for that interest?
I have written in prior posts that if the spouses owned the homestead jointly there would be immediate protection as tenants by entireties property if one spouse filed Chapter 7 bankruptcy.
posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida