Tenants By Entireties Exemption May Be Lost Because Of Declining House Value And Second Mortgage

I received an email from a man who was considering Chapter 7 bankruptcy to discharge a substantial amount of credit card debt. The man was married. He and his wife owned joint bank accounts with significant balances. His wife had no credit card debt. The spouses were jointly liable on a first and second mortgages on their primary residence. The house was going into foreclosure. The house value may have declined to an amount which is lower than even the first mortgage balance. Question: can the wife file Chapter 7 bankruptcy and protect their joint bank accounts.

Joint bank accounts are presumed to owned tenants by entireties. All tenants by entireties property is exempt in Chapter 7 bankruptcy of one spouse if the debtor spouse and non-debtor spouse have no joint unsecured debt. Usually, the issue is whether the spouses have joint unsecured credit cards or tax liability. In this case, the non-debtor spouse has no unsecured debt either individually or jointly with the debtor. But, there is a problem.

The couple borrowed two separate mortgage loans. Mortgages are secured debts. When they made the mortgage loans the couple had two joint secured debts. The joint secured debts do not jeopardize their entireties bank accounts. The decline in their home value has caused the second mortgage to be unsecured by the house. The legal question is whether the second mortgage is a joint secured debt because it was secured when created, or whether it is now a joint unsecured debt because its security in the house has been destroyed by the declining market.

I think the second mortgage is a joint unsecured debt. The debts should be evaluated at the time the bankruptcy is filed. The second mortgage debt may cause the joint bank account to lose its entireties exemption. As a practical matter, it the debtors have evidence that the house value is even a little bit greater than the first mortgage balance they may be able to protect their joint accounts if the husband files bankruptcy because a partially secured mortgage should be classified as a joint secured debt rather than a joint unsecured debt.