What happens to property held as tenancy by the entirety in bankruptcy?
When you file bankruptcy, property held as a tenancy in the entirety remains exempt from creditor claims to the extent provided by state law.
When you file bankruptcy, any ownership interests that you have become property of the bankruptcy estate. Generally, your creditors, in order of priority, are entitled to payment from bankrutpcy estate assets. However, there are some exceptions to this; one exception is when couples own property as a tenancy by the entirey.
In many states, married couples can own property as a tenancy by the entirety. Property owned as a tenancy in the entirety is jointly owned by a married couple as a single marital entity, not as individuals. For the most part under state law, only joint creditors of a husband and wife can collect from property held as a tenancy in the entirety.
When you file bankruptcy, property held as a tenancy in the entirety remains exempt from creditor claims to the extent provided by state law. This means that ordinarily, if you file bankruptcy on your own and your spouse is not liable with you on any debts, property that you own through a tenancy in the entirety cannot be sold to pay your creditors.
Relatively few married debtors, however, have only individual debts. Most couples who have been married any length of time have joint creditors. Even if you file bankruptcy without your spouse, the trustee can sell property held through a tenancy in the entirety if there are joint creditors who would be entitled to collect from the asset under state law.
Keep in mind that a tenancy by the entirety is only one type of exemption recognized under bankruptcy law. You also may claim a homestead exemption if you and your spouse own your home as a tenancy in the entirety. To learn how homestead exemptions work and how much the homestead exemption is in your state, see our articles in the The Homestead Exemption in Bankruptcy area.