Saltzman Law

Bankruptcy Can Change Your Ownership Interest in Real Property

In Maryland, the declaration of bankruptcy can have the unintended effect of converting ownership interests of real property held as joint tenants to interests held as tenants in common. This can cause a serious impact to your rights as a property owner and can make it increasingly difficult to protect the interests of both you and your heirs.

A joint tenancy (also known as a joint tenancy with right of survivorship) is an ownership option for co-owners of real property to concurrently own that property. When a person who owns property as a joint tenant dies, his or her interest in the property passes immediately to the remaining joint tenants, without having to go through the probate process.

A tenancy in common, alternatively, is a form of property ownership in which a co-owner’s interests pass directly to the co-owner’s heirs upon death. This method continues or even grows the number of ownership interests in a property, by continually passing to heirs of the co-owners of the property.

If co-owners choose to hold real property as joint tenants, they might expect that form of ownership to be permanent. However, an obscure decision by the U.S. Bankruptcy Court for the District of Maryland in 1984 held that a joint tenancy is automatically converted into a tenancy in common upon filing for of bankruptcy by one of the joint tenants.

In order for a joint tenancy to be valid, there are four “unities” that must exist simultaneously: time, title, interest, and possession. If any of these unities is destroyed, the ownership interest automatically converts to a tenancy in common.

In Panholzer v. Feldman, the Maryland Bankruptcy Court considered whether ownership interests initially in the form of a joint tenancy converted to a tenancy in common upon declaration of bankruptcy. 36 B.R. 647, (Bankr. D. Md. 1984) (Mannes, J.). Contrary to the prevailing view throughout the U.S. the Maryland Court held that the severance of the four unities destroys the joint tenancy and converts it to a tenancy in common. Specifically, the Court turned to § 544 of the Bankruptcy Code, which provides that upon filing for bankruptcy, a bankruptcy trustee may avoid any transfer of property of the debtor that is voidable by a creditor. The Court found that this procedure is the same one that destroys a joint tenancy. See, Eder v. Rothamel, 202 Md. 189 (1953).

The Panholzer Court concluded that the creation of a bankruptcy estate acts as a conveyance by the debtor to the trustee, thus severing the four unities, and converting the joint tenancy. To justify its ruling, the Court noted that “Just as a bankruptcy estate is not depleted by the death of the debtor who is a joint tenant, so ought it not be enriched by the death of a joint tenant survived by the debtor.” Panholzer at 651-52. On the other hand, if the ownership interest is in a tenancy by the entireties, which is similar to joint tenancy, but between married persons, the four unities would not be severed, and the ownership interest would not convert to a tenancy in common.

Other states do not hold this position. For example, the United States Court of Appeals for the Eighth Circuit has issued a contrary ruling, that bankruptcy does not automatically convert the joint tenancy to a tenancy in common unless the trustee in bankruptcy takes actual control of the property.

For owners of real property in Maryland, it is crucial that you understand your rights as property owners. Even if you do not declare bankruptcy, but a co-owner of joint property does, your ownership interest could be converted.

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