When you declare bankruptcy, you must describe the property that you own, its location, and its value. There are many forms of ownership, including sole or individual ownership, joint ownership, joint tenancy with right of survivorship, community property, tenancy in common, title by contract, etc.

Some states recognize ownership by tenants by the entirety, a special kind of ownership for married couples and, in a few states, same-sex couples who have registered with the state.

Tenants by the entirety means that both tenants have the right to enjoy the entire property and neither one can unilaterally end the tenancy. A creditor of one tenant only, cannot force a sale of the tenants by the entirety property to collect on a debt.

Tenants by the entirety extends to property of the debtor in bankruptcy. If only one tenant files, creditors, including the bankruptcy trustee, can only attack the value of tenants by the entirety property to an amount equal to the tenants’ other joint unsecured debt.

To give a quick example, suppose married couple Mike and Carol Brady fall on hard times. Mike files Chapter 7 bankruptcy and discloses that he has a paid-for, custom made family home that is owned with Carol as tenants by the entirety. He and Carol have always kept their finances separate, and maintain separate credit cards and bank accounts. The home is the only asset they own jointly, and they have no joint unsecure debt. In a tenants by the entirety state, the home is entirely protected during Mike’s bankruptcy.

On the other hand, if Mike and Carol had joint unsecured debts, the creditors and trustee could take and sell the property and keep proceeds up to the amount of the joint unsecured debt.

  • Value of the Brady home: $100,000
  • Mike’s homestead exemption: $30,000
  • Mike and Carol’s unsecured debt: $50,000

In the above example, the bankruptcy trustee could sell the Brady house and keep up to $50,000 to distribute to Mike and Carol’s unsecured creditors. The rest of the proceeds from the sale of the home are protected as tenants by the entirety property and are paid to Mike and Carol. If the home sold for $70,000, then a different analysis is made. Mike would claim a $30,000 homestead exemption and creditors would only receive $40,000.

Which states allow property protection as tenants by the entirety?

Not all states allow their residents to protect property as tenants by the entirety. States that recognize tenants by the entirety ownership are:

  • Alaska
  • Arkansas
  • Delaware
  • District of Columbia
  • Florida
  • Hawaii
  • Maryland
  • Massachusetts
  • Mississippi
  • Missouri
  • New Jersey
  • Mississippi
  • Oklahoma
  • Pennsylvania
  • Rhode Island
  • Tennessee
  • Vermont
  • Virginia
  • Wyoming

States that allow tenancy by entirety for real estate only are:

  • Illinois
  • Indiana
  • Kentucky
  • Michigan
  • New York
  • North Carolina
  • Oregon

Recently the Eleventh Circuit Court of Appeals (covering southeastern states) ruled that tenants by the entirety ownership can be used to protect a joint tax refund.

In the case of In re Uttermohlen, the debtor filed an individual Chapter 7 bankruptcy and listed a joint 2010 Tax Refund in the amount of $10,688.

Mr. Uttermohlen claimed that the entire tax refund was exempt under 11 U.S.C. § 522(b)(3)(B), (https://www.law.cornell.edu/uscode/text/11/522) as well as Florida’s tenants by the entirety law. The Chapter 7 trustee objected.

During the appeal process the District Court examined the debtor’s exemption claim and found that the six characteristics (or unities) of tenants by the entirety property were present in the Uttermohlen’s tax refund, therefore the trustee’s objection to the debtor’s exemption claim was overruled.

The Eleventh Circuit agreed with the District Court analysis. The six characteristics of tenants by the entirety property are:

  • Unity of Possession – Joint ownership and control of the property.
  • Unity of Interest – The interests in the property must be identical.
  • Unity of Title – The interests must have originated in the same document.
  • Unity of Time – The interests must have been created simultaneously.
  • Right of Survivorship – When one spouse dies, the surviving spouse becomes the sole owner of the property.
  • Unity of Marriage – The parties must be married to one another at the time of creating the interests.

Protecting property during a bankruptcy case can become complex, especially when examining the interplay between federal and state law. In some cases state law exemptions such as tenants by the entirety can be applied to protect the property of a debtor who recently moves from another state.

For a debtor who has not been “continuously domiciled” in a state for 730 days (2 years) before filing bankruptcy, the debtor must use the exemptions of the state where he was domiciled for the greater portion of the 6 months prior to the two years preceding the bankruptcy.

To illustrate, say you were domiciled in Nevada from January 1, 2011 to January 1, 2013, and then moved to Missouri. On January 1, 2014, you file bankruptcy in Missouri. Even though you have lived in Missouri for twelve months, you must use the exemption laws of Nevada. Why? Because you have not been domiciled in Missouri for a full two years (the 730 Day Rule), and for the six months prior to the two years preceding the bankruptcy filing you were domiciled in Nevada (July 1, 2011 through December 31, 2011).

This means that you would not be able to take advantage of Missouri’s tenants by the entirety ownership protection and Nevada does not recognize tenants by the entirety ownership.