The life estate becomes part of the bankruptcy but it is normally difficult to find a buyer for theinterest. This is a case by case analysis and depends on many factors that a bankruptcy attorney in your local community must analyze.
People often ask if they can keep second homes, cars, boats, tax refunds, etc., when they are contemplating Bankruptcy. I always tell them they can keep what they want of they can pay for it, or if the equity or value is protected by an exemption in their State!
There are two types of Bankruptcy for most individuals. Chapter 7 (liquidation) and Chapter 13 (payments are made to a Chapter 13 Trustee to be distributed pursuant to a Plan you and your attorney draft). To determine of you get to keep the property you have to know two things…
1) What is the equity in the property? (I.e., what is it worth minus what you owe on it).
2) Will the exemption laws that are applied to the property protect the equity?
Bankruptcy is much more concerned with equity than it is with debt. If you have no equity in a rental home the Trustee in a 7 or 13 does not have an interest in the property and you may keep it.
If you owe more on the vacation home than it is worth you may be able to use Bankruptcy to reduce the amount of the debt, and again, keep it.
When you have equity in something that is not protected by an exemption then that is an issue that a lawyer must evaluate. See an attorney right away before you act.
Disclaimer: This answer does not constitute legal advice. I am admitted in the States of New York, New Jersey and Massachusetts only and make no attempt to opine on matters of law that are not relevant to those three States. This advice is based on general principles of law that may or may not relate to your specific situation. Facts and laws change and these possible changes will affect the advice provided here. Consult an attorney in your locale before you act on any of this advice. You should not rely on this advice alone and nothing in these communications creates an attorney client relationship. The opinions expressed herein are those of the author only and the fact that he has worked as an Assistant District Attorney; State Supreme Court Clerk; Special Assistant United States Attorney (Hawaii); Assistant Cornell University Counsel or Judge Advocate, United States Marine Corps should not be relied upon to assume that these statements reflect the policy of these organizations.
The posting above is generally correct, but did not answer your question of whether your Mother-in-law's house can be sold out from under her. The Answer is no. No one has the right to do anything with the property without her consent as long as she is alive and living there.
The Bankruptcy Trustee can sell your life-estate interest, that would mean someone else would have an interest in the home, and would become the owner of the home when your mother-in-law dies. I have heard the Trustees say at Continuing Legal Education classes that they have a rolodex of speculator/buyers who will purchase these types of remainder interests in property, and that the value is determined with reference to actuarial tables and the like, but I don't know how often they actually do take and sell life-estate interests. There is actually a formula for determining the value in the context of Medicaid liens.
You definitely need to talk to a lawyer about this issue.
Does your Mother-in-law have the life estate (i.e. the right to live on the property till death) or do you and your husband have the life estate? This makes a difference in the analysis of your situation.
If your Mother-in-law has the life estate and you and your husband have the remainder interest (i.e. the property goes to you and your husband when your Mother-in-law dies) then you would need to try to calculate what the value of that remainder interest is and then determine whether you will be able to exempt the equity you have in that interest.
If you and your husband have the life estate and somebody else has the remainder interest then you would need to try to calculate what the value of the life estate is and then determine whether you will be able to exempt the equity you have in that interest.
In addition to talking with a bankruptcy lawyer, it might be worth first talking with an estate planning lawyer to determine what the value of your interest in the property is.
Errin P. Stowell, Esq.
Stowell Law Firm, LLC
St. Paul, MN
"We are a debt relief agency. We help people file for relief under the federal Bankruptcy Code."