Owning a home is a cornerstone of the American dream, and protecting that investment becomes especially important during tough financial times. If you’re considering filing for Chapter 7 or Chapter 13 bankruptcy, it’s crucial to understand how tenancy by the entirety can provide valuable protection for your home.
It’s important to note that “home” is broadly defined in this context. It can include a cooperative, condominium, or property held in a land trust, as long as the property is used or intended to be used as a homestead by a married couple during their marriage. This form of ownership can be established through various means, including purchase, inheritance, conveyance, assignment, or other forms of transfer.
What is Tenancy by the Entirety?
Tenancy by the entirety is a special legal ownership for married couples in Illinois. It offers significant protections against creditor lawsuits and foreclosures compared to other ownership forms like joint tenancy. Basically, it makes the home jointly owned in a way that’s inseparable, providing an extra layer of security for both spouses, but only for individual debts, not joint debts owed by both spouses.
Applicable Bankruptcy Exemptions
Illinois has formally rejected the federal bankruptcy exemptions and is officially an “opt-out” state regarding bankruptcy exemptions. 735 ILCS 5/12-1201 Consequently, the exemptions available to debtors are determined exclusively by Illinois statutes. Regarding tenancy by the entirety, the relevant Illinois statute states:
“Any real property, or any beneficial interest in a land trust, held in tenancy by the entirety shall not be liable to be sold upon a judgment entered on or after October 1, 1990, against only one of the tenants…” 735 ILCS 5/12-112
How Does Tenancy by the Entirety Protect Your Home in Bankruptcy?
The magic lies in the specific wording on your property deed. Look for the phrase “to [Spouse 1] and [Spouse 2], his/her wife/husband, not as tenants in common, nor as joint tenants with the right of survivorship, but as TENANTS BY THE ENTIRETY.” This exact language activates the tenancy by the entirety protection.
With this protection in place, creditors can only attach a lien to the home and potentially foreclose if their debts are joint debts guaranteed by both spouses. In my opinion, this language can be the difference between saving your home and losing it to creditors in certain cases.
Recording a Judgment Against Tenancy by the Entirety Property
Creditors can record a memorandum of judgment against only one spouse’s interest in a home held in tenancy by the entirety. According to Illinois law, 735 ILCS 5/12-101 states:
“This provision, containing no exception for entireties property, mandates, first, that a judgment, once recorded, is a lien on the real estate of the person against whom it is entered.”
However, this lien is unenforceable as long as the tenancy by the entirety remains intact. The lien attaches only to the judgment debtor’s contingent future interest, namely the right of survivorship. This means it does not impact the couple’s current use or ownership of the property and cannot be foreclosed upon as long as the tenancy remains in place.
The protection provided by tenancy by the entirety ends if the tenancy is dissolved—for example, through divorce, death, or transferring the property out of the tenancy. Creditors are allowed to “wait it out” until one of these events occurs.
While I haven’t encountered it personally, it is entirely plausible that a creditor could assert a claim against a probate estate, seeking repayment of a debt from the sale proceeds of a tenancy by the entirety property if the judgment debtor predeceases their spouse. Furthermore, the lien is not automatically released upon the debtor’s death; it is conceivable the debt would still need to be resolved through a payoff letter in any conventional sale of the property. An interesting variation of this occurred in Securities and Exchange Commission v. Roger Householder, where a court-ordered sale overrode the lien. (Case No. 02 C 4128, N.D. Ill. Feb. 2, 2005).
Attempting to quitclaim your share of the property before a judgment is recorded is also unlikely to succeed. Such a transfer may be deemed an illegal or fraudulent conveyance and can be voided by a creditor.
This situation can create prolonged uncertainty, as creditors may wait years to enforce the lien. Bankruptcy, by contrast, offers a much cleaner and more definitive solution to addressing such issues, potentially removing the lien and resolving the debt in a more efficient manner.
Asset Protection Tips:
- When taking title to your home, discuss tenancy by the entirety with your lawyer and how your specific debts are guaranteed by each spouse. This can significantly impact your bankruptcy options.
- Ensure that you are solvent and that all necessary criteria for fraudulent conveyance are satisfied.
- Avoid joint debts if possible, especially if you anticipate potential financial difficulties.
Transferring to Tenancy by the Entirety to Evade Creditors
While tenancy by the entirety offers significant protection for married couples’ homes, it’s not a loophole to avoid paying debts. The Illinois legislature anticipated potential abuses and amended the relevant statute (735 ILCS 5/12-112) in 1997 to prevent fraudulent transfers. The statute specifically denies protection to properties transferred into tenancy by the entirety if the purpose was solely to shield assets from debts that the transferor could not reasonably pay.
However, proving “sole intent” is challenging, and the creditor must show both:
- The debtor was unable to pay their debts as they became due.
- The transfer was made exclusively to avoid those debts.
This means that if a homeowner transfers their property into tenancy by the entirety while already drowning in debt, with no reasonable means of paying those debts, a court may rule that the transfer was fraudulent. As a result, the creditor could still force the sale of the property to satisfy the judgment.
Joint vs. Single Bankruptcy Filing:
- If both spouses file for bankruptcy, the entire home’s equity becomes part of the bankruptcy estate and could be sold by the Chapter 7 Trustee.
- Therefore, it’s generally advisable for only one spouse to file for bankruptcy while the other spouse’s tenancy by the entirety protection shields the home.
- Joint debt can pose challenges, even if only one spouse files for bankruptcy.
- To avoid complications, it’s generally better not to have any joint debt.
Key Takeaways:
- Taking legal title in this manner offers strong protection for married couples’ homes against creditor lawsuits and foreclosures.
- Specific deed language and avoiding joint debts are crucial for this protection to work.
- Consider a single bankruptcy filing with only one spouse if protecting the home is a priority.
- Seek professional legal advice for navigating the intricacies.
Remember:
Navigating bankruptcy laws and tenancy by the entirety can be complex. Consulting with an experienced bankruptcy attorney like myself is crucial for personalized guidance and maximizing your home’s protection during challenging times.
