Lien Strip on Tenancy by the Entireties Property

The following I included in a recent post on lien stripping regarding the McNeal case, but it is an important issue to have a separate post and title for reference.

A most distressing recent lien stripping case is Judge Cristol’s in In re Alvarez, 11-44246 BKC AJC(DE 63)(April 24, 2012), 2012 Bankr Lexis 1800.(Bank. S. D. FL) Debtor owned the home with non-debtor spouse as tenancy by the entireties. Spouse did not sign the promissory note. Judge Cristol held that debtor could not strip the second mortgage unless both husband and wife filed the chapter 13. The non-filing spouse is receiving the benefit of the lien strip. There is also the idea that each owns all of the property so neither can enter a transaction without the joinder of the other spouse.

(Does anyone see the irony? Local judges have held that a Debtor cannot strip if not eligible for discharge due to prior 7. In Alvarez, even though never signed the note so nothing to discharge, spouse must join in the chapter 13?)

Judge Cristol’s decision does discuss that there is a split of authority on this issue and cites cases going both ways (though a case in the Middle District of Florida also did not allow the strip). The reasoning of contrary authority allowing the strip discusses various points. Consider that since each spouse owns all of the property, why cannot one spouse obtain one order stripping one mortgage lien from the entire property? The non-filing spouse does receive benefits in a bankruptcy. For example, the non-filing spouse does receive protection during a chapter 13 while the spouse is making plan payments to pay a mortgage. And note that in a chapter 7, if there is joint debt, the chapter 7 trustee can administer the property even though only one spouse filed.

What are the planning implications? Hopefully this case will not be followed in Broward County bankruptcies. If followed, this would mean both spouses must file bankruptcy to strip a second mortgage or to reduce the amount on a first mortgage for investment property. But consider the possibility of a non-filing spouse executing a quit-claim deed to the filing spouse. And should this be done before filing the bankruptcy, or can it wait until there is an objection during the bankruptcy to strip the lien?

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