Be Careful of Transferring Your House to a Trust

This is a little bit more advanced than the usual topic, but I had a client come in who put her personal residence in a qualified personal residence trust.  Unfortunately, she got behind on her second mortgage, and the house had a moderate amount of equity in it; therefore, the second mortgage holder had no problem filing a foreclosure action against her.

She paid me a visit in hopes of filing a Chapter 13 because she’s heard it can halt the foreclosure process. This is true: for property of the Debtor.  When she transferred her residence years ago into a qualified personal residence trust in an attempt to shield herself from personal liability, she also took away the biggest weapon she had against a home foreclosure.  You see, when you file bankruptcy, a statutory beast called the automatic stay creates a literal “stay” against all creditor collection activity against property owned by the Debtor or the bankruptcy estate. In this situation, the woman did not own the property; the QPRT did! As a result, even if she filed bankruptcy, the automatic stay would not have prevented the second mortgage lender from foreclosing on her residence since she did not technically own the residence.  And for those of you who think a possessory interest (having mere possession of the property) is enough, it probably is not.

Her only recourse was to try to work something out with the second mortgage lender outside of bankruptcy. While there are some very valid reasons to put your home into a QPRT, the benefits for most individuals with moderate net worths outweigh the con of no being able to protect the house in the event of a foreclosure.