When you divorce, your jointly owned property is legally divided, but it can sometimes take a while to actually divide the property. Sometimes, you must sell property first, and then divide the proceeds. Often, one of you must refinance property to remove the other's name from the deed and mortgage. If your ex-husband files for bankruptcy before the proceeds from the property are split, the money typically will still be divided according to the terms of your divorce decree.
Chapter 13 v. Chapter 7
Most individuals file for bankruptcy under either Chapter 7 or Chapter 13. Chapter 7 is sometimes called “liquidation bankruptcy” because a Chapter 7 debtor’s assets can be taken and sold by a bankruptcy trustee to pay the debtor’s creditors. Under Chapter 13, the debtor creates a repayment plan to pay on his debts over three or five years. A bankruptcy trustee oversees the plan, but typically does not force the sale of assets.
Sale of Assets
Even under Chapter 7 bankruptcy, not all assets are taken and sold. In addition to these exempt assets, a bankruptcy trustee typically cannot sell jointly owned property if the sale would create a hardship for the non-debtor owner. This means the trustee cannot sell property that you and your ex-husband own jointly if the sale causes you a hardship, such as if you live in the home. The trustee cannot sell jointly owned property unless all of the following conditions are met: the property cannot be easily divided, selling only one part of the property would produce significantly less cash, the benefit of selling outweighs the harm it will cause you and the property is not used to produce electricity or gas.
Division of Profits
If you and your ex-husband decide to sell jointly owned property when he has filed – or will soon file – Chapter 13 bankruptcy, profits from the sale of the property are divided according to the terms of your divorce decree. Your ex-husband’s bankruptcy does not affect your share of the profits because your share is separate. If your divorce decree does not address division of the profits, you and your ex-husband can enter a signed agreement to formalize your arrangement for division before the sale is complete.
State and federal homestead exemptions laws allow your ex-husband to keep the value of the property that is exempt from bankruptcy. For example, say your state’s homestead exemption is $50,000, you and your ex-husband owe $150,000 on your mortgage and you house sells for $300,000. You and your ex-husband should each receive $75,000 from the sale, but your husband may only be allowed to keep $50,000. The remaining $25,000 would go to pay creditors. Homestead exemptions typically only apply to the debtor’s residence. Other types of property may receive no exemption, which means all of his profits could be used to pay creditors.