Tenancy by the Entireties May Protect Property in Bankruptcy if there is no Joint Debt

12 Oct Tenancy by the Entireties May Protect Property in Bankruptcy if there is no Joint Debt

Tenancy by the entireties, in many states, is one of the most valuable ways for debtors to retain, or exempt, property in bankruptcy. Because entireties property can only be alienated (a fancy word for transferred or sold) by both spouses acting together, only joint creditors of both spouses can attach it to satisfy their debts, and as a result, a bankruptcy trustee can only sell it to satisfy joint debts, not debts of just one spouse. So if there are no joint unsecured debts, the entireties property is exempt: protected from the trustee.

Some states allow only real property to be held by the entireties; others (including Virginia, Maryland, Delaware, Pennsylvania, and the District of Columbia) allow personal property to be held in that manner as well. But not all states allow it at all. And some states (such as New Jersey and Massachussets) allow it in name, but do not accord entireties property the protection that it receives in other states. While it is not available if federal exemptions are selected in bankruptcy, the availability of the entireties exemption depends on the location of the property, not (as with other exemptions) on the state of residence two years prior to filing as designated under the bankruptcy code.

Property can only be held by the entireties by married couples, but this has been extended to registered domestic partners in some states, including Washington DC. To be held by the entireties, the parties must have been married (or, as applicable, registered domestic partners) at the time the property was deeded to them, together in a single deed, and must have remained married since that time, and, depending on the state, there may need to be “magic words” in the deed such as “as tenants by the entireties with common law rights of survivorship” (the survivorship language being critical in Virginia).

If there is no joint debt when a bankruptcy case is filed, entireties property (in states that fully recognize it) cannot be sold by the trustee, but it can if there is joint debt. But it may be OK to pay off joint debt before you file because that payment will not be avoidable or recoverable as a preference because the creditor would have been paid in full anyway from the proceeds of the entireties property. But the best protection is to avoid incurring any debt jointly with your spouse.

Tenancy by the entireties is a complex doctrine, and it does vary dramatically from state to state, so it is important that an experienced bankruptcy lawyer fully examine the facts and the applicable law before filing the case. It can sometimes be tricky to determine if debt is joint, so credit reports and other documents may be necessary. And it is critical to review the deed or other documents of title to make sure that the property is titled properly. But while it is complex, it is in many cases the most powerful exemption available.

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Daniel M. Press is a bankruptcy lawyer with the law firm of Chung & Press, P.C., in McLean Virginia. He practices in the Bankruptcy and Federal District Courts in the District of Columbia (Washington, DC), and the Eastern District (Alexandria and Richmond) and Western District (Harrisonburg and Charlottesville) of Virginia, and in Maryland, as well as other U.S. Appellate, District and Bankruptcy Courts around the country. He is the District of Columbia State Chair for the National Association of Consumer Bankruptcy Attorneys (NACBA), a member of the Section Council of the Consumer Bankruptcy Section of the Maryland State Bar Association and is the Treasurer of the McLean Bar Association. He has spoken on bankruptcy and related topics at Continuing Legal Education seminars and programs locally and nationwide sponsored by groups such as NACBA, the Virginia Bar Association, Virginia CLE, the Maryland State Bar Association, and the Bankruptcy Bar Association for the District of Maryland. A 1988 magna cum laude graduate of Georgetown University Law Center, he was an editor of the Georgetown Law Journal. He received his B.A. from The Johns Hopkins University. After graduating from law school, Mr. Press served as a judicial law clerk for Judge Jaime Pieras Jr. in the U.S. District Court for the District of Puerto Rico.
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