What happens to marital property in a Virginia bankruptcy?
A husband or wife’s interest in assets or property may be viewed differently for purposes of bankruptcy administration and equitable distribution in a divorce case. When a bankruptcy case is filed, an estate is created. The bankruptcy estate consists of each and every interest or right that that debtor may have in any kind of property, including tangible property like vehicles, real estate and furniture, and intangible property like a bank account, the right to a retirement or investment account, and an interest in a lawsuit. A person considering bankruptcy should particularly think about his or her intangible rights, for instance the right to a tax refund, a debt owed by another person, or the right to sue somebody, also known as a cause in action.
For the most part, the property of the estate includes property rights or interests that exist at the time the case is filed, and does not include earnings from services performed by the debtor after the case is filed, except in a chapter 13 case. In a chapter 13 case, earnings during the case are included in the property of the estate. In addition, the property of the chapter 13 bankruptcy estate includes property acquired by the debtor after the case is filed until it is closed, dismissed or converted. In any bankruptcy case, the property of the estate includes property acquired within 180 days by will or inheritance, by a divorce decree, separation agreement or property settlement agreement, and from a life insurance policy.
For the most part, a trustee in bankruptcy steps into the debtor’s shoes with even greater rights than the debtor in the debtor’s property. The trustee has the greater rights of a super-creditor or a bona fide purchaser and may set aside or avoid certain liens in, or transfers of, the debtor’s property. For example, a trustee may be able to set aside a transfer of property from a husband to a wife or other relative made before the bankruptcy case was filed. The trustee can administer or sell jointly owned property respecting the rights of any co-owners. Thus, a trustee could sell property owned by a husband and wife, if either the husband or wife files bankruptcy, unless the property is owned by the couple as tenants by the entirety and there are no joint unsecured claims against the spouses. In a debtor in possession case like a chapter 11, chapter 12, or chapter 13 case, the debtor may have some of the same rights as the trustee.
In Virginia’s scheme of equitable distribution, marital property may include property that is titled in the name of the other spouse. Title does not determine whether a husband or wife has an interest in his or her spouse’s property; all property acquired during the marriage before husband and wife separate is presumed to be marital property. The starting point for equitable distribution in a Virginia divorce is classifying the property of the husband and wife as separate, marital or hybrid – a mixture of separate and marital. Marital property is all property titled in the name of husband and wife, the marital portion of hybrid property and property acquired by husband or wife that is not separate property. Separate property is property owned by the husband or wife before marriage, property acquired by will or inheritance or a gift during the marriage, but not from the other spouse, and the separate portion of hybrid property. If marital property or significant personal efforts of either spouse during the marriage cause a substantial appreciation in the value of separate property, then that property can become hybrid property, with the increase in value being declared by the divorce court as marital property, regardless of the title.
The property of a bankruptcy estate includes both legal and equitable rights, that is, rights that could be enforced in a court of equity, which would include rights in a divorce case. Thus, the bankruptcy estate of a husband or wife could include that spouse’s rights in marital property under Virginia’s equitable distribution scheme and would certainly include property that the debtor spouse has at the time of filing, or acquires within 180 days after filing, in a divorce or under a separation agreement or property settlement agreement.
You should consult with your Virginia bankruptcy or divorce lawyer to discuss the affect of a bankruptcy proceeding on your marital rights in property.