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Property Division and Bankruptcy

Parties to a Dissolution of Marriage must enter into a separation agreement dealing with issues of parental rights and responsibilities, child and spousal support. Division of property and debt must also be resolved.. The separation agreement, when approved by the court becomes part of the decree of dissolution.

A separation agreement is a contract. To be enforceable, the contract must have been entered into voluntarily without duress, coercion, undue influence or fraud. The terms of a separation agreement incorporated into a decree of dissolution may favor one party or the other. So long as the agreement was freely entered into, and the parties acknowledge their satisfaction with the terms, it will be approved by the Domestic Relations Court.

Under current Ohio law, parties may by agreement, later modify their property division. Absent agreement by the parties, a property division may not be modified. A later bankruptcy filing by one of the parties to a separation agreement may, however, change the property division the parties intended.

In a recent United States Sixth Circuit Court of Appeals case known as In Re Neal, the bankruptcy trustee sought to set aside the transfer of assets from wife to husband pursuant to their separation agreement, as being fraudulent. Wife filed for bankruptcy shortly after the parties were granted a dissolution of marriage which incorporated their separation agreement. The trustee argued that wife had received less than reasonable value for the assets she transferred to husband and the marital debt she assumed,

Under bankruptcy law, a trustee may seek to be set aside any transfer of the bankrupt's property made within two years of the bankruptcy filing. The trustee must show that the value received for the property transferred and the marital debt assumed was less than “reasonably equivalent value.” In Neal, despite the parties having freely entered into the agreement and the Domestic Relations Court having approved the agreement, the trustee was successful in obtaining an order requiring husband to pay reasonable value for the assets he received and half of the marital debt wife assumed.

Parties to a separation agreement may not contemplate a modification of their property division, but a subsequent bankruptcy may cause an involuntary change.

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