Tenancy by the Entirety and Chapter 13 Bankruptcy
Recently, our clients, a married couple, presented me with a seemingly impossible task. The Clients were struggling under the weight of over $300,000 of credit card debt, yet, they also had over $160,000 in equity in a marital home. Due to their poor credit, the clients could not refinance or borrow against the home to “take out” the equity to pay their creditors. Nor did the clients want to consider selling the home, which would be the only other way to get cash to settle with their creditors. After all, this was the home that they saved for years to purchase. They loved the property.
Chapter 7 bankruptcy was not an option either, as in Chapter 7 the clients’ home would be jeopardized. It is possible to protect (exempt) some equity in Chapter 7, but only $15,000 for a single person, and $30,000 for a married couple. Because these clients had $160,000 in equity, in Chapter 7, the real estate could be sold by the bankruptcy trustee to pay the clients’ creditors.
The only remaining option to address this debt problem was a Chapter 13 bankruptcy. Chapter 13 is designed to allow people to consolidate and gradually repay debt without losing assets. There can be no forced liquidation in Chapter 13. So our clients’ house would be safe.
The problem with Chapter 13 for these particular clients is that a standard Chapter 13 Plan would be unaffordable. In Chapter 13, filers must generally pay to their creditors as much as the creditors would receive if their non exempt assets were sold. Because of the equity in their home, the clients would need to pay over $120,000 to their creditors over 5 years (after credit for a homestead exemption) in Chapter 13. The Chapter 13 payments were going to be over $2000 per month, which was simply not affordable for these clients, as only one is working. It would be a disservice to put these clients in bankruptcy if the Chapter 13 payment schedule wasn’t going to be feasible.
The situation seemed hopeless. These clients needed a creative solution, and after much deliberation, we were able to come up with one. The solution to the problem was Tenancy by the Entirety. Tenancy by the Entirety is a method of holding title to real estate for a married couple in which 100% of the home equity can be protected from the creditors of one spouse. Luckily, none of the clients’ creditors were joint, so we were set up perfectly for this solution.
But there was another wrinkle. The clients had not taken title to their property in tenancy by the entirety, a serious mistake by their previous real estate lawyer. So, we had to transfer the property from joint tenancy to tenancy by the entirety, via quitclaim, before filing the bankruptcy.
Changing the title to clients’ real estate right before filing a bankruptcy was risky. Courts do not favor this and it could have easily backfired. But, we did it anyway because this was our clients’ only shot to both save their home and get out of debt, and the clients understood the risk.
Ultimately, the risk paid off. No one objected to the transfer to tenancy by the entirety. The Plan was confirmed. Our clients get to keep their home and creditors will receive only a small % of what they are owed over 5 years. The Clients have an affordable Plan payment and they will be fully discharged of their debt if they complete their 60 months of Plan payments.
At our firm, we work tirelessly to find a solution to our clients’ problems, even when the task seems impossible. We became lawyers to solve difficult problems. If you have an issue that other attorneys told you could not be resolved, let us have a crack at it. Please do not hesitate to call us for a free consultation.