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Co-Owned Property in Bankruptcy: When Only One Owner Filed

One of the most legally complex situations in bankruptcy real estate occurs when a debtor co-owns property with a spouse, family member, or business partner who has not filed bankruptcy. The non-debtor co-owner believes their half of the property is protected. 11 U.S.C. §363(h) gives the trustee a powerful tool: the right to sell the entire property, including the non-debtor’s interest, under specific conditions. Courts apply this power carefully because it overrides the non-debtor’s property rights.

When the Trustee Can Sell Co-Owned Property: §363(h)

11 U.S.C. §363(h) authorizes the trustee to sell both the estate’s and the non-debtor co-owner’s interest if the court finds all three: (1) Partition is impracticable: the property cannot be divided into separate portions (a house cannot be partitioned; raw land sometimes can be). (2) Selling only the debtor’s interest would produce significantly less: the market for an undivided fractional interest in real property is far smaller and less competitive than the market for the whole property. (3) Benefit to the estate outweighs detriment to the co-owner: the court balances the creditors’ financial interest against the co-owner’s loss of their property. Courts apply §363(h) carefully and most commonly in spousal situations where the non-filing spouse co-owns the marital home.

The Non-Debtor Co-Owner’s Rights: §363(i)

11 U.S.C. §363(i) gives the non-debtor co-owner a right of first refusal to purchase the property at the price at which the sale is to be consummated. This right is exercisable before the sale to a third party. In practice: (1) The trustee files a §363(h) motion to sell co-owned property. (2) The non-debtor is served with notice and may oppose the motion by arguing the three-factor test is not met. (3) If the sale is authorized, the non-debtor can purchase at the court-approved price. (4) If the non-debtor does not exercise §363(i), the property is sold to a third-party buyer and the non-debtor receives their proportionate share of the proceeds. OLH coordinates with the trustee’s attorney to ensure the §363(i) notice is properly served and the timeline respected.

How Proceeds Are Divided in a Co-Owned Bankruptcy Sale

When co-owned property is sold under §363(h): (1) All sale costs (OLH commission 5–6%, closing costs) deducted first. (2) All liens and mortgages on the property paid in full. (3) The debtor’s applicable homestead exemption paid to the debtor. (4) Remaining proceeds divided by ownership percentage: the debtor’s share goes to unsecured creditors through the estate, the non-debtor’s share goes directly to the non-debtor. (5) Any surplus from the debtor’s share after paying all creditors returns to the debtor. The non-debtor co-owner is made whole for their proportionate equity interest, less any liens attributable to their ownership.

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Frequently Asked Questions

Can the bankruptcy trustee sell my home if only my spouse filed?

Possibly, under 11 U.S.C. §363(h), if the court finds: partition is impractical, selling only the debtor’s interest would significantly reduce value, and the benefit to the estate outweighs the detriment to you. Courts apply this power carefully. You have the right to oppose the motion and the right to purchase the property yourself under §363(i) at the court-approved price before any third-party sale. Consult a bankruptcy attorney immediately upon receiving the motion.

What is the Section 363(i) right to purchase?

11 U.S.C. §363(i) gives you, as the non-debtor co-owner, the right to purchase the property at the same price approved by the court before it is sold to a third party. This allows you to keep the property by paying the court-approved price — effectively buying out the debtor’s interest from the estate. The right must be exercised before the third-party sale closes.

How are proceeds divided when co-owned bankruptcy property is sold?

(1) Sale costs including OLH commission. (2) All liens and mortgages paid. (3) Debtor’s homestead exemption. (4) Remaining proceeds divided by ownership percentage: debtor’s share to creditors; non-debtor’s share directly to the non-debtor.