How does bankruptcy affect property settlement after a divorce?

When a person receives a property settlement during a divorce, that settlement is not exempt from liquidation during a bankruptcy. Should an individual file for bankruptcy and then get divorced afterward and subsequently receive a property settlement, he or she may lose that property settlement to the bankruptcy, since it counts as an asset.

These rules become important only in Chapter 7 bankruptcy, which requires the debtor to turn over assets for liquidation. Chapter 13 bankruptcy requires the debtor to make a repayment plan and does not subject the debtor to any seizure of assets.

If I am filing for bankruptcy, what will happen to the property settlement I received after my divorce?

Under Chapter 7 bankruptcy law, a property settlement can be taken from an individual and used to pay off creditors during bankruptcy if the settlement is decreed within 180 days after the bankruptcy was filed. During this time period, any assets that come into the individual’s possession can be grandfathered into the bankruptcy, whether they come from inheritances, property settlements, or other sources.

An exception can occur if the property settlement is subject to exemption laws. For example, a settlement may be related to a type of exempt asset such as a support payment for the individual or for a child in custody of the individual. By nature, these support payments are exempt from bankruptcy and so would not be affected. Any other property settlement received within the 180-day window after filing will be subject to liquidation.

For assistance in understanding your obligations under the bankruptcy laws, you should strongly consider speaking with an attorney. A lawyer can also help you to structure a divorce settlement in a manner that allows you to minimize the requirement to turn over assets in bankruptcy.

Case Studies: How Bankruptcy Affects Property Settlement After a Divorce

Case Study 1: John and Sarah

John and Sarah recently finalized their divorce proceedings, and as part of the settlement, Sarah was awarded a substantial sum of money and a property. Unfortunately, due to financial difficulties, John had to file for bankruptcy six months after the divorce was finalized.

Since the property settlement was received within the 180-day window before the bankruptcy filing, it is considered an asset and can be subject to liquidation. In this case, Sarah may risk losing the property settlement to John’s bankruptcy proceedings.

Case Study 2: Michael and Lisa

Michael and Lisa divorced two years ago, and Lisa received a property settlement as part of the divorce agreement. However, Michael found himself in a difficult financial situation and filed for bankruptcy. As the property settlement was received more than 180 days before the bankruptcy filing, it is no longer considered an asset and is exempt from liquidation.

In this case, Lisa’s property settlement is protected from Michael’s bankruptcy proceedings, as it falls outside the 180-day window.

Case Study 3: David and Emily

David and Emily’s divorce was finalized, and Emily received a property settlement shortly after. However, due to unforeseen circumstances, David had to file for bankruptcy just a month after the divorce. The property settlement received by Emily within the 180-day window is considered an asset and may be subject to liquidation.

To protect the property settlement from the bankruptcy, it is advisable for individuals like Emily to consult with an attorney who can guide them on structuring the divorce settlement in a way that minimizes the risk of losing assets during bankruptcy.