Timeshares and Bankruptcy

When timeshares aren't worth much, people are happy to get rid of them in bankruptcy. Some timeshares are valuable, however, and as a result, more filers want to keep them after bankruptcy. Your ability to keep your timeshare will depend on the bankruptcy chapter that you file, the amount of equity in your timeshare, and the laws of your state.

By contrast, if you want out of the monthly payments, you can surrender your timeshare and let it go back to the lender, but you'll likely remain responsible for maintenance fees until the bank forecloses and transfers title out of your name. In this article, you'll learn more about what happens to timeshares in bankruptcy and how to spot common problems so that you can avoid them before you file.

What Will Happen to a Timeshare in Bankruptcy?

When you purchase a timeshare, you share ownership of a piece of property with several other people. Most people pay a timeshare mortgage and monthly or annual maintenance fees to cover the costs of keeping up the property (similar to HOA dues). (Learn more about how timeshares work.)

Bankruptcy law considers a timeshare real estate and treats it in much the same way as your house. Here's how you'll list it when you fill out your bankruptcy forms:

If you still own the timeshare. If you are still in possession of the timeshare when you file for bankruptcy, you'll list it with your other property on official bankruptcy form Schedule A/B: Property. Because the lender can foreclose on the timeshare if you default on the loan, the timeshare secures the timeshare mortgage, and you'll list the debt on Schedule D: Creditors Who Hold Claims Secured By Property. You'll also indicate whether you intend to keep it or surrender it back to the bank.

If the lender foreclosed on the timeshare. In this situation, you won't list it on Schedule A/B (because you no longer possess it) and any remaining timeshare-related debt will be listed on official form Schedule E/F: Creditors Who Have Unsecured Claims.

Filing for Bankruptcy After Foreclosure

If the bank forecloses on your timeshare before you file for bankruptcy, you can discharge (get rid of) all of the remaining timeshare-related debt in either a Chapter 7 or Chapter 13 bankruptcy. The debt you can discharge includes a deficiency balance (the difference between the foreclosure proceeds and the amount you owe) and unpaid maintenance fees.

Filing for Bankruptcy When You Still Own the Timeshare

Filing for bankruptcy before the lender forecloses can be more complicated than if the foreclosure has already taken place, but you'll have more options. Your choices will depend on whether you want to keep or surrender the timeshare, the type of bankruptcy you file, the amount of equity in the timeshare, and the exemption laws of your state (the laws that tell you what property you can keep in bankruptcy).

Keeping the Timeshare in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, if the value of the timeshare is equal to or less than the amount that you owe (there is no equity), selling it won't financially benefit your creditors. You can keep it as long as you can continue making the payments.

If there is equity, however, the bankruptcy trustee—the person responsible for overseeing your case—will want to sell it for the benefit of your creditors. You'll be able to keep it only if one of the following applies:

Your state's exemption law (the law that lists the property you can keep) allows you to protect your timeshare equity. Because a timeshare is a luxury, it's unlikely that your state will have a specific exemption that covers a timeshare. Instead, you'll likely need to live in a state with a "wildcard exemption" that allows you to exempt a certain amount of property of your choosing.

You borrow money to purchase the equity from the trustee. The trustee will often let you buy the property at a discount as long as you prove that you borrowed the funds from a friend or relative.

The trustee can't sell the timeshare and abandons it.

If you can't protect the timeshare in one of these ways, the trustee will sell it and distribute the proceeds to your creditors.

Keeping the Timeshare in Chapter 13 Bankruptcy

One of the benefits of Chapter 13 bankruptcy is that you're allowed to keep all of your property. The trick, however, is demonstrating that you have enough income to pay the monthly mortgage payment and maintenance fees in addition to your required monthly repayment plan payment. If you can't cover everything, you'll need to surrender the timeshare or let something else go. (Learn about how Chapter 13 repayment plans work.)

Surrendering the Timeshare in Chapter 7 and Chapter 13 Bankruptcy

You can surrender the timeshare in both Chapter 7 and Chapter 13 bankruptcy. If you do so, your bankruptcy discharge will eliminate your liability for:

the remaining timeshare mortgage balance, and

any unpaid maintenance fees assessed before your filing date.

In most states, you'll continue to be responsible for the maintenance fees that accrue after you file bankruptcy and until the foreclosure takes place. Bankruptcy wipes out only the bills you incur before your bankruptcy filing date, not afterward. As well, you'll remain the legal owner of the timeshare until the lender forecloses on the property and transfers the title out of your name.

To avoid paying for ongoing maintenance fees, it might be a good idea to file for bankruptcy after the foreclosure. However, you'll want to talk with an accountant before you use this strategy to ensure that you won't incur a tax liability. (Learn about the consequences of a timeshare foreclosure.)

It's important to note that any remaining balance won't be wiped out in a Chapter 13 discharge until after you complete your three- to five-year repayment plan.

Surrendering a Timeshare With Equity

If you surrender a timeshare with equity, the Chapter 7 trustee will sell it and distribute the funds to your creditors. If you have "priority" debts that you'll still have to pay after bankruptcy, such as child support or spousal support debt and unpaid income taxes, this can be a great thing because the trustee must pay your priority debts before nonpriority debts, such as credit card balances and medical bills. Therefore, if you have a priority debt, giving up the equity in your timeshare might not sting as much.

If you file for Chapter 13 bankruptcy, however, the trustee will not sell the property for you. So if you have equity in the timeshare, you'll want to make arrangements to sell it yourself and use the funds in your repayment plan.

Consulting With a Bankruptcy Lawyer

For help determining how to handle a timeshare when filing for bankruptcy, consider meeting with a knowledgeable bankruptcy attorney.