Upcoming Property from a Divorce

One special category of future assets in bankruptcy is property from a divorce—either from a property settlement agreement or court decree.  

Bankruptcy and Future Assets

Five blog posts ago we started this series on special assets about inheritances and life insurance proceeds. We referred to a special 180-day exception to the otherwise strong rule saying that you focus on assets that you own as of the day that you file your bankruptcy case.

This exception means that assets you acquire by inheritance or life insurance up to 180 days AFTER filing bankruptcy are treated as if you owned those assets at the time you filed your case. Section 541(a)(5)(A) and (C) of the Bankruptcy Code. This means the inheritance or life insurance proceeds could go to your creditors instead of into your pocket.

Property Acquired by Property Settlement Agreement or Decree

Notice how that reference to the Bankruptcy Code on that 180-day exception just now was to subsections 541(a)(5)(A) and 541(a)(C). Well, how about the subsection in between those two: 541(a)(5)(B)?

The 180-day exception applies there as well, this time to property (assets) acquired:

as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree…  .

Dealing with Divorce and Bankruptcy at the Same Time Is Complicated Enough…

Both divorce and bankruptcy deal with a lot of the same financial issues, including assets and debts. Divorce often shifts your assets and debts. That’s one reason that it’s often unwise to file bankruptcy right in the midst of a divorce. Bankruptcy, especially Chapter 7 “straight bankruptcy,” has trouble dealing with a moving target, with shifting assets and debts. Divorce creates that complicating moving target.

The 180-Day Exception

Just one of those complications is that you can’t just look at what your assets are when you file bankruptcy. You have to anticipate what else you may acquire through your divorce in the subsequent 180 days.

By Settlement Agreement, Interlocutory Decree, or Final Decree

To be clear, the law doesn’t just cover assets you get from your final divorce decree. It includes prior steps in the process, such as property settlements that you make with your spouse. It may also include court orders resolving just part of your divorce.

Conclusion

So be very careful if you’re in a hurry to get a divorce filed. Don’t make the understandable mistake of thinking that bankruptcy fixates only on what you own at the time of filing.

Also, just because you figure it’ll take a long time to finish your divorce, you might want to wait to start it. That’s because even though you might be fighting about child custody or spousal support for many months, the property settlement of the case or a partial decree on property could happen faster. If any of this happens within 180 days after filing bankruptcy, assets you expected to receive yourself could easily go instead to your creditors.

Related posts:

Crucial Question: Can You Show How Chapter 13 Can Help After a Divorce? Divorce and Bankruptcy: The Initial Questions and Answers Making Sense of Bankruptcy: How Do You Choose between Chapter 7 and 13 If You Owe Money to Your Ex-Spouse? Making Sense of Bankruptcy: How Do You Choose between Chapter 7 and 13 If You Owe Money to Your Ex-Spouse? The Chapter 13 “Super-Discharge” of Divorce Decree Debts