In most New York bankruptcy cases, the debtor’s assets that are placed into the bankruptcy estate for distribution consist only of what the debtor owns at the time of the bankruptcy filing, less exemptions. Debtors can keep most assets they obtain after filing, except if they file in chapter 13, then that’s a windfall they will have to report to the trustee. Most of the time, though, chapter 7 debtors don’t obtain new assets, but when they do, under certain circumstances the trustee can demand they be placed into the bankruptcy estate for distribution. What are these circumstances?
Section 541(a)(5) specifies that a debtor’s interest in any property that would otherwise be part of the bankruptcy estate at the time of filing but was acquired by the debtor within 180 days after the filing can become part of the bankruptcy estate if it is obtained:
(A) by bequest, devise, or inheritance;
(B) as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree; or
(C) as a beneficiary of a life insurance policy or of a death benefit plan.
Subsection (A) uses legal terms of art. A “bequest” or “devise” occurs by operation of a person’s will. For instance if a parent dies and passes a house to a debtor in bankruptcy by will, then that could be incorporated into the bankruptcy estate. An inheritance, on the other hand, refers to assets obtained through intestacy statutes that operate when someone dies without a will.
The other subsections are more straightforward. It should be noted that the automatic stay can slow down a divorce, but it won’t stop it. Life insurance policies also speak for themselves, but there are rare situations in which a debtor will find out that he or she is the beneficiary of such a policy created by an ex-spouse who neglected to alter the policy.
The 180-day rule discussed above makes sense for divorces because the Bankruptcy Code wants to discourage wealthier spouses from obtaining a windfall between a divorce and bankruptcy, but arguably, the rule is arbitrary for the other two situations. Debtors don’t decide when relatives die and what they will inherit from them, so why should they have to hand it over to their creditors? The answer is that the goal in both cases is to prevent opportunistic bankruptcy filings by people who anticipate a transfer of wealth to their advantage.
Ultimately, post-petition debts are another reminder to debtors that they should consider discussing their financial situations with an experienced New York bankruptcy lawyer to avoid difficulties due to circumstances beyond their control.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy lawyer Bruce Weiner for a free initial consultation.