Real Property Exemption as Homestead

States’ Homestead Exemptions

Many states’ laws provide for a homestead immune from claims by creditors against a debtor. On the other hand, over 50% of states allow a married couple the privilege of the singular joint tenancy by the entireties. This means that the only way to fully understand what choices are available to a debtor is to carefully examine the applicable state laws in addition to having a full grasp of federal statutes.

Federal Homestead Exemptions

The federal homestead exemption’s limit is $15,000. However, the federal exemption may apply to real property or personal property and would even protect a mobile home. A co-op apartment is also included in the federal provision of Section 522(d)(1). State laws are frequently dated and may not recognize more modern interests like an apartment co-op or mobile homes. The federal homestead is the debtor's equity. The conclusion is obvious, but some leaps must be made to reach it. Bankruptcy Code, Section 522(a)(2) says that "value" as used in the exemption section means the fair market value of assets as of the date that the bankruptcy petition is filed. And Bankruptcy Code, Section 541(a)(1) defines the estate as the debtor's interest, whether legal or equitable. In the instance of the mortgaged real property the lender and the debtor both have a great deal of interest in the same real property. While the debtor's interest is not wholly tangible, it is still enough to give the bankruptcy court jurisdiction to rule over the entire property.

Tenancy by the Entireties Exemptions

A state may not necessarily have a homestead law protecting debtors. However, if the state acknowledges tenancy by the entireties, however, this may serve the exact same purpose of a homestead in protecting the property from the reach of the creditors of one spouse. The tenancy by the entireties may even secure a much greater protection to the debtor than a homestead statute can. However, it is necessary to consider Bankruptcy Code, Section 363(h) along with the analysis of the tenancy by the entireties. This section grants the trustee with the authority to dissolve both the debtor and the non-debtor's joint interests under certain circumstances, such as if the estate would benefit by allowing the trustee's sale and there is no practical alternate choice. And while the trustee may be allowed to sell that interest, the interest may be of such a small amount the sale is does not benefit the state at all. It may be that the applicable state law may uphold that the nature of the tenancy by the entireties is such that no interest may be obtained by a creditor of only one of the tenants.

Limitations of Tenancy by the Entireties

There are two important limitations to remember if a debtor chooses to rely upon tenancy by the entireties to secure protection in a bankruptcy case. First, the nature of this kind of tenancy does not allow for any division between the interests of husband and wife. If a husband and wife file joint bankruptcy petitions, the protection is gone and the property may be sold by the trustee at will. The second limitation is the language of Section 522(b)(2), which recognizes the tenancy by the entireties as an exemption only if the state list is used and not the federal list. Therefore the debtor in a state which has not enacted opting-out legislation must decide whether it will be better to retain the tenancy by the entireties property or use the federal list. The question also surfaces in the minds of those who read legislative statements of concern about the leniency of the federal list as the reason for maintaining the opting-out provision. The clear outcome is that abuses in the laws of exemptions and immunity seem to be more prevalent in the state laws and far less so in federal laws.