How does bankruptcy affect property settlement after a divorce?
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UPDATED: Jul 15, 2021
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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.