Tenancy by the Entirety Property: Joint Marital Debts or No Joint Debts? That Is The Question ...
What is Tenancy by the Entirety?
"Tenancy by the Entirety" is a type of property ownership that is available in Michigan to married co-owners. (Non-married co-owners are simply "joint tenants/owners".) Tenancy by the Entirety is a common-law concept rooted in the old idea that two married people are a "unified person" from a legal standpoint. The creation of a Tenancy by the Entirety requires a written instrument (deed, etc.) of conveyance that unifies the time, title, interest, possession, and person (marriage of the two spouses). (The usual conveying deed says something along the lines of "Joe Blow warrants and conveys title to this property to Johnny and Judy Ramone, husband and wife.") What's the difference? A joint tenant is free to sell off or transfer his or her interest in the jointly owned property at will, but a tenant by the entirety cannot do so without the willing participation of the other owner. This distinction makes for a crucial difference in Chapter 7 or Chapter 13 bankruptcy.
Real Estate in Bankruptcy
First, although it's been discussed in more and better detail in other posts on this blog, the question of how real estate is generally handled and, ideally, protected when one or more owners files a bankruptcy must be noted. An ownership interest in real estate is property that, upon the filing of a Chapter 7 or Chapter 13 bankruptcy petition, automatically enters the "bankruptcy estate" that is created by function of law with the petition's filing. In a Chapter 7, depending on the value of the property relative to the dollar-value of the "exemption" placed upon the property in the bankruptcy petition, the property may be seized and liquidated by the Chapter 7 Trustee assigned to liquidate (sell off) non-exempt property in order to repay some of the debt owed to the filing person's creditors. In a Chapter 13, no property is ever liquidated, but the value of the "non-exempt" portion of any property can constitute a minimum amount that the filing person's unsecured creditors must receive through the Chapter 13 payment plan. The "exemptions" are allowances provided for either at the Federal level in the US Bankruptcy Code or at the state level in Michigan statute that allow a person filing bankruptcy to remove certain dollar-value amounts of certain types of property (some types of property are easier to exempt than others) from the bankruptcy estate so that, in Chapter 7, the Trustee cannot seize and liquidate it or, in Chapter 13, require that a person's monthly Chapter 13 plan payment be increased because of it. In Michigan, a filing debtor can choose to use either the Federal exemptions or the Michigan State exemptions---but not both, or to pick and choose between individual exemptions. One set or the other is used, period. The question, when it comes to real estate owned as a Tenancy by the Entirety, how much is that exemption?
Exempting Tenancy by the Entirety Property in Michigan Bankruptcy
In Michigan, Tenancy by the Entirety property is fully exempt from seizure by creditors---regardless of the value of the real estate---under State law, and, therefore, from a Chapter 7 Trustee's liquidation power in bankruptcy (or the Chapter 13 effect described above). However, the Michigan exemptions only provide for this exemption and protection. The (Federal) Bankruptcy Code only notes that the bankruptcy estate does not contain entireties property to the extent provided for under "applicable non-bankruptcy law." That is, the law of the state where the bankruptcy case is filed. The use of the Michigan exemptions rather than the Federal exemptions generally comes at a cost as many of the exemptions available from the Bankruptcy Code (such as automobile, household good, and the generic, all-purpose "wildcard" exemption) are far more robust and protective than the analogues in the Michigan statute. However, one's home is often the most valuable property owned by a person filing bankruptcy, and a decision to protect the home rather than, say, a baseball card collection is a calculated decision to be made between the filer and their experienced Michigan bankruptcy attorney. Additionally, the Michigan statute stipulates that the entireties exemption "does not apply with regard to a claim based on a joint debt of the husband and wife." (Note that the statute's language is out-of-date with regard to changes in Federal law regarding the definition of marriage and that the entireties protection should apply to any married couple, regardless of gender under prevailing Supreme Court case-law.) But what this means is that, if the bankruptcy is filed jointly by the married spouses and those spouses share any joint debt, the exemption is not available at all.
Tenancy by the Entirety in Michigan Bankruptcy: The Bottom Line
It is rare that a married couple shares no joint debt. Therefore, those considering filing for bankruptcy in Michigan who may own Tenancy by the Entirety property should not presume that their property is safe. It is always best to consult an experienced Michigan bankruptcy lawyer before filing a bankruptcy to ensure that the roof over your head stays there. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
If you enjoyed reading "Is a Michigan Tenancy by the Entirety Property Protected in Bankruptcy?," please browse our other articles on our main Michigan Bankruptcy Blog.