Can Illinois Debtor Protect Florida Entireties Property?

A debtor domiciled in Illinois filed bankruptcy in Illinois. The debtor’s wife did not file bankruptcy. The debtor and his wife owned a vacation home in Florida. Florida common law exempts tenancy by entireties property; Illinois law does not exempt tenancy by entireties property. The bankruptcy trustee the debtor’s claimed exemption of his Florida property because the Trustee believed the law of Illinois applied to defining what is included in the debtor’s bankruptcy estate. The Trustee argued that the debtor could not exempt Florida property because the debtor does not reside on the property or anywhere else in Florida. The appeals court said Florida law applied and that the vacation home was exempt.

The appeals court used several lines of reasoning to reach the same conclusion. Bankruptcy law exempts assets which are otherwise exempt under applicable non-bankruptcy law, that is, exempt under state law. The court pointed out that the Bankruptcy Code does not require that state law always be the law of the state where the debtor is domiciled. Federal conflicts of law principles state generally that the laws applicable to real property are the laws of the state where the property is located, in this case, Florida. Therefore, the court applied Florida’s common law exempting tenants by entireties property to protect the vacation home. Application of bankruptcy exemptions is, as in this case, often determined by complex legal principles involving conflicts of laws in different jurisdiction. The case is In re Holland, decided March 30, 2007, N.D. Illinois.

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