"Property of the Estate" and Marital Property Division

 Posted on June 07, 2017 in Bankruptcy And Divorce

The 180-day rule also applies to marital property division, whether by agreement or court decree.

Our last half-dozen blog posts have been about what’s in the “property of the estate” of your Chapter 7 case. This matters because you must protect whatever is “property of the estate” by a property exemption or you risk losing it.

Generally, everything you own at the moment you file your Chapter 7 case is “property of the estate.” The date of filing is usually crucial in determining what is and what is not. But as we’ve seen in the last three blog posts, if you come into property a few very special ways during the 180 days AFTER filing, that property is also “property of the estate.” We’ve covered property received through an inheritance, life insurance proceeds, and other death benefits. The idea is that if you come into money or property that soon after filing bankruptcy, the creditors have rights to it.

Property from Divorce Property Settlements and Decrees

Property that you receive through divorce is one last special way of getting property to which the 180-day rule applies.

The U.S. Bankruptcy Code says that “property of the estate includes “an interest in property” which “a debtor acquires or becomes entitled to acquire” within 180 days after filing bankruptcy “as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree.” Section 541(a)(5)(B) of the Bankruptcy Code.

In other words, if within the 180-day period you get rights to property through a divorce property settlement or decree, it’s “property of the estate.” Whatever you get is treated as if it was yours at the moment you filed your Chapter 7 case.

An Example

Let’s assume you filed bankruptcy not long after filing for divorce. You and your ex-spouse had already agreed that you would each just get what you’d already split up. Your vehicle, household goods, and other personal effects all fit within the available property exemptions.

But there’s a problem. You received the family home in the divorce decree as expected. You didn’t think there was any problem with that. Assume you are allowed a homestead exemption of $50,000. (This varies greatly depending on your state.) You owe $150,000 on a $230,000 home. At the time you filed your case both you and your spouse owned the house. That allowed you to claim only half of the equity as yours, or $40,000 of the $80,000 total equity. This $40,000 fit within the $50,000 homestead exemption, so it seemed to be protected.

But when the divorce decree was entered into within 180 days of your bankruptcy filing, you became the sole owner. The home is then treated as if were all yours as of the filing date.

So now all $80,000 of equity is treated as yours, with the $50,000 homestead exemption insufficient to protect it. Your home would be in serious jeopardy.

Conclusion

Be sure to tell your bankruptcy lawyer if you are in the midst of any divorce-related negotiations or dissolution proceeding. In fact, in some states this might even possibly apply to unmarried cohabitating couple break-ups. If you have ANY situation in which you may receive something because of the end of a marriage or relationship, discuss it thoroughly with your lawyer.