Pennsylvania courts recently upheld their strict stance on not allowing creditors to consolidate debt judgments against spouses unless both signed the same agreement at the same time.
In the case, a bank made a construction loan to a real estate company, secured by a guaranty agreement with the partnership’s principal. Two years later, the bank agreed to extend the maturity date of the loan in exchange for an additional guaranty, this time signed by both the principal of the business and his wife.
The loan eventually went into default. The bank filed a judgment against the principal based on the first guaranty, and a judgment against his wife under the second guaranty.
The bank, however, could not reclaim its losses by going after assets that the couple held as “tenancy by entireties” property. “Tenancy by entireties” is a legal protection of property that means that both spouses own undivided interest in the whole of the real estate, and neither can sell without the other’s consent. If only one spouse defaults on a loan, creditors cannot pursue assets that are owned as entireties to recover their losses.
The bank attempted to consolidate the judgments against husband and wife so that it could pursue the couple’s entireties property. The court ruled that Pennsylvania law does not allow separate judgments against separate individuals to be consolidated by a court order, even in the case of a married couple. For a creditor to pursue any assets owned by a couple as entireties, both spouses must have acted together in the same transaction.
Before entering into any loan or guaranty agreement, both creditors and business owners should understand exactly how entireties properties may be affected if the loan should go into default.
— Frank Kosir, Meyer, Unkovic & Scott, firstname.lastname@example.org
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