Tuesday, July 30, 2013

BANKRUPTCY AND DIVORCE PITFALLS by Flint Divorce Bankruptcy Lawyer Terry Bankert 235-1970

My observation that language in a divorce judgment are done quickly, sloppily and by the uniformed. What are the implications of one spouse being in bankruptcy immediately after a divorce?

This article posted by Flint Genesee Bankruptcy Lawyer Divorce Attorney Terry Bankert 235-1970  www.attorneybankert.com 07/30/13

Regardless of the magic language used we have to be aware of what are called  avoidance issues if one spouse files bankruptcy immediately after a divorce.

Your attorney , and most will not know,  needs to remember that if one spouse files bankruptcy, he or she (or the bankruptcy trustee) will be able to use “avoidance powers” to undo what the divorce counsel and the parties negotiated.

There are several steps that you and your divorce attorneys should take to avoid this pitfall:

  1. Be familiar with  11 USC 548 and the Michigan UFTA, MCL 566.31 et seq., and be aware of the so-called “badges of fraud,” some of which are itemized below in MCL 566.34(2).
  2. 566.34 Transfer with intent to defraud.Sec. 4.(2) In determining actual intent under subsection (1)(a), consideration may be given, among other factors, to whether 1 or more of the following occurred:
  3. (a) The transfer or obligation was to an insider.
  4. (b) The debtor retained possession or control of the property transferred after the transfer.
  5. (c) The transfer or obligation was disclosed or concealed.
  6. (d) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.
  7. (e) The transfer was of substantially all of the debtor's assets.
  8. (f) The debtor absconded.
  9. (g) The debtor removed or concealed assets.
  10. (h) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.
  11. (i) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
  12. (j) The transfer occurred shortly before or shortly after a substantial debt was incurred.
  13. (k) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
  14. Courts use those badges of fraud, and others distilled from caselaw, to determine the existence of “actual intent to hinder, delay or defraud creditors.” Bankruptcy’s fraudulent transfer statute, 11 USC 548, is similar to the Michigan statute, but it does not contain a statutory description of the so-called badges of fraud.
  15. In any settlement, divorce your attorney  should structure transfers in a way that reduces the chance that they will get avoided as either a fraudulent transfer or a preference. For example, mutual transfers, concessions, and promises given in reaching a consensual property settlement should be stated so a court is less likely to find that a transfer was made for less than reasonably equivalent value (which is the threshold for a constructively fraudulent transfer under both 11 USC 548 and MCL 566.31 et seq.). I see this language in less that 5% of the divorce judgments prepared by other counsel.
  16. Your Divorce attorneys should record or perfect whatever liens or security interests are granted as soon as possible. If the liens or security interests are not recorded as of the date one spouse files bankruptcy, the debtor or a bankruptcy trustee will be able to avoid them using 11 USC 544. If the liens or security interests were recorded within 90 days before the bankruptcy (1 year for insiders), the debtor or trustee may be able to avoid them as preferences.

DOMESTIC SUPPORT ORDERS , DSOs , are nondischargeable in all bankruptcies that an individual can file. The definition of DSO includes anything that is in the nature of alimony, maintenance, or support and is nondischargeable, irrespective of the label it has been given.

Consequently, whenever a debtor spouse or his or her bankruptcy trustee seeks to take action that would impair the rights of the non debtor spouse, that non debtor spouse should consider whether the obligation or property is really in the nature of alimony, maintenance, or support. If so, the non debtor spouse will have a DSO where the Bankruptcy Code provides much more protection.

The power of the automatic stay stops all legal action against your property when a bankruptcy is filed. If a divorce is not final as of the date one spouse files for bankruptcy, the automatic stay imposed by the Bankruptcy Code stays the divorce proceedings. Unless one party moves to lift the stay so the divorce proceedings can continue, the divorce will be frozen until the bankruptcy case is concluded. This is the case for any pending appeals of divorce judgments as well as spousal or child support award appeals.

Sphere: Related Content