When it comes to matters of the heart, bankruptcy usually coincides with divorce. Sometimes, though, it affects couples who are about to get married. Given that it lasts longer, a chapter 13 bankruptcy is more likely to have greater ramifications with a new marriage. Chapter 7, however, can create obstacles too. One notable way is how engagement rings are dealt with.
Let’s say a debtor buys an engagement ring for a partner, and then files chapter 7 bankruptcy. Does the receiving partner own the ring? No! It’s a gift that’s conditional on the marriage occurring (unless the giver is already married, which would make it an outright gift). A receiving partner who changes her or his mind about the marriage must return the ring or its equivalent value to giver. The reason it’s a gift is that it’s given without value in exchange. This potentially makes it a fraudulent transfer under Section 548 of the Bankruptcy Code, which has a two-year look-back period before the bankruptcy case is filed. (It wouldn’t be a preference payment because the spouse-to-be isn’t a creditor.)
As a result, the debtor-giver is obligated to list the engagement ring as an asset in his or her bankruptcy petition. Fortunately, the federal bankruptcy exemptions offer debtors up to $1,550 for jewelry, and New York offers debtors up to $1,000. If the engagement ring is more valuable than that, debtors with exempted cash can use it to keep the ring out entirely. Otherwise, the trustee will recover the ring and sell it for its non-exempt value.
It’s also possible for the recipient of an engagement ring to file chapter 7 bankruptcy. This person’s situation is slightly more favorable as the same rules apply: The engagement ring is a conditional gift and therefore belongs to the giver. The debtor-recipient should be careful to list the engagement ring as an asset over which she or he is the custodian but not the owner. The only situation in which the trustee would try to recover the ring is if it is in fact an outright gift, which would be an unlikely circumstance. In that case, the debtor-recipient would need to use the available exemptions to shield the ring from the trustee.
Marriage, conditional gifts, and other unusual circumstances can amplify the difficulties of a bankruptcy. For these reasons, it’s important to discuss them with an experienced New York bankruptcy lawyer rather than try to resolve them alone.
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 New York bankruptcy Bruce Weiner for a free initial consultation.