What Happens to Your Assets in Bankruptcy


Most bankruptcy cases are filed voluntarily by debtors. But there are a few cases where the creditors file a bankruptcy petition against the debtors. This is called as involuntary bankruptcy.

A person can be made bankrupt through the Federal Court if a creditor files a creditor’s petition. To do this, a creditor has to obtain a judgment against the debtor and serve a bankruptcy notice on that person. The debtor has to pay for the debt before bankruptcy notice expires, otherwise the creditor may file a creditor’s petition to make the debtor bankrupt.

When a debtor enters an involuntary bankruptcy, the control of all non-exempted assets will be transferred to the bankruptcy trustee. If the debtor acquires or receives a property after the bankruptcy case is filed it will not become part of the bankruptcy estate unless the debtor was eligible to receive it at the time of filing.

Although the majority of possessions acquired after a filing are not included in the bankruptcy estate, there are some exceptions. If the debtor receives a death benefit, inherits a property, or becomes entitled to a certain property as a result of divorce proceeding, the debtor has let the trustee know about it if the entitlement was granted within 180 days after a bankruptcy and even after the bankruptcy discharge.

Marital property will be included in the bankruptcy estate depending on the state laws and type of bankruptcy case filed. In a joint filing, all marital property is included in the bankruptcy estate. If only one spouse is filing, then the fate of a marital property would depend on state laws that govern marital property ownership.

In a community property state, all property obtained during the marriage is treated as marital property. But a property received as a gift or inheritance of one spouse, bought or acquired before the marriage, or acquired following a divorce is excluded in the bankruptcy estate. Since a marital property is owned by both spouses, if one spouse files for bankruptcy their property becomes part of the bankruptcy estate.

In a common law property state, the spouses can own a property either jointly or individually. If a spouse files for bankruptcy, all property of the filing spouse and one half of the property owned jointly becomes part of the bankruptcy estate.

In a tenancy by the entirety state, marital property is held by the matrimony itself. None of the spouses can alienate or encumber the property without the permission of the other. For that reason in tenancy by the entirety states, marital property is excluded from the bankruptcy estate.

There are certain assets a bankruptcy trustee may not use to repay creditors. This consists of assets acquired 180 days after the date of filing, and any property that carries a lien. In addition, pension and retirement plan funds are protected in bankruptcy. The exception to this rule is retirement benefits that are paid to you as income are not protected from creditors.


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