Stripping Off an Unsecured Mortgage on Property Owned Tenancy by the Entirety in North Carolina
North Carolina recognizes Tenancy by the Entirety ownership of real property, and now there is one more reason why that matters in bankruptcy.
Generally, a Chapter 13 bankruptcy case provides a means for stripping off a wholly unsecured junior mortgage lien on a primary residence. For instance, some homeowners have two mortgage liens against their residence. If the fair market value of the home is less than the balance owed on the first position mortgage lien, then action can be taken in a Chapter 13 bankruptcy case to strip off the second position mortgage lien as a wholly unsecured claim. The real estate market in Raleigh, North Carolina, area has not plummeted to the same degree as some markets across the country over the past 5-7 years but many people currently have this up-side-down position on their mortgage loans. In October 2013, the United States Court of Appeals for the Fourth Circuit issued an opinion in Alvarez v. HSBC Bank USA (In re Alvarez), 733 F.3d 136, that impacts how homeowners go about stripping off a wholly unsecured mortgage lien.
North Carolina law recognizes a type of real property ownership known as tenants by the entirety, meaning that the property is owned by the “marital unit” with each spouse holding an undivided interest in the property. One spouse alone cannot sell or encumber, either voluntarily or involuntarily, his or her interest in the real property. The practical effect is that a creditor of only one spouse cannot execute against real property owned as tenancy by the entirety.
When spouses own real property as tenants by the entirety, the bankruptcy filing of one spouse does not sever the unity of the tenancy, and the property interest of the non-filing spouse does not become property of the bankruptcy estate. Thus, the bankruptcy court cannot change the rights of the second position mortgage lien-holder as to the non-filing spouse’s interest in the home.
In the Alvarez case, only one spouse filed a Chapter 13 bankruptcy case but he owned real property with his non-filing spouse as tenants by the entirety. A wholly unsecured second position mortgage encumbered the real property on which both spouses were liable for the promissory note and deed of trust. The debtor and his non-filing spouse sought to strip off the second mortgage lien, but the court would not allow the strip off based on the fact that both spouses had not filed the bankruptcy case. The court ruled that to strip off this second position mortgage lien, both spouses comprising the tenancy by the entirety had to file the bankruptcy case.
While questions remain regarding how to apply the court’s ruling in Alvarez, in short, it seems that the best and perhaps only option is that both spouses in a tenancy by the entirety must file for Chapter 13 bankruptcy relief before the court can strip off or modify the rights of a secured creditor of both debtors.
A copy of the Alvarez opinion is attached as a PDF document to this post.