A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA
BANKRUPTCY – TENANCY BY THE ENTIRETY AND CLAIMING §522 EXEMPTIONS
1. Overview and summary
We will refer to husband and wife as H and W. If H and W own land as tenants by the entirety, they may exempt the land pursuant to old 11 U.S.C §522(b)(2)(B), or new 11 U.S.C. §522(b)(3)(B). This can be done if there are no joint debts of H and W. For example, if there are only debts of H and only debts of W the exemption will stand. If there are joint debts of H and W, the exemption will not be available. The cases discussed below illustrate these principles. The cases note that when H and W have encumbered the land with a deed of trust, it is the equity they seek to exempt under the bankruptcy statute.
2. The cases
In re Bunker, 312 F. 3d 145 (4th Cir. 2002). This case dealt with two couples’ bankruptcy problems.
In the Bunker case, the facts were:
Title to the home was vested in H and W as tenants by the entirety. The value was $215,300. There was a mortgage for $134,212. H and W filed a joint voluntary Chapter 7 bankruptcy petition. A debtor’s interest in a tenancy by the entirety becomes part of the bankruptcy estate under 11 U.S.C §541(a). Unsecured creditors’ claims totaled $48,896. Each claim was against H or W but not against both. Only H claimed the home as exempt at roughly the equity in the amount of $75,000. The exemption was pursuant to 11 U.S.C. §522(b)(2)(B). (After the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, this section will become 11 U.S.C. §522(b)(3)(B). See the other article below.) §522(b)(2)(B) says a debtor may exempt any interest in property in which the debtor had , immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant “to the extent that such interest……. is exempt from process under applicable non bankruptcy law.”
In the Thomas case the facts were:
H and W owned the home, worth $227,000, as tenants by the entirety, subject to a mortgage of $7,600. H and W filed a joint Chapter 7 petition listing unsecured creditors with claims totaling $80,296. Each creditor was of H or W. There were no joint creditors. H and W claimed the home exempt under §522(b)(2)(B).
At 261 B.R. 848 (Bankr. E.D. Va. 2001), the court ruled on the Bunker and Thomas cases, holding that while §522(b)(2)(B) shields a tenancy by the entirety from a creditor of one spouse when only H or W files bankruptcy, §522 (b)(2)(B) is not available when H and W file jointly. At 271 B.R. 450, the District Court reversed.
At the Circuit Court level, the court noted that when H and W file a joint petition, separate bankruptcy estates are created. Under joint administration, the estate of each debtor remains separate. Under Virginia law, as under North Carolina law, a tenancy by the entirety is subject only to claims of a creditor having a joint judgment against H and W.
The trustee’s principal argument was that when both H and W are before the court in a joint case, neither is allowed to take the entireties exemption under §522(b)(2)(B). While the trustee based his argument on §541(a) and §363(b)(1), he overlooked §522(b) which allows the exemption and which applies “notwithstanding §541.” The court also cited §522(c). Consolidation of H’s case and W’s case does not alter §522(b)(2)(B)’s reference to exemption from process under non bankruptcy law. 312 F. 2d at 154.
In Sumy v. Scholossbery, 777 F. 2d 921 (4th Cir. 1985), the facts were:
H and W owned a $73,500 home in Maryland as tenants by the entirety, with $20,000 in equity. H filed a Chapter 7 bankruptcy petition. H’s schedule of debts listed $19,570.50 in unsecured claims including $1,474.78 in debts incurred jointly with his non-filing W. H claimed the $20,000 equity as exempt under the entireties exemption under §522(b)(2)(B).
In Sumy, even though only H filed bankruptcy, 11 U.S.C. §541 provides that the entirety property becomes part of the bankruptcy estate, subject to the applicability, if any, of §522(b) exemptions. For property that becomes part of the estate under §541 but that is not exempt under §522(b), the trustee has the general power, after “notice and a hearing,” to use, sell, or lease, other than in the ordinary course of business, property of the estate. §363(b)(1). §363(f) allows a sale free and clear of liens. Here, the trustee objected to H’s exemption and wanted to administer the property under §363(h) for the benefit of joint creditors of H and W. The court held that if bankruptcy filing H and non filing W have joint debts, their entirety property cannot be exempted under §522(b)(2)(B) and the trustee can administer the property for the benefit of joint creditors under §363(h).
The court included an interesting discussion of the interplay between §522(b)(2)(B)’s exemption for entirety property and §522(f)(1)’s rule that a debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent such lien “impairs an exemption” to which the debtor would have been entitled under §522(b), if such lien is a judicial lien. At 777 F. 2d at 931, 24, the court cited In re Trickett, 14 B.R. 85 (Bankr. W.D. Mich. 1981), which said, as to joint claimants, the property is not eligible for the §522(b)(2)(B) exemption and so, there can be no impairment of a tenancy by the entirety exemption by a judicial lien docketed against H and W. See Bankruptcy-Lien Avoidance under 11U.S.C. §522(f) at www.oldrepublictitle.com/nc
In In re Cordova, 73 F. 3d 38 (1996), it was held that where H and W owned the home as tenants by the entirety and W filed a Chapter 7 petition and W claimed her §522(b)(2)(B) exemption and within 180 days of filing the petition, W got a divorce which converted the interest to a tenancy in common, W lost her §522(b)(2)(B) exemption. See §541(a)(5)(B). §541(a)(5)(B) applies to an interest acquired by the debtor within the 180 day period. The same thing would have occurred if H died within the 180 day period.
In re Williams, 104 F. 3d 688 (1997), should be noted. W filed a Chapter 7 proceeding and listed a tenancy by the entirety H and W owned as exempt under §522(b)(2)(B). There were six unsecured creditors holding joint claims against H and W for $14,445.29 and creditors with claims against W for $19,443.52. The trustee failed to object within 30 days of the claim under §522(l) and F.R.B.P. 4003(b). This means that the trustee forfeits his right to object. Taylor v. Freeland and Kronz, 503 U.S. 638, 643-44, 112 S. Ct. 1644, 1648 (1992). W argued that the trustee lost his right to administer the tenancy by the entirety for both joint and non-joint creditors. The court held that since W made her claim under §522(b)(2)(B), the trustee’s failure did not preclude his ability to administer the property for joint creditors of H and W since those claims are not protected by §522(b)(2)(B). W never claimed the real estate was exempt from the claims of joint creditors.
The case of In re Payne and Payne (no. 04-5212 4C-7W, U.S. Bankr., M.D.N.C.) construes 11 U.S.C. §522.
On 7-22-04, H and W filed a Chapter 7 petition. They owned their residence as tenants by the entirety. When spouses file a joint Chapter 7 petition, separate bankruptcy estates are created. In the case, each of the debtors exempted their residence pursuant to 11 U.S.C. §522(b)(2)(B) and the laws of North Carolina pertaining to entirety property.
Bankruptcy Rule 4003, entitled “EXEMPTIONS,” requires the debtor to list all property claimed exempt under 11 U.S.C. §522 on the schedule of assets filed pursuant to Bankruptcy Rule 1007. See Bankruptcy Rule 4003 (a). Pursuant to Bankruptcy Rule 4003(b), a party in interest may file an objection within 30 days after conclusion of the meeting of creditors or within 30 days after any amendment to the list or supplemental schedule is filed, whichever is later. Before such expiration, a party of interest may file a request for an extension.
Bankruptcy Rule 4003(d) states that a proceeding by the debtor to avoid a lien or other transfer of property exempt under §522(f) of the Code shall be by motion in accordance with Rule 9014.
Bankruptcy Rule 5003(a) provides that the clerk shall keep a docket and enter thereon each judgment, order or activity.
And Bankruptcy Rule 5003(c) requires the clerk to keep a correct copy of every judgment or order affecting title to real property or a lien on real property.
The debtors listed the value of the home at $120,000 and listed a mortgage lien against it for $83,178. The debtors did not claim the residential exemption under G.S.1C-1601(a)(1). There were no other joint creditors. In North Carolina, entirety property is not subject to a claim by a creditor against only one spouse. The court held that both debtors may exempt their entirety property under 11 U.S.C. §522 (b)(2)(B) to the extent of their equity.
BANKRUPTCY-BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005
In our last newsletter, we referred to the above captioned act which was awaiting President Bush’s signature. He signed the bill on April 20, 2005. The law becomes effective 180 days after that date.
MECHANICS’ LIEN LAW REVISION
Senate Bill 887 made “the crossover.” We have helped revise proposed G.S. 44A-13(a) to make sure that , while filing a proof of claim in bankruptcy within the 180 day lien enforcement period constitutes commencement of a lien enforcement action, that type of commencement will be subject to G.S. 44A-13(c)’s lis pendens requirements ---- unlike as set forth in the original bill. We are also working to make sure that the G.S. 44A-13(b) revision does not include interest on top of the lien’s principal amount as against a purchaser or lender who is not an obligor of the lien claimant.
ESTATES - PERSONAL REPRESENTATIVE’S POWER TO SELL
Unfortunately, SB 917, worked on so hard by the NCBA sections, did not make “crossover.”
FAIR AND ACCURATE CREDIT TRANSACTIONS (FACT) COMPLIANCE
You might want to remember the above captioned act and it requirements to shred any document that has personal information on it prior to discarding it. Old Republic Title has advised us as follows.
Personal information could be a telephone number, address, Social Security number, etc. The requirement comes from the federal Fair and Accurate Credit Transactions (FACT) Act, which was passed in December 2003. According to USA Today, “The law requires the destruction — ‘shredding or burning’ or ‘smashing or wiping’ — of all paper or computer disks containing personal information that is ‘derived from a consumer report’ before it is discarded.” This law applies to all employers with one or more employees.
The aim is to protect the public from identity theft, one of the fastest-growing crimes in the United States. Many times personal information is stolen from an employer. The information comes from the employer’s paperwork as well as computer database systems. Employers have a duty to restrict access to this data as well as properly dispose of the information.
Failure to comply with the new regulations could result in several different types of penalties:
Civil liability. Employers could be made to pay up to $1,000 per employee in statutory damages. Employees could receive actual damages if their identities are stolen as a result of the company’s failure to protect the information.
Class-action lawsuit. Employers could face a class-action lawsuit if many employees are affected.
Federal and state fines. Fines up to $2,500 can be assessed by the federal government, and the state could assess fines up to $1,000 per violation.
We are advised that the act also applies to customers and that the act becomes effective June 1, 2005.