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Trustee May Not Sell Jointly Owned Home Over Objections of Co-Owner - Lovald v. Tennyson

July 26, 2011

Our San Bernardino bankruptcy attorneys know that divorce and bankruptcy often go hand in hand, since money problems can be hard on a marriage. So we were interested to see a bankruptcy appeal on a subject that confronts many couples going through divorce and bankruptcy: What to do with the couple's jointly owned home. In Lovald v. Tennyson, a trustee for debtor Theodore Wolk sought to sell the home Wolk co-owns with the wife he was divorcing, Kathryn Tennyson, free and clear of Tennyson's interest. Tennyson was not a party to the bankruptcy. The bankruptcy court held a hearing and concluded that Tennyson contributed more to the equity in the home than Wolk, and thus selling it would not benefit the bankruptcy estate. It denied the motion.

The trustee made an earlier appeal to the Eighth U.S. Circuit Court of Appeals, which sent the case back down to trial court for consideration of arguments not raised at trial. Specifically, the bankruptcy court was asked to determine whether the trustee's ability to sit in the place a bona fide purchaser or judicial lienholder under bankruptcy law can stop the court from examining exactly how much interest each spouse has in a co-owned home. The bankruptcy court examined the issue and again denied the trustee's request to sell the home clear of Tennyson's interest. This appeal followed.

The Eighth agreed with the bankruptcy court that at best, the trustee's hypothetical lien attached to only half of the home's equity, which came to about $31,500 (minus closing costs). The bankruptcy court found that this was insufficient benefit to overcome the harm to Tennyson. Again, the Eighth agreed. The trustee had not proven that any funds from the sale would be made available to creditors, it said. Furthermore, substantial evidence was presented about the harm to Tennyson from such a sale: She had contributed all of the home's equity, and her therapist testified that a sale would likely lead to depression. The Eighth found no flaws in the bankruptcy court's reasoning, and thus upheld its ruling.

As Westminster bankruptcy lawyers, we frequently hear from clients who are trying to resolve similar co-ownership situations. Even if divorcing spouses can agree -- which is not always easy -- the trustee for a bankruptcy estate is not obligated to do what they prefer, since he or she stands in the shoes of a creditor. One way to avoid this situation is to finish a divorce before bankruptcy, if possible, so there is no dispute about who owns what. Of course, in a case like this, filing before divorce may be more advantageous because it allows claims on property that might get taken away later. To make sure you have the best possible timing, you should speak to an experienced Oceanside bankruptcy attorney as early as possible in your case.

If you're considering bankruptcy to deal with overwhelming debt, or to stop a foreclosure, you should call Howard Law PC to discuss your options. For a free, confidential consultation, you can reach us toll-free at 1-800-872-5925 or send us an email anytime.

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