The Interplay Between Bankruptcy and Divorce Law in Virginia

July 17, 2010

Can an individual Chapter 13 bankruptcy debtor strip off a second mortgage on nonresidential property owned by the debtor and his wife as tenants by the entireties?

Filed under: — James H. Wilson, Jr. @ 11:35 am

Can an individual Chapter 13 bankruptcy debtor strip off a second mortgage on nonresidential property owned by the debtor and his wife as tenants by the entireties?

Not in the case of In re Hunter, 284 B.R. 806 Bkrtcy.E.D.Va.,2002 http://scholar.google.com/scholar_case?case=6366726274960998195&q=284+B.R.+806&hl=en&as_sdt=80000000000002 where the United States Bankruptcy Court for the Eastern District of Virginia ruled that Chapter 13 debtor could not strip off a wholly unsecured, second-priority mortgage lien on non-residential real property owned by debtor and his nondebtor wife as tenants by the entireties.

In Hunter, the debtor filed an individual Chapter 13 petition in bankruptcy court and his wife did not join in the petition or file her own. Prior to confirmation of the plan, the debtor filed an adversary proceeding against creditor, seeking to avoid the second priority mortgage lien under 11 U.S.C. § 506(d), http://www.law.cornell.edu/uscode/uscode11/usc_sec_11_00000506—-000-.html The U.S, on real property in Pennsylvania that was not the marital residence.  The bankruptcy court judge addressed whether an individual debtor may avoid a lien, whether partially or wholly unsecured, on tenants by the entireties property, without his or her spouse. The court found no Fourth Circuit Court of Appeals precedent relating to either stripping off wholly unsecured mortgage liens in Chapter 13 or stripping off or stripping down undersecured mortgage liens on a debtor’s real property that is not the debtor’s primary residence.  The bankruptcy judge reviewed Pennsylvania’s law, where the subject real property was located, on tenancies by the entirety and found no basis for such relief.  Under Pennsylvania law, just as in Virginia, property held as tenants by the entireties is owned per tout et non per my, that is, each holds an undivided and indivisible interest in the entire property; neither spouse may unilaterally sever an estate held in the entireties.  A tenancy by the entireties is based on the legal fiction that a husband and wife are a single legal person.  As discussed in answer to the question, “Is my Virginia real estate vulnerable to creditors when I divorce?”,  http://bankruptcydivorceblawg.com/?page_id=43 , a tenancy by the entireties has a number of advantages over a tenancy in common for a married couple, including the right of survivorship, protection from creditors of one spouse alone, and the inability of either spouse to convey his or her interest without joinder of the other spouse.

In Hunter, the Bankruptcy Code provisions did not expressly support the debtor husband’s position, as noted by the Court:
The only provision permitting the severance of an entireties estate or a unilateral action by one co-tenant is § 363(h). This provision expressly provides that the “trustee may sell both the estate’s interest” and the co-owner’s interest. There is no authority for the debtor to sell the property under § 363(h). http://www.law.cornell.edu/uscode/html/uscode11/usc_sec_11_00000363—-000-.html See, Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A, 530 U.S. 1, 7, 120 S.Ct. 1942, 1947, 147 L.Ed.2d 1 (2000) http://www.law.cornell.edu/supct/html/99-409.ZS.html Such a unilateral action is contrary to the essence of the tenants by the entireties estate and should not be permitted absent clear legislative authority.

The court noted that the debtor sought to provide his spouse with the benefit of having filed bankruptcy without her having borne the burden of a bankruptcy filing.  The Debtor husband sought severance of a portion of the entireties estate when his wife’s interest was in the whole of the property, per tout et non per my, and Pennsylvania law envisioned neither such a division of a tenancy by the entireties estate nor the unilateral severance of any portion of the entireties estate.

You should consult with a Virginia bankruptcy attorney regarding how your interest in tenants by the entirety property will be treated in bankruptcy.

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