Protect Your Spouse in Your Financial Plan from Claims of Creditors

In Marital Money Matters, It Really Helps if You Work Together 

I read lots of posts, messages, and comments on financial planning blogs and forums in which one spouse complains that the other has various money maladies, from being a tightwad to a spendthrift. Naturally, the inclination of the complaining spouse is to proclaim the need to protect his or her money from the actions of the husband/wife. Sometimes that has already occurred through spending or saving that is actually concealed from the other spouse.

Mr. ToughMoneyLove is always disappointed when he reads about these marital money problems.  You love and cherish your spouse don’t you?  (That’s what you said in front of all your family and friends on that big day!) So this is the first in a series of posts for those spouses who seek to live in a state of relative bliss in matters of money and personal finance.  At the same time, even spouses who share and play fair with money can overlook critical steps that would protect the other spouse against avoidable financial risk.

Creditors and Judgment Owners Can and Will Pursue Marital Assets

There are a number of different ways that one spouse can put the other at risk of losing financial assets that would be needed to maintain a reasonable standard of living.  Most of them relate to uninsured or underinsured liabilities.  For example, one spouse may be sued for an unpaid business debt or for professional negligence (e.g., medical or legal malpractice).  More likely, one spouse could negligently operate a motor vehicle, causing serious personal injury to another.  In some of these cases, the available insurance coverage may be inadequate to cover the loss.  (More about this in future posts.)  Or, the negligent act could be uninsured altogether.  The hard truth is that insurance companies closely scrutinize all claims, looking for contractual excuses not to cover them.

In any of these situations, the complaining party (now the “judgment creditor”) may obtain a judgment against one spouse (now the “judgment debtor-spouse”) and seek to collect that judgment from any and all assets in which the debtor spouse has an interest.  Think again about the last part of that sentence: all assets in which the spouse has an interest.

If your marriage is like mine, your house, your vehicles, your bank accounts, and your investments are jointly owned. If they are not, you should keep reading and re-consider.  If your assets are jointly owned, you should keep reading and assess whether the form of joint ownership is optimal for the protection of your spouse.

The Form of Joint Ownership Can be Critical to the Protection of Marital Assets

Most married couples are generally familiar with the concepts of a “tenancy in common” and “joint tenancy with right of survivorship.”  They may have seen these phrases used on vehicle titles or real estate deeds. How these forms of ownership are treated in a marriage is determined by state law, which can vary from state to state. But some generalizations can be made.  (Disclaimer:  Mr. ToughMoneyLove is not providing you legal advice.  Get your own lawyer to do that.)

A tenancy in common and a joint tenancy with right of survivorship are forms of joint ownership that are not unique to married couples.  They are used to provide for a smooth transition of ownership should one joint owner die.  In these forms of ownership, the ownership interest of each joint owner is legally divisible from the other.  For example, if two persons (married or not) are tenants in common on a real estate deed, a judgment against one of the owners may be enforceable against that owner’s interest in the joint property.  The hard truth is that this could result in a forced sale or division of the marital property by the judgment creditor.  The same thing can happen to a jointly owned vehicle or bank account. The person owning a judgment against one spouse can pursue all assets in which that spouse has a divisible interest, dividing them up and leaving the other spouse with depleted assets.  Your goal should be to reduce that risk and help your spouse as well as yourself.

A Tenancy by the Entirety Can Provide Better Protection for Your Spouse

Most states recognize a special form of joint ownership of property by married couples.  Often, this is called a “tenancy by the entirety.”  What is conceptually unique about this form of ownership is that for as long as the marriage exists, neither spouse is considered to have a separate ownership interest in the property.  Rather, it is an indivisible marital ownership.  Because of this, most states also recognize that debts incurred by one spouse cannot be enforced against marital assets that are held as tenants by the entirety.  It is possible for a judgment against one spouse to attach to jointly held property as a lien.  However, if the married spouses are tenants by the entirety, most state laws provide that it is not possible to enforce that lien unless and until the non-debtor spouse dies.  If the debtor-spouse dies first, the lien disappears and the property remains in the hands of the surviving spouse, free and clear.  Much better outcome, don’t you think?

What You Should Do to Protect Your Assets

Our state is one of many that recognize tenancy by the entirety.  We have plenty of assets that would be attractive to someone who would successfully sue me or my wife.  Thus, I am careful to establish that our assets are owned as tenants by the entirety. This does not happen automatically just by being married.  It requires review and adjustment of the wording on deeds, titles, bank account documents, and the like.  In some cases, I had to create the wording myself and give instructions to a bank employee to use it on our paperwork.  In other cases (e.g., real estate purchases), I made it clear to the attorney drafting the deed that we wanted “tenancy by the entirety” specified.  In some states, a tenancy by the entirety is recognized for real property but not for personal property.  Again, check the laws in your state. 

If your state recognizes this special form of marital property ownership, you should review the paperwork on all of your significant assets and make the necessary changes to create the tenancy by the entirety. If it involves real estate ownership, you will certainly want to involve an attorney.  You need to get it right and you need to do it now.  If you try to change the form of ownership after you are sued, or after the problem debt is created, a court may void that change as being fraudulent. 

No one expects to get sued but your job is to anticipate and prepare for the worst.  That’s why you have insurance as Plan A.  This step is Plan B, in case your insurance is not enough.  Even if you and your spouse are fiercely independent in matters of money and property, the power of this strategy is a good reason to reconsider your attitudes.

Being a money strategist is important.  You should always think of your spouse when creating your financial plan.  This simple asset protection strategy would be a good place to start.  As I continue this series, I hope that other helpful strategies will become apparent.  What other spouse-protection strategies have you implemented in your financial plan?

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11 Responses to “Protect Your Spouse in Your Financial Plan from Claims of Creditors”
  1. Unfortunately, my jurisdiction doesn’t recognize tenancy by the entirety, and I’m actually not sure if anywhere in Canada does.

    For those of us without this option, the only option I see is a marital contract excluding one spouse’s interest in certain property where that spouse has a particularly high risk of being sued (because of occupation, etc). Of course, there’s a HUGE downside to this should the parties divorce.

    I have seen some fairly complex arrangements where assets are held by trust entities and corporate holding structures, but I’m not confident that these provide any real protection. for those without the option of tenancy by the entirety, are there any other options availabe?

  2. MGL – There are trusts that can be used but these are complex and have their own set of negative issues because they permanently separate ownership of the property from the spouses.

  3. MoneyStrategistWannabe says:

    My fiance has outstanding medical bills that creditors are beginning to salivate over. We have been paying as much as we can as often as we can. Being single, we knew they could put a lien on our house, but couldnt touch my savings or car, making us comfortable we would still have some money and a way to get to work. We will continue paying this medical debt for the next couple of years. How can we continue to protect our assets once we are married?
    Tenents by the entirety certainly seems fitting. Any other advice or resources?

  4. MoneyStrategistWannabe: Protection of assets from creditors is highly dependent on the laws of the state where the assets are located. If your state recognizes tenancies by the entireties, then that is one technique. However, debt that pre-existed the marriage can be a separate problem. If that debt is not manageable by the two of you, you should try to work it out with the creditors before marriage or consult an attorney as to the best way to combine your assets once you are married.

  5. Lynn says:

    I live in Florida and my spouse has 3 investment properties in Michigan. It looks like both FL & Mi recognize Joint Tenancy by Entireties. However, my husband wants to let the investment properties go into foreclosure. He owns a property in Michigan that is free and clear. We are worried they might put liens on this property. I have asked attorneys if he can deed it to me as Joint Tenancy by entireties and I keep getting mixed answers. Some say that they can come back and say you did it purposely. But we have never been late yet. Can we do it and then let go of everything?

  6. Lynn – You and your husband need to get some good legal advice from a lawyer familiar with Michigan real estate law. My guess is that if your husband permits a foreclosure, the lenders will pursue a deficiency action against him, get a judgment, then attach a judgment lien against his properties, including the one he owns free and clear. If he tries to join you as a tenant by the entirety while he is being sued for a deficiency or after the judgment is rendered, the courts will likely ignore that. if he does it now, it might work but again, get a written opinion from a lawyer in Michigan on that. Good luck.

  7. Moses says:

    I too live in FL and purchased a condo in 05. At the time I was married but purchased the condo solely under my name so I am the note holder and she only signed on the closing docs but is not attached to the actual debt. We have over a 100k in the bank and wanted to see if tenant by the entirety would protect our money from a deficiency judgement, if I let the property go into foreclosure. Also, she owns a home and it is homestead exempt and I only signed on the closing & deed not on the note. I want to see if I can protect our assets.

  8. Moses: You are in a complicated situation that requires consultation with a lawyer who is familiar with Florida law and creditors rights. It is likely that any moves you make to protect assets will have to occur well before any future deficiency jusgment so I would move quickly to get the advice you need.

  9. Melissa says:

    My husband and I are from Virginia and own property joint tenants by the entirety and he has a judgment against him. If we sell the property can the judgment go after the money?


  10. Brooke Smith says:

    Florida residents….My husband and I own one car jointly that is now paid in full, we also have our bank accounts as joint. I recently received a judgement against me with a credit card and I was wondering if those things are protected from garnish or being seized since my husband, who’s name is no where on the credit card or judgement, is co owner? If so, is there any documentation that we need to file to insure this? Do you know of a website I can go to that will assist me if you can not answer my quesions? I can not afford an attorney at this time.


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