Divorce settlement funds are only exempt if used for a limited purpose of reinvesting those funds into another homestead. Let’s say for example there is a martial home.  One spouse moves out and the other spouse stays in the home.  Both spouses are on the deed to the property.

The divorce is pending.  No settlement has been reached.  Property is not yet for sale.  The spouse living in the house can file for bankruptcy and exempt the home as homestead.  They would need the permission of the court to sell it while the bankruptcy is pending.  Ordinarily the proceeds of the home sale would be exempt as homestead, provided that those funds are segregated and used only to purchase another home.

This must be done within a reasonable period time, typically within one year. If part of those funds are used to pay bills, pay creditors, or pay rent until he/she finds a house the remaining proceeds would not be exempt.  There is no specific exemption for property settlement funds received from a divorce if they are not used for a home.  If the spouse who is not living in the home wants to file for bankruptcy while the divorce is pending, the home would not be exempt because he/she is not residing in the home.  You must be residing in the home for the homestead exemption to apply.

If you have any question as to whether you should file your bankruptcy case before or after your divorce and how property transfers will be viewed by the trustee its best to consult with our office.


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