Protection Against Post-Bankruptcy Real Estate Liability

Chapter 7 bankruptcy debtors who surrender upside down real estate in Chapter 7 bankruptcy sometimes are surprised by liabilities that arise after the bankruptcy filing. A common example is the debtor’s liability for HOA dues that accrue in the months after the bankruptcy petition is filed.

Real estate ownership entails ongoing financial obligations including not just HOA dues but also liability for accidents on the property. Chapter discharges debts incurred prior to the filing date, but debtors are responsible for debts and liability after the filing date. An HOA or injury claimant could sue personally a Chapter 7 debtor after filing for liabilities that mature while the debtor is waiting for a bank to foreclose on a surrendered property.

One option is for the debtor after filing to convey title to the property to another entity such as a corporation or LLC. The debtor could argue that the entity is the party responsible for ongoing obligations. A post-bankruptcy creditor could try to pierce the entity on the grounds that it was established for a fraudulent purpose or was the debtor’s alter-ego, but most potential creditors would not pursue a veil-piercing suit for relatively small debts such as HOA dues or minor injuries on the property.

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