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Bankruptcy Debtor Must Pay Value of Property Conceded in Divorce, BAP Rules - In re Neal

October 11, 2012

In the experience of Vincent Howard and our Corona consumer bankruptcy lawyers, bankruptcy and divorce often go together. That's not true for everyone, fortunately, but financial problems can be hard on a relationship, and divorce can be hard on a person's finances. However, because divorce generally leaves both parties with less money, it can occasionally be used--or appear to be used--to hide assets from the bankruptcy court. That was the allegation against Karen Neal, the bankruptcy filer in In re Neal. Neal legally separated from Carl Bruno in July of 2008 (divorcing that September) and conceded substantial property to him, then filed a Chapter 7 bankruptcy the following March. Her trustee alleged that the transfer was fraudulent and filed an adversary proceeding to recover the property from Bruno. The Bankruptcy Appellate Panel of the Sixth U.S. Circuit Court of Appeals ultimately allowed recovery of only some of the assets.

Prior to the separation, Neal borrowed $28,000 from her parents to pay off a home equity line of credit on the marital home. In the separation agreement, she transferred her entire interest in the marital home to Bruno. They agreed on no spousal support and that there was no marital debt. In March of 2009, Neal filed for a "no assets" Chapter 7 bankruptcy, listing the loan from her parents, a car loan and credit card debt of $60,700. A year after her bankruptcy discharge, the trustee in her case filed an adversary proceeding, arguing that she did not receive equivalent compensation for the assets transferred to Bruno, and seeking to recover the allegedly fraudulent transfers. Bruno argued that Neal's debt was not marital debt because it was never disclosed to him, and that the property was split fairly because he could have been awarded support, health insurance and a pension in a contested divorce. The bankruptcy court ultimately decided that Neal did not receive reasonably equivalent value for the property she transferred, and calculated that Bruno should pay the estate $47,635.27 for the value of the assets.

The BAP started by noting that under caselaw, an uncontested divorce agreement stating that the division of property is equitable does not preclude the issue from being litigated in bankruptcy court. It then went on to agree that Neal did not get reasonably equivalent value in exchange for the transferred property--but found that the bankruptcy court improperly included the value of the unsecured debt in its calculations. Debt is not property of the bankruptcy estate, it said; few courts have included it in reasonable value calculations. Furthermore, Bruno received no value from Neal's assumption of the debt, because credit card companies' right to repayment is determined by contract. The parental loan was also improperly included, the panel said, because no evidence ever showed that Bruno was a party to it. However, the panel did find that Bruno received more value in the home's equity than Neal got in the UPS pension, so it recalculated the payment at $4,532.98.

Vincent Howard and our Fontana individual bankruptcy attorneys believe there's an important lesson for bankruptcy filers in this case: if you are planning a bankruptcy within two years of a divorce (or vice versa), it pays to consult an experienced attorney. Though the divorce agreement in this case was approved with no problem, the bankruptcy court was under no obligation to agree with the divorce court or take the issue as settled. In fact, the BAP dismissed Bruno's argument that it should have considered the likely outcome of a contested divorce, saying in essence that equitable division is irrelevant for bankruptcy purposes. This resulted in a substantial financial setback for Bruno and complications for Neal; in a worse case, a bankruptcy court could believe Neal was attempting to hide assets, rather than merely trying to make a clean break from her marriage. That's why Vincent Howard and our Yorba Linda personal bankruptcy lawyers prefer to get involved early enough in both cases to structure the proceedings in a safe and advantageous way.

If you're so deep in debt that you don't believe you can ever get out, and you'd like to speak with an experienced California attorney about your options, call Howard Law, P.C. You can send us a message online or call toll-free at 1-800-872-5925.

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