Who gets the diamond when bankruptcy is filed?

19 Jan Who gets the diamond when bankruptcy is filed?

A diamond engagement ring can be a symbol of love and devotion.  It can also be a potential problem in a bankruptcy proceeding.  Ever since the DeBeers Organization began an aggressive marketing campaign for diamonds during the depression years of the 1930’s, diamond rings have become common place as in engagement arrangements.  They can be valuable, and exemption laws often cover only limited amounts for jewelry.

Historically, an agreement to marry was a contract.  As a down payment on this contract, the parties were often allowed to have sexual relations.  Historically, when virginity was an important component of an agreement to marry, one party (typically a woman) was giving up something of value when she entered into an engagement…..an asset that could never be recovered.  A “breach of marital promise” arose in many states and was often memorialized in statute.  This was intended to protect women who gave up their virginity as part of the engagement when the partner failed to complete the marriage.

Just as the DeBeers company began its campaigns to market diamonds, state legislatures began to repeal the breach of marital promise legislation.  Hence, the diamond engagement ring began to be considered a “non-refundable deposit” from prospective grooms to their betrothed.

So, what happens when the parties break off an engagement?  What happens to the diamond ring purchased by the prospective groom, if the bride-to-be changes her mind?  What happens if the bride files a bankruptcy?  Who gets the diamond ring?

The answer to these questions hinges primarily on the intent of the parties.  Was the diamond a conditional gift?  Was it only a gift to the bride if she goes through with the wedding?  Sometimes these rings are returned to the groom if the bride backs out.  In that circumstance, the bride may give back the diamond ring if she calls off the wedding.  On the other hand, if the ring is a completed gift, with “no strings attached”, a bankruptcy trustee may lay claim to the ring as an asset of the bankruptcy estate in the event such a proceeding is filed before the wedding.  If the prospective bride gives back the ring and files bankruptcy, the trustee may pursue the asset as a fraudulent conveyance.  Not a pretty prospect but perhaps an interesting story to tell the grandchildren if all works out in the end.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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