Owning a house with over $100K in equity and filing Chapter 7

[FamilyDrama2024]

What is the name of your state? MO

A little backstory. My sister, against advice but wanting to help out, agreed back in 2017 to purchase a house and let my brother live in it. He and his wife were divorcing and due to a very unique situation with some weird issues with the way the mortgage was processed for their marital home, he was able to live in their marital home after his wife left for 7 years without a house payment (the mortgage on THAT house was also not in his name, only his wife's). During that 7 years, my brother never once tried to put away any money or pay off any debt to put himself in a financially secure position for the inevitable day that the mortgage company would finally be able to foreclose on the house. Which is when he begged my sister to help him out and she stupidly agreed. She obtained a mortgage on the house, and he pays the house payment. They did have to initially do a construction loan because the house needed a kitchen (it had been gutted by previous owner/investor and never replaced before investor ran out of money and put house up for sale). My brother did do most of the work. The agreement was, after a year, he was to then to "buy" the house from her. He still has not fulfilled his end of their agreement to this day, because he's still financially irresponsible.

Fast forward to present day....my sister and her fiance broke up and she was forced to find a place to live very quickly, and was able to take over my mom's rental home, but the split created a financial disaster for her, and she's now about $25K in debt. She was told by her connection at the bank that holds the mortgage that due to the fact that the house has over $100K in equity, she would not be able to file a Chapter 7 bankruptcy to relieve her debt. She also advised my sister that if she DOESN'T file bankruptcy, and doesn't pay the creditors, the creditors will most likely put liens against the mortgage, which means, she wouldn't be able to sell without paying those liens off, nor could my brother be able to purchase the house for what is owed currently. She did speak with a BK attorney on a basic consultation call and that attorney basically said the same thing as the bank employee. That BK attorney hasn't seen any of her actual financial documents/debts to give her more in depth advice.

My sister is considering a HELOC on the house to pay off her debt (the payment would be considerably less than making the payments to her creditors), and my brother is throwing a huge fit. He's still not in any financial situation another 7 years later, to buy the house from my sister. He's also telling her she's wrong that she can't file BK with that much equity in the house, and refuses to understand that since the house is not her primary residence, it's treated differently.

I also feel like if she tried to sell the house to my brother for what is owed, and then later filed BK, she could get accused of BK fraud for selling it for much less than market value, especially since it would be sold to a family member. Technically, since he would not qualify, he tossed around the idea of having his ex wife buy the house for him. My sister told him she would sell the house to our ex sister in law for $160K (the payoff is $130K plus $30K to pay off her debt) and that's still not satisfactory for him.

Honestly, she's nicer to me, because the moment he started throwing a tantrum and name calling, etc, I would have listed the house for $300K (it appraised for $330K) and too bad, so sad, should have had his life together. He can go buy a different house with his ex and my sister could actually live in the house SHE owns and save herself $400 a month in rent.

I guess my question is, is the bank employee and the advice from the BK attorney correct (my brother says they're both wrong and the bank employee is a liar) and what would YOU do in my sister's position?

 

[LdiJ]

What is the name of your state? MO

A little backstory. My sister, against advice but wanting to help out, agreed back in 2017 to purchase a house and let my brother live in it. He and his wife were divorcing and due to a very unique situation with some weird issues with the way the mortgage was processed for their marital home, he was able to live in their marital home after his wife left for 7 years without a house payment (the mortgage on THAT house was also not in his name, only his wife's). During that 7 years, my brother never once tried to put away any money or pay off any debt to put himself in a financially secure position for the inevitable day that the mortgage company would finally be able to foreclose on the house. Which is when he begged my sister to help him out and she stupidly agreed. She obtained a mortgage on the house, and he pays the house payment. They did have to initially do a construction loan because the house needed a kitchen (it had been gutted by previous owner/investor and never replaced before investor ran out of money and put house up for sale). My brother did do most of the work. The agreement was, after a year, he was to then to "buy" the house from her. He still has not fulfilled his end of their agreement to this day, because he's still financially irresponsible.

Fast forward to present day....my sister and her fiance broke up and she was forced to find a place to live very quickly, and was able to take over my mom's rental home, but the split created a financial disaster for her, and she's now about $25K in debt. She was told by her connection at the bank that holds the mortgage that due to the fact that the house has over $100K in equity, she would not be able to file a Chapter 7 bankruptcy to relieve her debt. She also advised my sister that if she DOESN'T file bankruptcy, and doesn't pay the creditors, the creditors will most likely put liens against the mortgage, which means, she wouldn't be able to sell without paying those liens off, nor could my brother be able to purchase the house for what is owed currently. She did speak with a BK attorney on a basic consultation call and that attorney basically said the same thing as the bank employee. That BK attorney hasn't seen any of her actual financial documents/debts to give her more in depth advice.

My sister is considering a HELOC on the house to pay off her debt (the payment would be considerably less than making the payments to her creditors), and my brother is throwing a huge fit. He's still not in any financial situation another 7 years later, to buy the house from my sister. He's also telling her she's wrong that she can't file BK with that much equity in the house, and refuses to understand that since the house is not her primary residence, it's treated differently.

I also feel like if she tried to sell the house to my brother for what is owed, and then later filed BK, she could get accused of BK fraud for selling it for much less than market value, especially since it would be sold to a family member. Technically, since he would not qualify, he tossed around the idea of having his ex wife buy the house for him. My sister told him she would sell the house to our ex sister in law for $160K (the payoff is $130K plus $30K to pay off her debt) and that's still not satisfactory for him.

Honestly, she's nicer to me, because the moment he started throwing a tantrum and name calling, etc, I would have listed the house for $300K (it appraised for $330K) and too bad, so sad, should have had his life together. He can go buy a different house with his ex and my sister could actually live in the house SHE owns and save herself $400 a month in rent.

I guess my question is, is the bank employee and the advice from the BK attorney correct (my brother says they're both wrong and the bank employee is a liar) and what would YOU do in my sister's position?

Ok, I believe that you are wrong about her potential for being accused of bankruptcy fraud. It can be demonstrated that she bought the house for your brother and he is the one making the house payments. Basically it is a contract sale, although it is not properly documented in a contract. I suspect it is not being handled properly for tax purposes either. Those are things that your sister and brother probably needed to get rectified sooner rather than later.

I do see however potential problems if she further encumbers the house with a home equity loan, and I do see potential problems if she sells the house out from under him. Tecnnically she does own the home (since there is no contract in place) and can do whatever she wants, but I think that your brother could have recourse against your sister in court. She would have to lie and say that your brother was a tenant, rather than buying the house from her, and that could cause her even more problems.

While I agree that the home would be a complication in a bankruptcy I doubt that she explained that she was selling the home to your brother on contract (because she probably wasn't looking at it that way) and that could possibly change the bankruptcy attorney's answer.

In any case, she should speak to a bankruptcy attorney again and make the situation as clear as possible, including the fact that your brother is making the mortgage payments and that the agreement is that he will eventually get a regular mortgage on the property. The other option is that your sister can come to some sort of agreement with your brother about a potential HELOC. Perhaps that potential agreement could be part of putting things in a proper contract.

 

[quincy]

We have a bankruptcy attorney who is a member of this forum. I will direct attention to your thread to see if additional information can be provided to you. Look for a post by “despritfreya.”

@despritfreya

 

[Zigner]

Okease

Ok, I believe that you are wrong about her potential for being accused of bankruptcy fraud. It can be demonstrated that she bought the house for your brother and he is the one making the house payments. Basically it is a contract sale, although it is not properly documented in a contract. I suspect it is not being handled properly for tax purposes either. Those are things that your sister and brother probably needed to get rectified sooner rather than later.

I do see however potential problems if she further encumbers the house with a home equity loan, and I do see potential problems if she sells the house out from under him. Tecnnically she does own the home (since there is no contract in place) and can do whatever she wants, but I think that your brother could have recourse against your sister in court. She would have to lie and say that your brother was a tenant, rather than buying the house from her, and that could cause her even more problems.

While I agree that the home would be a complication in a bankruptcy I doubt that she explained that she was selling the home to your brother on contract (because she probably wasn't looking at it that way) and that could possibly change the bankruptcy attorney's answer.

In any case, she should speak to a bankruptcy attorney again and make the situation as clear as possible, including the fact that your brother is making the mortgage payments and that the agreement is that he will eventually get a regular mortgage on the property. The other option is that your sister can come to some sort of agreement with your brother about a potential HELOC. Perhaps that potential agreement could be part of putting things in a proper contract.

Just a reminder: contracts for real property must be in writing.

 

[FamilyDrama2024]

Ok, I believe that you are wrong about her potential for being accused of bankruptcy fraud. It can be demonstrated that she bought the house for your brother and he is the one making the house payments. Basically it is a contract sale, although it is not properly documented in a contract. I suspect it is not being handled properly for tax purposes either. Those are things that your sister and brother probably needed to get rectified sooner rather than later.

I do see however potential problems if she further encumbers the house with a home equity loan, and I do see potential problems if she sells the house out from under him. Tecnnically she does own the home (since there is no contract in place) and can do whatever she wants, but I think that your brother could have recourse against your sister in court. She would have to lie and say that your brother was a tenant, rather than buying the house from her, and that could cause her even more problems.

While I agree that the home would be a complication in a bankruptcy I doubt that she explained that she was selling the home to your brother on contract (because she probably wasn't looking at it that way) and that could possibly change the bankruptcy attorney's answer.

In any case, she should speak to a bankruptcy attorney again and make the situation as clear as possible, including the fact that your brother is making the mortgage payments and that the agreement is that he will eventually get a regular mortgage on the property. The other option is that your sister can come to some sort of agreement with your brother about a potential HELOC. Perhaps that potential agreement could be part of putting things in a proper contract.

Okease

Just a reminder: contracts for real property must be in writing.
[/QUOTE]
And there was no formal contract or anything. Just a verbal agreement that he'd have to make sure the loan was in his name in a year. My sister was actively house hunting for herself at the time she agreed to help him out. And that's why she wanted it out of her name in a year, so she could go back to her own home purchase process. 7 years later, he's in no hurry at all to keep up his end of the agreement. Having this house on her credit has hindered her a few times because of the DTI and he still refuses to do anything and blowing money on boats and ATV's and classic cars instead of paying off the debt that prevents him from qualifying for a loan.

 

[FamilyDrama2024]

Basically she has told him she's either going to get the HELOC or our ex SIL can buy the house from her for the $160 to pay off the loan and her debt. She doesn't want to sell it out from under him, she just wants to be able to pay off her debt from having her entire life pulled out from under her due to the ex fiance.

 

[Zigner]

Basically she has told him she's either going to get the HELOC or our ex SIL can buy the house from her for the $160 to pay off the loan and her debt. She doesn't want to sell it out from under him, she just wants to be able to pay off her debt from having her entire life pulled out from under her due to the ex fiance.

A HELOC won't help because it will still be in her name.
It sounds like the guy found a door mat. Perhaps it's time that your sister grow a spine and deal with the guy. If she doesn't know what to do, then she should speak to an attorney.

 

[LdiJ]

A HELOC won't help because it will still be in her name.
It sounds like the guy found a door mat. Perhaps it's time that your sister grow a spine and deal with the guy. If she doesn't know what to do, then she should speak to an attorney.

She wants money to pay off her other debts. It won't help to get the house out of her name but she believes that it will ease her financial situation by covering her other 25k of debt. I don't necessarily think it is a particularly good idea, because it will cause major family problems if brother is finally able to obtain financing for the agreed upon mortgage balance before she pays off the HELOC unless she has some sort of serious agreement in place with brother, but it's her decision how to proceed. I do agree that it would be in her best interest to get a consult with a local attorney before doing anything.

 

[despritfreya]

I see I was asked to look at this thread. Please bear with me. I will try to review in the morning.

Des.

 

[Taxing Matters]

Tecnnically she does own the home (since there is no contract in place) and can do whatever she wants, but I think that your brother could have recourse against your sister in court. She would have to lie and say that your brother was a tenant, rather than buying the house from her, and that could cause her even more problems.

When transactions are not documented for whatever reason it opens the door for problems whether in bankruptcy or not. Many years ago when I was a revenue officer for the IRS I had a case to collect delinquent income from a guy I'll call Jim. There was a rental property that I discovered was titled to him in deed records. As it suggested he had the money to pay the tax I told Jim pay the tax or I'll seize the property. That's when he tells me it's not really his property. It's his brother Sam's property. Sam collects all the rents, manages the building, pays the mortgage, etc. So why was the property titled to Jim? Well, Sam had some financial problems and transferred the property to Jim so help keep Sam's creditors from getting it. Sam later files bankruptcy and, of course, doesn't tell the bankruptcy court about the property. He shows me all the documentation, much like you alluded above and I did believe that Sam was the one paying for it. But Sam didn't own the property in the deed records and there was no written contract of sale. So I seized the property and sold it for the taxes Jim owed. Needless to say, they were very unhappy with me. They went to more than a dozen attorneys trying to find one to sue the IRS (and me) for an improper seizure. Every single attorney turned them down and told them the same thing: the property was titled to Jim, Jim's federal tax lien attached to the property, and thus I had the authority to seize and sell it. I have no idea how the two brothers dealt with the problem between themselves.

The point to all this is that it's not always the case that court will look at the evidence of who is paying for the property, maintaining it etc, and declare that person must the owner. Even if they had a contract, that contract would not have a affected the rights of any third party lien holder on the property. The court is going to rely on the public record because that's the whole point of the recording system in the first place: to provide certainty regarding who owns a particular piece of property. Each case stands on its own, and had the facts been a little different Sam might not have lost the property due to Jim's tax problems. Indeed, if Sam had just kept the property and declared it as an asset in bankruptcy he may have come out better because bankruptcy courts have broad powers of equity that others courts don't. When people do this kind of stuff they can end up getting burned because they don't know the law as well as they thought they did. Jim was a seasoned real estate investor and because of that he thought he knew everything about property law. The saying "a little knowledge is a dangerous thing" has a lot of truth to it. I've seen a number of situations over the years where someone who had a little knowledge of the law didn't bother consulting an attorney because they thought they knew more than they did and thought they didn't need to consult a lawyer.

I realize you may well know some or all of this already. But I want to leave this as a cautionary tale to anyone who reads it that just knowing a bit about the law doesn't make you an expert and it's easy, especially in bigger transactions like commercial/rental real estate, to make expensive mistakes because the law ends up being more complex than you thought.

 

[despritfreya]

I have not read the responses so what I am going to post may very well be included in some of the posts already done.

Re-writing OP’s original post:

My brother and his wife owned a home. They separated and for 7 years, based upon the “show me the note” argument, my brother lived in the marital property “rent free” - not paying the mortgage that was in his wife’s name. Eventually they divorced and the home was foreclosed in 2017. At that point my sister purchased a home and let my brother live in it. After its purchase, my brother assisted in repairing the kitchen. He pays rent by servicing the mortgage my sister took out. Based upon the rent payment and the work he put into the home, my brother and sister had a verbal agreement that after one year, he would buy the house (that would have been sometime in 2018). Nearly seven years have gone by and he has not fulfilled the verbal agreement.

Fast forward to present day....my sister, who currently lives in property owned by our mom, is in a financial bind. She owes about $25K. Someone who is not an attorney advised her that due to the $100k equity in the home that is title to her, she cannot file a Chapter 7. This non-lawyer also advised her that if she doesn't pay the creditors, the creditors will eventually sue her, get judgments and record those judgments which will become liens against any real property that is in her name. She finally called a licensed attorney who confirmed what she was told. My sister is considering a HELOC on the house to pay off her debt. My brother is throwing a huge fit.

Is the bank employee and the advice from the BK attorney correct?

Based upon the above, I would argue:

1. The agreement your siblings entered into 7 years ago, unless it was in writing, was probably never enforceable as it violated the Statute of Frauds. Contract for the sale of real property generally need to be in writing. I don't know if Missouri follows this requirement.

2. Even if it was enforceable, your brother violated the contract by not fulfilling its terms (purchasing the home in 2018).

3. Since there is no written lease, your brother is nothing more than a month-to-month tenant and is probably subject to a 30 day notice to move out (“notice to quit”). After that, your sister probably can take steps to evict him under State law.

4. A tenant generally has nothing to say when it comes to the owner of the property obtaining a mortgage against the property. The lender, however, will need to know that the property is not “owner-occupied” as that may change the parameters of what can be borrowed.

5. In general, the information given to your sister as it relates to filing a Chapter 7 is correct. If the home is not an exempt asset a Chapter 7 Trustee will sell it and use the net proceeds to pay creditors.

6. If your sister moves into the property before filing bk, she should be able to assert a homestead exemption however, whether it is under Missouri law or Federal law, it appears that the property’s equity is much more than any allowed exemption. Again, in a Chapter 7, the Trustee would sell the property, give her the allowed exemption and use the balance to pay creditors.

7. If she a) does not use the home’s equity to get out of debt or b) does not want to lose the property to a Chapter 7 Trustee, she could try a Chapter 13. Since her debt is only $25k, she would propose a 100% repayment plan. That would “save” the home from being sold by a Chapter 7 Trustee.

Best solution: Use the home’s equity to get out of debt AND never run up debt again.

Edt to add:

RULES:

1. NEVER transfer an asset in an attempt to hinder, delay or defraud a creditor.
2. NEVER sell an asset for less than its fair market value - goes back to rule #1

Des.

 

[LdiJ]

When transactions are not documented for whatever reason it opens the door for problems whether in bankruptcy or not. Many years ago when I was a revenue officer for the IRS I had a case to collect delinquent income from a guy I'll call Jim. There was a rental property that I discovered was titled to him in deed records. As it suggested he had the money to pay the tax I told Jim pay the tax or I'll seize the property. That's when he tells me it's not really his property. It's his brother Sam's property. Sam collects all the rents, manages the building, pays the mortgage, etc. So why was the property titled to Jim? Well, Sam had some financial problems and transferred the property to Jim so help keep Sam's creditors from getting it. Sam later files bankruptcy and, of course, doesn't tell the bankruptcy court about the property. He shows me all the documentation, much like you alluded above and I did believe that Sam was the one paying for it. But Sam didn't own the property in the deed records and there was no written contract of sale. So I seized the property and sold it for the taxes Jim owed. Needless to say, they were very unhappy with me. They went to more than a dozen attorneys trying to find one to sue the IRS (and me) for an improper seizure. Every single attorney turned them down and told them the same thing: the property was titled to Jim, Jim's federal tax lien attached to the property, and thus I had the authority to seize and sell it. I have no idea how the two brothers dealt with the problem between themselves.

The point to all this is that it's not always the case that court will look at the evidence of who is paying for the property, maintaining it etc, and declare that person must the owner. Even if they had a contract, that contract would not have a affected the rights of any third party lien holder on the property. The court is going to rely on the public record because that's the whole point of the recording system in the first place: to provide certainty regarding who owns a particular piece of property. Each case stands on its own, and had the facts been a little different Sam might not have lost the property due to Jim's tax problems. Indeed, if Sam had just kept the property and declared it as an asset in bankruptcy he may have come out better because bankruptcy courts have broad powers of equity that others courts don't. When people do this kind of stuff they can end up getting burned because they don't know the law as well as they thought they did. Jim was a seasoned real estate investor and because of that he thought he knew everything about property law. The saying "a little knowledge is a dangerous thing" has a lot of truth to it. I've seen a number of situations over the years where someone who had a little knowledge of the law didn't bother consulting an attorney because they thought they knew more than they did and thought they didn't need to consult a lawyer.

I realize you may well know some or all of this already. But I want to leave this as a cautionary tale to anyone who reads it that just knowing a bit about the law doesn't make you an expert and it's easy, especially in bigger transactions like commercial/rental real estate, to make expensive mistakes because the law ends up being more complex than you thought.

I understand and don't disagree with anything that you said. However, when I went through bankruptcy there was some property in my name that actually belonged to my minor daughter. The case was not identical to this one of course but there were similarities. The bankruptcy court (which as you said, has broader power of equity that other courts don't have) agreed that the property belonged to my minor daughter, and left it alone. I do agree that if I had been dealing with the IRS rather than the bankruptcy courts that the results would likely have been much different.

 

[LdiJ]

I have not read the responses so what I am going to post may very well be included in some of the posts already done.

Re-writing OP’s original post:

My brother and his wife owned a home. They separated and for 7 years, based upon the “show me the note” argument, my brother lived in the marital property “rent free” - not paying the mortgage that was in his wife’s name. Eventually they divorced and the home was foreclosed in 2017. At that point my sister purchased a home and let my brother live in it. After its purchase, my brother assisted in repairing the kitchen. He pays rent by servicing the mortgage my sister took out. Based upon the rent payment and the work he put into the home, my brother and sister had a verbal agreement that after one year, he would buy the house (that would have been sometime in 2018). Nearly seven years have gone by and he has not fulfilled the verbal agreement.

Fast forward to present day....my sister, who currently lives in property owned by our mom, is in a financial bind. She owes about $25K. Someone who is not an attorney advised her that due to the $100k equity in the home that is title to her, she cannot file a Chapter 7. This non-lawyer also advised her that if she doesn't pay the creditors, the creditors will eventually sue her, get judgments and record those judgments which will become liens against any real property that is in her name. She finally called a licensed attorney who confirmed what she was told. My sister is considering a HELOC on the house to pay off her debt. My brother is throwing a huge fit.

Is the bank employee and the advice from the BK attorney correct?

Based upon the above, I would argue:

1. The agreement your siblings entered into 7 years ago, unless it was in writing, was probably never enforceable as it violated the Statute of Frauds. Contract for the sale of real property generally need to be in writing. I don't know if Missouri follows this requirement.

2. Even if it was enforceable, your brother violated the contract by not fulfilling its terms (purchasing the home in 2018).

3. Since there is no written lease, your brother is nothing more than a month-to-month tenant and is probably subject to a 30 day notice to move out (“notice to quit”). After that, your sister probably can take steps to evict him under State law.

4. A tenant generally has nothing to say when it comes to the owner of the property obtaining a mortgage against the property. The lender, however, will need to know that the property is not “owner-occupied” as that may change the parameters of what can be borrowed.

5. In general, the information given to your sister as it relates to filing a Chapter 7 is correct. If the home is not an exempt asset a Chapter 7 Trustee will sell it and use the net proceeds to pay creditors.

6. If your sister moves into the property before filing bk, she should be able to assert a homestead exemption however, whether it is under Missouri law or Federal law, it appears that the property’s equity is much more than any allowed exemption. Again, in a Chapter 7, the Trustee would sell the property, give her the allowed exemption and use the balance to pay creditors.

7. If she a) does not use the home’s equity to get out of debt or b) does not want to lose the property to a Chapter 7 Trustee, she could try a Chapter 13. Since her debt is only $25k, she would propose a 100% repayment plan. That would “save” the home from being sold by a Chapter 7 Trustee.

Best solution: Use the home’s equity to get out of debt AND never run up debt again.

Edt to add:

RULES:

1. NEVER transfer an asset in an attempt to hinder, delay or defraud a creditor.
2. NEVER sell an asset for less than its fair market value - goes back to rule #1

Des.

I re-read the original post and I don't think that there was any attempt to "hinder, delay or defraud" anyone. Brother couldn't qualify for a mortgage so sister bought the property and let him live there and pay the mortgage. It was basically a contract sale by sister to brother. In spirit anyway if not in reality.

 

[quincy]

I re-read the original post and I don't think that there was any attempt to "hinder, delay or defraud" anyone. Brother couldn't qualify for a mortgage so sister bought the property and let him live there and pay the mortgage. It was basically a contract sale by sister to brother. In spirit anyway if not in reality.

Selling the property to the brother or sister-in-law for less than its fair market value before filing for bankruptcy can be seen as “hindering, delaying or defrauding” a creditor.

Some additional information:

Missouri Statute of Frauds: https://revisor.mo.gov/main/OneSection.aspx?section=432.010

Missouri Notice to Quit:
https://revisor.mo.gov/main/OneSection.aspx?section=441.060#:~:text=Except as otherwise provided by,lease termination to the contrary.

Missouri has opted out of the federal bankruptcy exemptions. A Missouri bankruptcy homestead exemption, IF the property is a primary residence, is $15,000 in equity.

Thank you for taking the time to respond, despritfreya. Much appreciated.

 

[Taxing Matters]

2. NEVER sell an asset for less than its fair market value - goes back to rule #1

I don't agree with the never part of that as it is too broad. For a person potentially facing bankruptcy I agree it's a bad idea. But for someone not struggling with debt problems there are instances in which that kind of sale may useful, e.g. as part of estate planning. But there are tax traps for the unwary doing this, so someone considering it should see a tax attorney for assistance with that.