Tenancy by the Entirety - North Carolina's Super Exemption
In pre-bankruptcy planning, exemptions--certain statutory property allowances--are of significant consequence. A debtor whose property fits the exemptions well may be able to file chapter 7 without losing any property, while a debtor whose property doesn't fit the exemption pattern may have to turn over thousands of dollars worth of real or personal property. In the case of the North Carolina exemptions, the exemptions reflect a public policy choice by the General Assembly. In essence, the legislature has decided what a bare minimum amount of property each person should be able to have free of their creditors-at-large in order to maintain a basic lifestyle. For example, in most parts of North Carolina, it is difficult to hold a job without a car, and therefore an exemption exists for $3,500 value in an automobile.
North Carolina has a homestead exemption of $35,000, by which a debtor can protect their residence from creditors. While this has increased in recent years, North Carolina's traditional method of protecting a family residence can be much more generous. Tenancy by the entirety (or entireties) is not an exemption, but rather a method of ownership that fulfills the same role. Applicable only to real property in North Carolina, a tenancy by the entirety is created by deed of property to married co-owners. When property is owned in this fashion, neither spouse can unilaterally sell it, voluntarily or involuntarily, except by divorce. A creditor of one spouse is unable to force the sale of the entireties property to pay the debt. A tenancy by the entirety also has a survivorship function, in that if a spouse dies, the remaining co-owner spouse automatically takes over a complete interest in the property.
In bankruptcy, property held as tenants by the entireties remains protected from individual creditors. One of the foundational principles of bankruptcy is that creditors collectively have access to the same assets in bankruptcy as outside of bankruptcy. The benefit of using this in place of an exemption can be significant. If a couple owned a house worth $150,000 as tenants by the entireties, with no mortgage, they should be able to keep the house through bankruptcy. On the other hand, if they owned the same house as tenants in common (simple joint ownership), they could only exempt a total of $70,000 ($35,000 homestead exemption amount per person), meaning that the house would either need to sold for the benefit of creditors, or they would need to pay $80,000 into the estate to keep the property.
Whether tenancy by the entirety is effective as a super exemption depends on whether joint debts exist. If there are joint debts between the spouses, those creditors remain entitled to collect against the entireties property in bankruptcy. Some joint debts are obvious from contractual terms, while others, such as certain medical debts under the necessaries doctrine, may be a source of unexpected joint liability. Careful attorney analysis of your debts is advised before relying on tenancy by the entirety to protect an asset, particularly in chapter 7 bankruptcy. It must also be noted that conveying property to create a tenancy by the entirety could potentially be a fraudulent transfer, reversible by a creditor or trustee, and must be undertaken with caution if bankruptcy is contemplated or other financial distress exists.