Protect Your Love Nest: Tenancy by the Entireties Exemption Explained

Are you worried about losing your family home or other joint property during bankruptcy? 

The tenancy by the entireties exemption is a popular tool for protecting assets owned by married couples. 

Sounds pretty straightforward, right?

The tricky part is figuring out what to do when the property is in another state.

Protecting Property in Bankruptcy

Bankruptcy exemptions are vital tools for individuals and couples dealing with financial difficulties. One of the most popular exemptions is the tenancy by the entireties exemption, which shields property jointly owned by spouses from being liquidated to pay off the debts of one spouse. Couples must be legally married and jointly own the property to claim this exemption. 

Here are a few more details about the tenancy by the entireties exemption:

• The exemption is recognized in most, but not all, states.
• It usually applies to real property (such as a house or land) and personal property (such as bank accounts or stocks).
• In some states, couples must file a declaration of tenancy by the entireties to claim the exemption.
• The exemption typically does not apply to debts owed jointly by the couple, such as joint credit card debt.

Now, let’s explore how this exemption works for real property outside the state where the owners reside.

Out-of-State Property Exemptions

Courts typically look to the law of the state where the property is located when determining whether this exemption applies to out-of-state property. That said, it’s not always a straightforward decision, as the courts may have a variety of factors to consider. 

For example, some states require specific documentation, such as filing a declaration of tenancy by the entireties, to claim the exemption. And if the law of the state where the property is located conflicts with the bankruptcy laws of the state where the debtor resides, applying for the exemption could create a conflict.

In other words, the exemption might not apply to out-of-state property in a state that does not recognize this type of tenancy, as courts have taken a nuanced approach to those types of cases.

Tenancy by the entireties versus joint tenancy

Joint tenancy is another form of property ownership in which each owner has an equal share in the property, and when one owner passes away, their share is automatically passed on to the other owner(s) without going through probate. 

In contrast, tenancy by the entireties is a form of joint ownership only available to married couples, offering additional protection against creditor claims. In tenancy by the entireties, both spouses have an undivided interest in the property, and creditors cannot go after the property to satisfy the debts of only one spouse. 

This protection applies to both in-state and out-of-state property, as long as the state where the property is located recognizes tenancy by the entireties.

Tips for Avoiding Issues

The tenancy by the entireties exemption can be a valuable tool for protecting joint property from creditor claims during bankruptcy. However, it’s important to avoid the typical roadblocks:

• Claim the exemption in good faith and avoid using it to defraud creditors.
• Understand the specific requirements and limitations of the exemption in your state, such as filing a declaration of tenancy by the entireties or specific restrictions on how the exemption can be used.
• Be aware of the differences between joint tenancy and tenancy by the entireties to avoid confusion that could lead to potential issues.

Exceptions to tenancy by the entireties exemption

There are, of course, some notable exceptions.

For example, say both spouses are jointly responsible for paying debts. They have joint credit cards and are equally responsible for repaying their respective cards. In cases like this, the tenancy by entireties exemption might not apply, as creditors could seize property to satisfy outstanding obligations.

And, of course, any evidence of fraudulent intent could void this exemption. For example, if a creditor can show that a debtor transferred a property into joint tenancy to avoid paying the debt, then courts may view the transfer as fraudulent and allow creditors to seize the property to satisfy the obligations.

Again, the burden of proof lies with creditors to demonstrate why an exemption should not apply in these situations.

Not sure if you’re a candidate for this exemption?

Thinking about applying for the tenancy by the entireties exemption but uncertain whether an exception might apply? Consult with an experienced bankruptcy lawyer. The Van Horn Law Group can guide you through this process while helping you avoid potential pitfalls along the way.