While joint real property ownership has many benefits, one of the main drawbacks concerns what happens when the other owner gets sued and incurs a judgment. Under most circumstances, a judgment creditor will be able to seize the debtor's property and sell it to satisfy the award. This includes real property that the debtor owns jointly with another party. Depending on state law, however, several mechanisms exist for protecting your interests from the claims of a joint property owner's creditors.
Tenancy by the Entireties
In some states, you can hold real property with your spouse as tenants by the entireties. When a couple owns land by the entireties, the law views each as owning a one-half undivided interest in the property; each is entitled to the whole. As your interest is inseparable from that of your spouse, a judgment against only one of you can't attach to any of it. If you get divorced, however, you generally revert to a tenancy in common. As tenants in common, you each continue to own fifty percent of the property, but this interest is now divisible. Your co-tenant's interest is now available for attachment by creditors.
Exemptions
In each state, the law contains exemption levels for certain types of property. Below these levels, a judgment creditor cannot seize exempt property to satisfy a judgment. As such, there will be a certain amount of equity in real property that your co-owner will be entitled to keep as exempt from his creditors. This is sometimes referred to as a "homestead exemption," even though it isn't always required to be used for a home. As your interest will not be reachable, the creditor can only get half of the difference between what is owed on the property and what it can sell for. If your joint owner's interest doesn't exceed the exemption amount, his creditors won't be able to get it.
Claiming Exemptions
In most states, exemptions are not automatic. At some point after the entry of judgment, your joint owner will probably be required to fill out and file some sort of motion to claim his exemptions with the court. If he does not appropriately designate these exemptions under state law, he could lose them. If he has no exemptions, the creditor can seize anything he has and sell it to help satisfy the judgment.
Effect Upon Your Interest
Unless you live in certain community property states, your interest in jointly owned real property technically shouldn't be affected by the claims of your co-owner's creditors. As a practical matter, though, you stand to lose a lot of money. If the real property is ordered sold and the debtor's half liquidated to pay on the judgment, the property will probably bring far less than fair market value at a judgment sale than it would if you put it on the open market. As such, you may find yourself having to "buy out" your joint owner to keep the property from being seized and sold.
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