Summary:
The Court of Appeals affirmed the decision of the district court regarding Ronald Lee Morgan's Chapter 7 bankruptcy filing. Morgan had sought to exempt his home, owned as tenancy by the entirety with his wife, from the bankruptcy estate to shield it against an outstanding tax debt owed to the IRS. The bankruptcy court, however, disallowed the exemption, and the district court affirmed this decision.
The appeal centered on whether Morgan's home could be exempt from the bankruptcy estate under 11 U.S.C. § 522(b)(3)(B), which allows for the exemption of certain property interests from creditors under applicable nonbankruptcy laws. The courts found that while North Carolina law protects such properties from creditors of a single spouse, federal tax law under 26 U.S.C. § 6321 creates a lien for unpaid taxes that can attach to property owned in entirety. The Supreme Court's decision in United States v. Craft supported this interpretation, allowing the IRS's claim against the property despite the non-joint nature of the tax debt.
Morgan argued that an actual lien must be perfected by the IRS before filing for bankruptcy, which was refuted based on precedents that do not require such a lien for the property to be considered non-exempt under federal law. The court concluded that federal law permits a tax lien to attach to an individual's interest in entirety properties, rendering Morgan's home not exempt from the bankruptcy estate concerning the IRS debt.
Commentary:
Even after navigating through the Tenancy by the Entireties dangers that having overtly joint debts present, the risk that a modest IRS tax claim can result in the loss of the marital home, means that, with utterly insufficient an homestead exemption in North Carolina, debtors simply cannot file Chapter 7 if they own real estate.
To read a copy of the transcript, please see:
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