When one co-owner declares bankruptcy, their share in jointly owned property becomes part of the bankruptcy estate managed by a trustee. This transforms the partnership dissolution from a two-party matter into a three-party (or more) proceeding involving the bankruptcy trustee.
The Bankruptcy Trustee’s Role
Upon a partner’s bankruptcy, a court-appointed trustee takes control of their assets, including their share in jointly owned property. The trustee’s primary obligation is to maximize the value available to creditors, not to accommodate the other partner’s preferences.
This means the other partner must now deal with a professional whose interests may be quite different from those of their original partner.
Coordination Between Dissolution and Bankruptcy Proceedings
Both dissolution proceedings and bankruptcy proceedings may be underway simultaneously regarding the same property. Coordinating these proceedings – ensuring they do not conflict and that the property is managed appropriately during both – requires expertise in both fields.
The bankruptcy trustee may seek to sell the bankrupt partner’s share or the entire property as quickly as possible to generate funds for creditors.
The Innocent Partner’s Strategies
The non-bankrupt partner has several strategic options. They can seek to purchase the bankrupt partner’s share from the trustee, often at a price negotiated with the bankruptcy court. They can participate in the bankruptcy proceedings to ensure the property’s value is properly established. They can seek to have their own claims against the bankrupt partner recognized as priority creditors.
An attorney who understands both bankruptcy law and property law is essential to navigate these complex proceedings.
The Impact on Property Value
The knowledge that a partner is bankrupt can affect the property’s marketability and value. Buyers may be wary of purchasing a property connected to bankruptcy proceedings. The attorney should work to minimize any such discount.
