Here are five ways that bankruptcy can involve assets you used to own, may own in the near future, or you own only a share of.
Special Assets in Bankruptcy
For the last several blog posts we have been focusing on special kinds of assets in bankruptcy. What makes them special?
Most of the time when you file a bankruptcy case you are trying to keep what you own. With most kinds of things you own, the focus is on what you own on the date of filing the case. That’s what is under the jurisdiction of the bankruptcy court, especially in a Chapter 7 “straight bankruptcy” case.
But with these five special kinds of assets, it’s not enough just to look to the date of filing. Sometimes the bankruptcy system can reach backward in time, to involve something you used to own. Sometimes assets that you don’t own at filing but own later can be affected. Or sometimes the court even has jurisdiction over assets in which you don’t even know you have ownership rights.
Here’s a helpful summary of these special assets.
1) Inheritance and Life Insurance Proceeds
If within 180 days after you file bankruptcy you “acquire or become entitled to acquire” an inheritance—through the death of the person from whom you are inheriting—then the property being inherited is counted as if it was your property at the time you filed. Same thing with assets coming through life insurance—this same within-180-days rule applies. (Section 541(a)(5)(A) and (C) of the Bankruptcy Code.) So, whatever you inherit or get through someone’s life insurance within 180 day after filing counts as yours at filing.
2) Shared Assets
Any property you hold jointly or in common with someone else is under the jurisdiction of the bankruptcy court. That is, your share in that property is—not the other co-owner’s share. This is most obviously a concern when are married and file bankruptcy without your spouse. Your share in the marital assets is part of what you own. Same thing with your share in any present or past businesses, whether you were actively or only passively involved. It’s especially easy to neglect business or personal co-ownership situations where you weren’t closely involved, and may not remember or possibly not even know about your ownership share.
3) Fraudulent Transfers
Be careful about assets you sold or gave away without being paid “a reasonable equivalent value in exchange” for what you sold. (Section 548(a)(1)(B)(i) of the Bankruptcy Code.) This can happen two ways. You can’t sell or give away assets “with actual intent to hinder, delay, or defraud” your creditors. (Section 548(a)(1)(A).) You can’t purposely hide your assets from your creditors by getting rid of the assets. But even without any such fraudulent intent, a constructive “fraudulent transfer” can happen. You get “less than a reasonably equivalent value in exchange for such transfer or obligation,” while being insolvent. (Section 548(a)(1)(B).) It’s not good to be selling or giving away assets without getting paid enough when you aren’t paying your debts. If you do during the two-year period before filing bankruptcy, the transaction can be undone and the asset brought back into your case.
4) Rents and Profits
Your assets for bankruptcy purposes don’t just include the present value of your assets at the time of filing. They also include the subsequent “[p]roceeds, product, offspring, rents, or profits of or from” those assets. (Section 541(a)(6) of U.S. Bankruptcy Code.) So even if an asset has little or no present value, a bankruptcy trustee may still be interested in it because of the rents and profits it could generate. However, this does not include payment for your labor done after you file your bankruptcy case. The Bankruptcy Code explicitly excludes “earnings from services performed by an individual debtor after the commencement of the case.” (Section 541(a)(6).)
5) Divorce Property Settlements and Decrees
The within-180-day rule about inheritances and life insurance proceeds in paragraph 1) above also applies to property gotten through divorce. So your bankruptcy case includes whatever you “acquire or become entitled to acquire” in the 180-day period after filing that case “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).)
Most people who file bankruptcy can keep everything they own that they want to keep. That’s usually because all of their assets are “exempt”—protected from their creditors under bankruptcy. Assets can also be protected other ways.
But when you consider what assets you own and how to protect them, you can’t always just be looking at what you possess on the date of filing your case. Be sure to consider the above five ways that bankruptcy can also involve assets you used to own, may own in the near future, or you own only a share of.