Equitable Distribution in Bankruptcy
In re Howell
This is a case which involves the distribution of marital property when one of the parties has filed for bankruptcy. In this matter, The United States Bankruptcy Court, District of New Jersey, held that under New Jersey state law, the right to equitable distribution does not arise until a final judgement of divorce is entered.
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As this case demonstrates, a bankruptcy filing can have a significant impact on divorce proceedings and the potential of one party filing for bankruptcy is a situation that should be closely monitored. Failure to do so could have adverse consequences for the litigants.
In re Howell also holds that the the automatic stay of the equitable distribution claim in the state divorce case does not apply to the debtor’s property that is not subject to the federal bankruptcy proceedings.
When debtor-spouse’s bankruptcy filing precedes entry of judgment of divorce, debtor’s interest in marital property is included in property of the estate protected by automatic stay and the other spouse may not seek to have such property equitably distributed, however may request a monetary award of equivalent value.
Given the potential complexities caused by a bankruptcy filing it is critical that divorce attorenys either familiarize themselves with bankruptcy law or work closely with a bankruptcy attorney if necessary.
This case is of vital importance to the other spouse in a pre-divorce situation and should be the subject of discussion with legal counsel on an immediate basis.
Given the significant impact that a bankruptcy may have on a pending divorce, a protocol should be established for communication betweent the Federal Bankruptcy Judge and teh State Family Part Judge. It is often a lack of communication between the two that leads to inequitabel and even inconsistent results.
The above-referenced case highlights significant property distribution concerns for both bankruptcy and matrimonial attorneys. In this case, court held that if the filing of a petition precedes a judgment of a divorce, then the pending claim for equitable distribution by a spouse will be treated as a post-petition claim within the bankruptcy proceeding. Treating the claim as a post-petition claim removes the claim from dischargeability, which allows the spouse to pursue their state court rights for equitable distribution claims whether or not discharge occurs. Of most importance is the court’s holding that the trustee retains superior rights to all bankruptcy estate property sought in an equitable distribution claim so long as the bankruptcy predates the judgement of divorce. This holding maintains the distribution of property of the bankruptcy estate within the jurisdiction of the bankruptcy court, rather than the state court. Although the court agreed that a state court could order equitable distribution of property, the state court can only order distribution subject to the rights of the trustee as a hypothetical lien creditor. Further, execution on the property requires lifting of the automatic stay by the bankruptcy court. Although the decision does clarify that a spouse does not require court ordered relief from the automatic stay to pursue non-estate property, such as exempt or abandoned property. This case exemplifies the importance of monitoring property rights of clients not only during a bankruptcy, but also before, in anticipation of filing a bankruptcy proceeding.
In New Jersey, if a wife files for bankruptcy, but her husband owns the home (only his name is on the deed), then is the house an asset of the wife’s?
Noah –
Thank you for your comment. The answer is a little more complex than you may think. It may depend upon whether you are still living together, whether a divorce complaint has been filed, etc.
There is the property itself and the bankruptcy trustee may argue that your wife has a separate “property” interest as her inchoate or marital share of it.
I believe that they may try to sweep some value of the house into her bankrupt estate, but you are likly able to defend against that happening..
We can not give legal advice over the internet or by telephone, but my partner Tim Duggan who can be reached at 609 895- 7353 is our bankruptcy expert. Give him a call.
Post Divorce- I did not receive equitable distribution/ the court did not address it in final degree/I filed for Bankruptcy. I would like the divorce case reopened.
Illinois:My wife filed bankruptcy and I believe it was discharged in Sept.2003. I filed for divorce in May 2004. She never mentioned to my knowledge the eguity in the house to the bankruptcy judge. The house is in my name only. Is she entitled to equity? I have been trying to find case law does anyone have a clue. I found somthing that was appealed that states “Failure to list an interest in assets in a bankruptcy petition by the husband equityably estopped him from claiming an interest therein in a later divorce proceeding according to Gelber v. id decided by the New York Supreme Court in King’s County.”Please help my research. Thank you.
Does a plaintiff’s refusal of her equitable distribution check (her interest in the former marital home which is now sold) amounts to or equals her waiver of her rights under the Final Judgement of Divorce in New Jersey Family Law?