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Newsletter - Spring 2008
Bankruptcy after Divorce
Barry Mukamal, Partner, Advisory Services |
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Despite the acrimonious environment of many divorces, most financial arrangements between divorcing spouses are decided by the parties themselves prior to the final hearing for dissolution. As a practical matter, it is almost always preferable for the parties to reach a settlement of financial issues rather than to invite the judge to do so. In either case, the potential implications to the payee spouse of the payor's post-petition financial condition must be considered.
Under current bankruptcy laws, spousal support is a nondischargeable obligation of the payor spouse. The waters become murkier in situations where property distributions provided according to the terms of the settlement agreement or final decree are intended to substitute as a form of periodic support. Similarly, imputed earnings from property to be transferred to the non-moneyed spouse are often factored into the ultimate determination of spousal and child support as a reduction in amounts that would otherwise be appropriate. This becomes significant because a property settlement is generally dischargeable in bankruptcy, while a support settlement is not.
In crafting a final judgment or settlement agreement, it is essential to consider the potential implications of the payor pouse's ability to fulfill the obligations. Many a divorce settlement has been thwarted by the payor's post-divorce bankruptcy filing, leaving the payee spouse without a means of support.
If a bankruptcy court determines the agreement is not fair and reasonable to both parties, anything received and to be received may be deemed a fraudulent transfer and recoverable by a trustee for distribution to the filing spouse's creditors.
Protections
When faced with this possibility, all options must be explored. Chiefly among them is the availability of any collateral that can be pledged to support any pay-out or long-term obligation. Another option is to negotiate for as many liquid or near-liquid assets as possible, including retirement accounts.
Conclusion
Although the focus of crafting a marital settlement agreement or proposed final judgment is primarily on the division of assets and continuing spousal support, the real threat of bankruptcy post-filing cannot be ignored. Due consideration must be given to the potential of a bankruptcy filing until the obligations of both spouses are met. Even the best intentions and fairest of settlements can be thwarted if these considerations are not properly addressed.
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