Date of Publication:
South Florida Business Journal
Patricia Donlevy-Rosen, Esq.
December 13, 1996
Juan E. Planas, a recent Florida bankruptcy case, changed the rules of the game for married individuals hoping to save their assets if one spouse declared bankruptcy. Before that case was decided, if you owned properties with your mate in what is termed “tenants by the entirety”, you could be reasonably comfortable that those properties would be safe from your spouse’s creditors if he or she ever declared bankruptcy.
But now that comfort is gone, and the magical cloak is off. The ruling covers South Florida from the Keys north through Indian River County.
In fact, the magic has always had its limitations. Married people who relied on this shield often failed to consider that protection was lost if the couple divorced or the non-debtor spouse died first. Nonetheless, they breathed easier believing that jointly held property was less vulnerable to creditors of the individual spouse.
Safety shield is down
Now, the existence of just one creditor who can go against the joint property of the couple removes some of the safety shield protecting their property. In other words, if a couple has any jointly owned debts and one spouse goes into bankruptcy, one-half of the couple’s jointly owned property is available to the debtor-spouse’s creditors.
And rare is the couple who does not have at least one joint obligation — be it a car loan, a credit card account, a child’s tuition payment.
The case of Len and Maria
Consider the following scenario: Len and Maria Goodfolks own property worth $330,000. Their portfolio includes a $180,000 home and stocks and bonds worth $150,000. Len and Maria are both responsible for their child’s recent hospital bill. Len, on his own, has a small checking account, a car, a motorcycle, clothing and a CD collection, totaling $25,000.
Over a failed business venture, Harry sues Len and gets a $200,000 judgment against Len, individually.
Before the recent decision, if Len were to file for bankruptcy, both Len and Maria could assume that their joint property was safe from creditors. Anyone to whom either Len or Maria (alone) owed money would not be able to get at the couple’s jointly held property. Harry would only have had access to Len’s $25,000, minus any bankruptcy exemptions (such as $1,000 value for the car and $1,000 in personal items).
Under the recent change, because Maria and Len had at least one jointly owed debt–their child’s hospital bill — one-half of the couple’s property may be available to pay the hospital, as well as Harry. So Harry does better if Len goes into bankruptcy.
However, look at the effect on the couple’s financial picture as a result of the change. One-half of the couples’ stocks and bonds, or $75,000, will now be available for paying off creditors; the couple will walk out of bankruptcy with $75,000 less than they would have before this case was decided.
Len and Maria will be worse off. Their overall financial picture was better before Len’s bankruptcy, because until Len is in bankruptcy, Harry can only reach Len’s assets — the stocks and bonds held by the couple would be out of Harry’s reach. Fortunately, the couple’s home would be spared from both the joint and individual creditors.
Warning for couples
Why then would a married individual even think of seeking bankruptcy relief?
This change should be a wake-up call to couples relying on joint ownership. Holding assets as tenants by the entirety has never been the soundest way to protect them. Besides the unpredictability of death and the possibility of divorce, such ownership may cause additional and unnecessary estate taxes upon the death of the second spouse.
Other avenues for protection are sophisticated estate and business planning techniques, include the use of limited partnerships, limited liability companies and offshore trusts.
Individuals should avoid like the plague “do-it-yourself” planning, such as hiding assets in foreign bank accounts, filling out form trusts or other too good-to-be-true schemes promising such benefits as “pay no more taxes.” Promises like those usually omit warnings about criminal laws.
Before deciding how to safeguard wealth, seek the advice of a professional. Check out credentials. Understand where you are putting your money, and the consequences of what you are doing before, not after the fact.
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