I have previously written about the effect of marriage and divorce on debts and the ability to discharge them in a chapter 7 bankruptcy. A recent case decided in the Middle District bankruptcy court in Orlando shows how the death of a spouse may affect the outcome of a bankruptcy proceeding. In the case of In re: Taylor, a 72 year old married man filed for chapter 7 bankruptcy without his wife. They were residents of Palm Coast, Florida. Six weeks after filing for bankruptcy, the wife of 52 years died. At the time of her death, the couple owned together approximately $34,000 in a bank account; $6,000.00 in a CD, and another $6,000 in household goods and furnishings. Mr. Taylor’s bankruptcy lawyer helped him claim all of these assets as exempt from the bankruptcy. Had the wife remained alive, the husband could have claimed an exemption for all of this property, which would have allowed him to keep all of it after the chapter 7 bankruptcy, without having to turn it over to the trustee for liquidation for his creditors. That is because the property was considered to be held as “tenancy by the entireties.” Tenancy by the entireties (called TBE for short) is a special form of legal title for property owned jointly by married people. Under Florida law, when only one spouse is liable on a debt, the creditor of that single spouse cannot seize property that is owned by the married couple as tenancy by the entireties. (However, seizure is permitted when the debt is joint, because both the husband and the wife owe the debt to the creditor). A married individual who files a chapter 7 bankruptcy in Orlando, (or any other court in Florida), may exempt from the bankruptcy any property that is owned in the form of tenancy by the entireties, provided that their spouses do not join them in the bankruptcy (this is usually done if most or all of the debt is in the name of the filing spouse).
However, for the unfortunate Mr. Taylor, the bankruptcy court ruled that after his wife died, the cash, CD, and household goods, were no longer owned in the form of tenancy by the entireties. Instead, upon the wife’s death, these assets becomes Mr. Taylor’s assets, owned entirely by them. For that reason, they were no longer exempt and Mr. Taylor was required to surrender these assets to the bankruptcy trustee(minus the $1,000.00 exemption permitted for personal property owned by the debtor).
This interesting case also demonstrates another important point in chapter 7 bankruptcy. Once you file your case, it cannot be dismissed unless the court finds a justifiable cause. In this case, the bankruptcy court, recognizing the harsh result of this apparently unexpected death, gave the debtor special permission to have his attorney file a motion to have the bankruptcy case dismissed.
Marriage creates unique benefits and burdens with regard to debts and the ability to discharge them in bankruptcy. The legal aspects of marriage need to be evaluated carefully before proceeding with a bankruptcy proceeding.
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