Bankruptcy and The Life Estate

What happens when a life estate is involved in a bankruptcy. First, a life estate is created in order to provide an individual with a right to remain in a property for the remainder of their life. For example in a will an individual can give his wife a life estate and give the remainder interest to his child. The child is the owner of the property except the mother has the right to remain in the property for the rest of her life. What happens if the child files for bankruptcy. In a bankruptcy a debtor filing bankruptcy can protect a certain amount of equity. If the equity exceeds the value of the exemption in the property then a trustee in a Chapter 7 bankruptcy could sell the property and use the money in excess of exemptions to pay creditors. Or the debtor can file a Chapter 13 and pay creditors an amount equal to the nonexempt equity. For example, if the home in question is worth $100,000 and there is a $25,000 mortgage against the property and the individual lives in, say,  Voorhees New Jersey where the New Jersey exemption allows the individual to protect approximately $24,000 in equity in his home, is there $50,000 in equity in the property. The real question is would a willing buyer pay $100,000 for a property which would otherwise be worth $100,000 except for the fact that whoever buys the property has to allow the mother to remain in the property until she passes away. In the Chapter 13, rather than selling the property the debtor could pay creditors an amount equal to the value of the property. However, establishing the value can be problematic. Some trustees and courts will look at actuarial tables to determine how long the person with the life estate is expected to live. Often the value could be negotiated between the debtor’s attorney and the trustee but certainly an experienced attorney would be needed to assist in a circumstance like this and one should be consulted to discuss the impact of any life estate issues in the bankruptcy.