Can An Undersecured Mortgage Lender Attack Tenants By Entireties Assets In Chapter 7?

I often get legal questions I can’t answer with certainty. For instance, I recently consulted with a man who had guaranteed a large business debt. His wife did not sign the guarantee. The man and his wife had most of their assets in joint financial accounts. He and his wife were both liable to pay three mortgages. The third mortgage is effectively unsecured because of the declining value of their home in today’s real estate market. The couple has no joint debts other than the three mortgages on their home. The husband is considering Chapter 7 bankruptcy. The issue is whether his joint financial accounts are exempt as tenants by entireties property.

Outside of bankruptcy all T by E assets are exempt from the husband’s creditors. The same assets are exempt in bankruptcy unless the debtor and his wife have joint unsecured debts in which case the bankruptcy trustee could liquidate joint assets to the extent necessary to pay joint unsecured creditors. This couple has no joint credit cards. However, there may be an issue whether their third mortgage loan is a secured or unsecured joint debt.

In Chapter 13 bankruptcies a debtor can discharge a junior mortgage with other unsecured debts if the junior mortgage is wholly unsecured, i.e., there is no house value securing any part of the junior mortgage. In this situation the couple’s third mortgage holder could benefit by making the argument that its mortgage is wholly unsecured. If its unsecured and the husband files bankruptcy the lender could get paid from the couple’s joint assets. Although courts just recently have permitted Chapter 13 debtors to treat unsecured mortgages as part of unsecured debt in Chapter 13 plans it is unclear whether in Chapter 7 the mortgage lender could succeed by making the same argument to get at otherwise exempt entireties assets.

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