Equitable Interests in Property During Bankruptcy

When an individual files a bankruptcy case, a bankruptcy estate is created. This bankruptcy estate is comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case.” Consequently the debtor must identify all legal and equitable property rights when completing the bankruptcy schedules. But what exactly is a legal interest and what is an equitable interest in property?

Without getting too technical, a legal interest is simply ownership that is readily recognized by law. Say, for instance, that you go to the auto dealer, buy a car, and title it in your name. This is a legal interest in a vehicle that is disclosed when completing your bankruptcy schedules.

On the other hand, an equitable interest may exist when there is no legal interest, but in fairness there should be an interest in the property. The most common type of equitable interest is an express trust. In a trust a trustee hold the legal right to the property for the benefit of another person (the beneficiary). If you are the beneficiary of a trust, this is an equitable interest that must be disclosed on your bankruptcy schedules.

Another common situation that may result in an equitable interest is a child’s vehicle. Suppose that your son purchased a car with his own money, but it is titled in your name to save on insurance. You have legal title, but your son has an equitable interest. You must list your legal interest on your bankruptcy schedules. That begs the question: can the bankruptcy trustee take the car?

Probably not. This situation is called a “resulting trust.” Your son paid for the car and drives the car. . . it’s his car. Just like in the express trust situation discussed above, the law will recognize that you are the trustee with legal title of the car and your son is the beneficiary. The bankruptcy trustee will want evidence of the “real owner,” including evidence that shows you did not pay for the car.

Equitable and legal interests are sometimes difficult to distinguish during bankruptcy. If you have co-signed for a secured loan, recently purchased property for a family member, or are named in a trust, there is likely a property interest that must be disclosed. It is vital to discuss all of your financial issues with your attorney prior to your bankruptcy filing. Your attorney can propose options for dealing with the situation and for protecting your property rights.