Consumer Law Center of Maryland
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What Happens to a Divorce Settlement Received during Your Bankruptcy?

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When you’re filing for bankruptcy under Chapter 7, any property you own at the time of filing will be considered part of your estate. However, certain types of property received after you file for bankruptcy can also be included in your estate. If you’re going through a divorce during a bankruptcy, this could result in seizure of property by the bankruptcy trustee. Learn more about how bankruptcy could affect your divorce settlement, below.

One of the most important components of a bankruptcy filing is the process of determining what property is included in your estate. The size and contents of your estate can determine whether you’re eligible to file for bankruptcy under Chapter 7 or Chapter 13. The contents of your estate will also determine whether you’ll be able to retain all your property through the use of exemptions, or if you will have certain non-exempt property that the bankruptcy trustee will have the right to sell for the purpose of paying your creditors.

Typically, the bankruptcy court will include only the property you legally own at the time of the bankruptcy filing in your estate, and not include items acquired after the fact. However, there are several types of property that, if received within 180 days (six months) after you file for bankruptcy, will be considered part of your estate.

One of these forms of property is a divorce settlement. If your divorce becomes final within six months of you filing for bankruptcy, any property you received in the divorce will become part of your bankruptcy estate. That means that the trustee could seize that property and liquidate it to pay back your creditors—even if your bankruptcy case was already closed. It doesn’t matter whether you physically received the property by the 180-day mark; only that you became legally entitled to the property by this date.

Becoming entitled to a divorce settlement may not be a problem for you, however. For example, if you didn’t use all your property exemptions when you filed for bankruptcy, you may be able to use them to cover what you receive in a settlement. Alimony and child support aren’t eligible for seizure to satisfy creditors, so if your share of a property settlement comes only in the form of alimony and child support, you’ll be able to keep it. Trouble often comes when recent bankruptcy filers are awarded a house in a split. You may have used a homestead exemption to protect your ½ share of the equity in your home, but if the equity interest you gained when becoming the sole owner of the home is greater than the amount of your homestead exemption, you may be at risk of losing it. Speak with a skilled bankruptcy attorney to ensure your most important possessions are protected from seizure.

If you’re facing unmanageable amounts of consumer debt in Maryland, contact a seasoned and compassionate Germantown bankruptcy lawyer at Haeger Law for a free consultation, at 888-463-3520.