Press Room
12 May | 2008
Rachlin LLP, Offers Advice on Bankruptcy after Divorce


MIAMI--(BUSINESS WIRE)--Barry Mukamal, a partner with Rachlin LLP, the accounting and advisory firm, offers the following insight regarding recent divorces and bankruptcy consideration:

"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," said Mukamal. "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 spouse's ability to fulfill the obligations," Mukamal adds. "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," Mukamal said.

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, according to Mukamal.

"When agreeing to the payor spouse's assumption of joint liabilities in lieu of an equal amount of assets to be distributed to the non-moneyed spouse, care must be exercised, especially if those liabilities are not going to be immediately satisfied," Mukamal said. "Where possible, advisors should insist that non-essential assets be sold to provide an added source of liquidity or reduction of the payor spouse's outside obligations. Similarly, all refinancing options for the payor's retained assets should be explored.

"Many matrimonial attorneys attempt to cast property settlements as support payments, which are generally non-dischargeable in bankruptcy and subject to the court's enforcement powers. While this remedy, properly structured, might achieve this, the desired result is far from certain.

"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," Mukamal said. "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."

About Rachlin LLP
For more than 50 years, Rachlin LLP has offered traditional audit and tax services and a wide range of specialized business advisory services. Today, Rachlin has more than 200 employees in four locations: Miami, Ft. Lauderdale, West Palm Beach and Orlando.