Tenants By Entireties Protection in Bankruptcy Proceedings

The protection afforded tenants by entireties property in bankruptcy court is different than in state court. All TE property is protected in state court from the debts of either spouse. In Chapter 7 bankruptcy, the debtor’s TE property is unprotected and is part of the bankruptcy estate available to creditors to the extent the debtor and his non-filing spouse have any joint debt. I represented a debtor who claimed TE exemptions and had no joint credit cards. I thought the TE exemption would protect jointly held property. However, upon examination by the trustee the debtor stated that he and his spouse owed IRS taxes for the previous year. The debtor had not disclosed the tax liability on schedules because they were aware that the IRS debt was non dischargeable.

The trustee cleverly asserted that the joint IRS debt exposed the debtor’s TE property to the extent of the tax obligation. The case illustrates that tenants by entireties protection is relatively unreliable in bankruptcy proceedings. I believe it is an exemption of last resort. Debtors often forget to list joint unsecured debts which they are not interested in discharging in bankruptcy. Joint unsecured debts do not affect TE protection outside of bankruptcy in state court collection proceedings.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida