Bankr. W.D.N.C.: In re Hmok- Voluntary Sale Severs Tenancy by the Entireties

Summary:

After previously approving the sale of the debtors' home, which was previously owned as tenants by the entirety, the  bankruptcy court subsequently their motion to modify their Chapter 13 plan,  ruling  that the proceeds from the voluntary sale were no longer protected by the tenancy by the entirety exemption. The debtors sought to keep the proceeds, arguing that the exemption applied to the sale proceeds. However, the court determined that pursuant to N.C.G.S 41-63(3) the Tenancy by the Entirety protections do not extend to cash proceeds from a voluntary sale.  The court contrasted this with an involuntary sale by a Chapter 7 Trustee, as in In re Surles (also attached), where the Tenancy by the Entirety protections were preserved as to the proceeds of the sale of the property.

Consequently, the court further found that the sale of the property resulted in a substantial and unanticipated financial improvement, which justified modifying the plan to increase payments to unsecured creditors. Although the debtors' paltry homestead exemption was preserved, the court ordered the remaining proceeds to be distributed to the unsecured creditors.  

Commentary:

This case oddly could seem to urge Chapter 13 debtors (or at least one debtor) seeking to sell assets owned as Tenants by the Entireties  to convert to Chapter 7 first.  Then the Trustee might either force an involuntary sale,  paying only joint debts and the IRS,  but preserving the remainder of the proceeds from the creditors of only the individual debtors,  or, if there are no joint debts,  abandon the asset.  This would likely take longer for the sale to consummate,  but preserve greater assets for the debtors.  This approach might also be more beneficial as Chapter 13 Trustee often seem constrained,  whether by judicial oversight or their own perspective, in negotiating with debtors. 

This concern seems  especially apt since in this case where the debtors appear to have been rather blindsided, with little hint when the motion to sell was granted that these proceeds would be lost.  Perhaps had the motion to sell property been filed contemporaneously with the motion to modify plan, the court would have tipped its hand in this regard,  giving the debtors the opportunity to reconsider the sale.

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