Bankruptcy and timeshares

[voyager1]

Since Tuggers know everything I'm hoping to find some information for a friend going through a tough time. He owns 2 timeshares free and clear. Both are at top quality resorts. 1 is in a prime location (U.S.) and 1 is RTU (Mexico).

Due to poor health and a job loss he is forced to file bankruptcy. He has both properties for sale at bargain basement (approximately half Ebay sales prices), but doesn't believe they will sell before the bankruptcy is final. He is prepared to lose the timeshare, but what worries him is what recourse the resorts may still have in regard to maintenance fees after the discharge.

He has asked his attorney who has said "don't worry about it". That's probably good advice, but if any wise Tuggers can offer any knowledge it may help alleviate a slight amount of his current stress.

[Icarus]

I'm not an attorney, but I agree with the attorney's advice.

If the court allows them to be sold at auction, they probably will sell, since they are "top quality resorts". When they are auctioned off, all past and future amounts owed on the timeshare will go to the buyer. If they don't sell at auction, the bankruptcy court can dismiss any past amounts owed as part of the bankruptcy settlement. Or he could award them to the management company if they put in a claim for past MFs. Or if there's a loan, they could be turned over to the company that holds the loan. Many things are possible. I suppose if somehow he ends up keeping them, then he probably would be liable for future MFs. But if he doesn't keep them, and his attorney does his job properly, he won't be liable for future MFs.

But as the attorney says, it's not really something your friend needs to worry about. I'm sure there are enough things to worry about other than this relatively minor detail.

-David

[timeos2]

If someone - your friend, the bankruptcy court, someone - doesn't sell the timeshares and the bankruptcy is finalized without action on those units they, and the fees, would still belong to your friend. Like any ongoing obligation they don't simply "disappear" in bankruptcy unless specifically listed as part of the final decree. It would be to his advantage to ensure that something is done with them during the process or else he'll be dealing with them again after his fresh start. Most lenders won't take over timeshares as they would then owe the fees. They just want to be paid not pay others.

See if you can push him to get the units sold - even for a small amount - or deed them back to the resorts if they'll take them so the resorts have paying owners and he has two less things to worry about.

[Icarus]

As long as the assets and liabilities are listed properly in the bankruptcy filing, I disagree with your advice. Any listed liabilities, including timeshare loans and fees owed would be part of the filing. If the lender doesn't want them, then they have to discharge the loan. If they are "top quality resorts", the weeks can be rented out to cover any future MFs. And you can't just give away assets without the courts approval during a bankruptcy proceeding.

-David

[timeos2]

Originally Posted by Icarus

As long as the assets and liabilities are listed properly in the bankruptcy filing, I disagree with your advice. Any listed liabilities, including timeshare loans and fees owed would be part of the filing. If the lender doesn't want them, then they have to discharge the loan. If they are "top quality resorts", the weeks can be rented out to cover any future MFs. And you can't just give away assets without the courts approval during a bankruptcy proceeding.

-David

The lenders would have to reply to the notice of Bankruptcy - most are too big to even notice. The Court would have to approve of any action to dispose of the weeks that is true. But if positive action isn't taken and covered in the final decree then the original owner still has the obligations as, in that case, they are not discharged but left in the care of the filer. Better to get them resolved officially during the process both for the filers' piece of mind and so the resort has a proper owner for the time.

[voyager1]

Originally Posted by Icarus

As long as the assets and liabilities are listed properly in the bankruptcy filing, I disagree with your advice. Any listed liabilities, including timeshare loans and fees owed would be part of the filing. If the lender doesn't want them, then they have to discharge the loan. If they are "top quality resorts", the weeks can be rented out to cover any future MFs. And you can't just give away assets without the courts approval during a bankruptcy proceeding.

-David

Thank you for the (mostly) encouraging answers you have provided. What David stated above is one of the problems. My friend has family members and friends who would gladly take over title and incur the maintenance fees, but during a bankruptcy the courts refuse to approve that solution because they believe the units have fair market value.

There are no loans or maintenance fees outstanding, everything is current. Since one unit is a Mexican RTU he also is concerned about a U.S. bankruptcy discharge being honored out of the country.

[mshatty]

Originally Posted by Icarus

As long as the assets and liabilities are listed properly in the bankruptcy filing, I disagree with your advice. Any listed liabilities, including timeshare loans and fees owed would be part of the filing. If the lender doesn't want them, then they have to discharge the loan. If they are "top quality resorts", the weeks can be rented out to cover any future MFs. And you can't just give away assets without the courts approval during a bankruptcy proceeding.

-David

Actually David,

John is correct. If you list the TS on your schedules of assets and the bankruptcy case is closed without the TS being "administered", that is sold, there is a provision in the bankruptcy code that "abandons" the asset/TS back to the debtor, the person filing bankruptcy. It passes through the bankruptcy case right back to the debtor.

If that happens, the debtor remains liable for the MF and all other costs associated with the TS. If there was a mortgage on it, the debtor will be discharged from the mortgage but the mortgagor's lien still attaches to the TS. The mortgagor can only look to the TS for payment.

I have been practicing bankruptcy law for more than 23 years and know of what I speak. Before ebay, the bankruptcy trustees would rarely try to sell the timeshare. Today, some put in a little effort. This is where the debtor can help himself and try to educate the trustee on how to sell the TS.

[mshatty]

Originally Posted by voyager1

Thank you for the (mostly) encouraging answers you have provided. What David stated above is one of the problems. My friend has family members and friends who would gladly take over title and incur the maintenance fees, but during a bankruptcy the courts refuse to approve that solution because they believe the units have fair market value.

There are no loans or maintenance fees outstanding, everything is current. Since one unit is a Mexican RTU he also is concerned about a U.S. bankruptcy discharge being honored out of the country.

Marcia,

What your friend's family should do is make a written offer to the trustee to purchase the TS. The trustee will consider it.

[Icarus]

Originally Posted by mshatty

Actually David,

John is correct. If you list the TS on your schedules of assets and the bankruptcy case is closed without the TS being "administered", that is sold, there is a provision in the bankruptcy code that "abandons" the asset/TS back to the debtor, the person filing bankruptcy. It passes through the bankruptcy case right back to the debtor.

If that happens, the debtor remains liable for the MF and all other costs associated with the TS. If there was a mortgage on it, the debtor will be discharged from the mortgage but the mortgagor's lien still attaches to the TS. The mortgagor can only look to the TS for payment.

I have been practicing bankruptcy law for more than 23 years and know of what I speak. Before ebay, the bankruptcy trustees would rarely try to sell the timeshare. Today, some put in a little effort. This is where the debtor can help himself and try to educate the trustee on how to sell the TS.

But there is no loan and all fees are current, and they can be rented out to cover future MFs, or deeded over to another family member after the bankruptcy closes if that's what they want to do and if they can't find a buyer for them.

I'm sure you know more about this than I do, but under the circumstances listed by the OP in both posts, is there anything to worry about as long as all the assets and liabilities are properly listed in the proceedings?

I didn't know that the lender could discharge the loan and somehow keep an interest on the title.

-David

[mshatty]

Originally Posted by Icarus

But there is no loan and all fees are current, and they can be rented out to cover future MFs, or deeded over to another family member after the bankruptcy closes if that's what they want to do and if they can't find a buyer for them.

I'm sure you know more about this than I do, but under the circumstances listed by the OP in both posts, is there anything to worry about as long as all the assets and liabilities are properly listed in the proceedings?

I didn't know that the lender could discharge the loan and somehow keep an interest on the title.

-David

David,

As long as the assets and liablities are listed correctly, the person filing the bankruptcy will be discharged from pre-bankruptcy debts. The discharge would not affect post bankruptcy MF for example.

It's somewhat complex. Until a trustee sells the TS or abandons the TS, the debtor has no control or say so. The debtor cannot use the TS because it belongs to the bankruptcy estate. The debtor cannot rent it out as long as the trustee has control. So the worse case scenario would be the trustee holding onto the TS for a couple of years, closing the case and the TS is abandoned back to the debtor with 2 years of MF that accrued post bankruptcy.

As for the lender with a lien. The lender doesn't discharge the loan; the bankruptcy court issues a discharge order that relieves the debtor from paying his/her debts. However, there are exceptions to some debts being discharged.

On a non-exempt asset, a valid properly perfected lien on any collateral does not get discharged. The personal obligation to pay the debt does get discharged.

There's a whole other layer of issues on how the asset can be treated depending on whether the asset is an exempt asset or non-exempt.

What the OP should advise his friend is to ask his lawyer what happens if the trustee abandons the TS back to him and what he can or cannot do with the TS.

[Icarus]

Mike,

Thanks for the explanation.

-David

[e.bram]

What would hapen if the TSes were put into a LLC or corp and then let that entity go belly up?

[voyager1]

Thank you all for your helpful answers. Mike, your explanation was very thorough and helped my friend understand some of the things his attorney told him.

As usual, if you ask a question on TUG there will be some expert replies.

[Mel]

So the best way to make sure the week is used would be for him to contact the resort management and make sure they know of the situation, and the interest of the other family member to use the unit.

One of two things will happen -

1) The Bankruptcy trustee know the maintenance fees are due on the timeshare, and pays them from the trust. This keep the timeshare out of default. He would then have control over what happens to the week (though he might have to fight the resort management over it).

2) what I suspect is more likely - the Trustee does not pay the maintenance fee. The resort should have a mechanism to deal with this - often they will restrict access, and rent the week. This might be facilitated if they know for certain the fees are not going to be paid. When they rent the week, after they take a cut for rental fees, they might apply the remainder toward the fees owed.

I'm sure the resort management would appreciate being kept in the loop.

[mshatty]

Originally Posted by Mel

So the best way to make sure the week is used would be for him to contact the resort management and make sure they know of the situation, and the interest of the other family member to use the unit.

One of two things will happen -

1) The Bankruptcy trustee know the maintenance fees are due on the timeshare, and pays them from the trust. This keep the timeshare out of default. He would then have control over what happens to the week (though he might have to fight the resort management over it).

2) what I suspect is more likely - the Trustee does not pay the maintenance fee. The resort should have a mechanism to deal with this - often they will restrict access, and rent the week. This might be facilitated if they know for certain the fees are not going to be paid. When they rent the week, after they take a cut for rental fees, they might apply the remainder toward the fees owed.

I'm sure the resort management would appreciate being kept in the loop.

Mel,

The bankruptcy trustee could "rent" the TS. The resort/management company cannot rent the TS if it still belongs to the bankruptcy estate. Only the trustee may use/sell/rent it. While part of the bankruptcy estate, the management company cannot foreclose its liens without bankruptcy court permission.

You are corrent in advising that a person filing bankruptcy should definitely list the resort management as a creditor so that it gets notice of the case being filed.