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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.

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IMPUTATION OF INCOME IN SPOUSAL SUPPORT OR CHILD CUPPORT CALCUALTIONS

HOW ARE INCOME IMPUTATION DECISIONS MADE BY THE COURT

Presented here by Terry Bankert a Genesee Flint Family Law Attorney 810-235-1970

1. REAL INCOME

A. What is the real income  of the self employed engaged in an underground economy with unreported income?

HEYYUZA VS  HEYZA no 282790 unpublished The court opinionated that even if a party has unreported income, form purpose of calculating support, taxes that would be owed on that income should be taken into account. MCSF 2.02 3

EXAMPLES.

Landscapers

Beauticians

Personal Trainers

Dance Instructor

-BERGER VS BERGER ABility to earn $50,000 per  year as a nurse dance instructor see MSSF 2.01 G 2, a, b, d, h

Manicurists, nail techs

Restaurant business

Bar Business

Party Stores

Construction

Home Improvement

Maintenance

Contractor Generally

Mason

NOVAK VS NOVAK  no. 275267 July 22 208 . no imputed income because of mortgage  application stated income but masonry skills and past employment  imputed at $65,000.

Electricians

Plumbers

anyone doing side jobs

House Cleaners

Commercial Cleaners

Exotic dancers

Escorts

Companions for elderly

Professionals generally

Lawyer

Doctors

Dentist

chiropractors

holistic health people

Truck Driver

MCDOWELL VS MCDOWELL No 273807 May 22 2008 unpublished it Truck driver imputed income when working after  leaving his own company business. okay to subtract operating expenses and taxes. MCSF 2.021 2 G a d e h

b. unexercised ability to earn

STALLWORTH VS STALWORTH 275 Mich App 282 (2007) Criminal sentence is not a voluntary reduction.

b.WIERINGA VS WIERINGA no 288475 June 16 2009 Unpublished. It was not an abuse of discretion to not impute income to a spouse who was a homemaker and home-schooled children, two with special needs MCSF 2.01 G 2 a i ii.

b.MORK VS MORK no 283270 june 23 2009. appropriate to not impute income wife limited work experience, tried to find work, . include husbands employer provided room food, work experience did not warrants an unexercised ability to earn.

b.MYLAND VS MYLAN Court cannot guess but must use imputation factors  MCSF 2.01 G 2 a b.

b.TOAL VS TOAL The Court of Appeals found that it was appropriate to impute income to plaintiff husband in the amount of  $350,000 where he was previously employed as an investment banker and had retained investments. It was appropriate to consider plaintiffs unexercised ability to earn more than he was earning as a teaching coach. The court pointed out  this was not a deviation but  an appropriate imputation of income as permitted  by the Michigan CHild SUpport formula MCSF 2.01 G 2 a b h

b. VANGESTR V VANGEST No. 294427 March 1,2011 [unpublished]

The Court of Appeals upheld  a trial court's decision to award a substantial spousal support to balance the parties income taking into consideration the fact that the defendants income had been reduced by $10,000 per year because of a drunk driving conviction.

b. CARLSON V CARLSON No. 292536 June 26 2011 The COurt of Appeals found  that the trial court abused its discretion in failing to consider the factors enumerated in 2004 MCSF 2.10 (E) or finding that the defendant had the actual ability and likelyhood of earning the imputed income.  MSCF 2.01 (2)(G)(h)

c.The use of forensic accountants for business practices

MORRIS V MORRIS No 301555 January 31 2002 unpublished. The Court of Appeals found no error in imputing income $35,000 per year to plaintiff /payer who flipped houses and an expert was used to present an analysis of plaintiff business income.

d.Lifestyle analysis including support from friends and relatives

BYERS VS BYERS No. 300027 May 5 2011 unpublished

The Court of Appeals  upheld a trial court's child support and spousal support award essentially relying on evidence of defendants “ lifestyle” and ability to pay his bills arriving at imputing income  of $52,000 to him. Specifically refers to Michigan Child SUpport Formula factors MCSF 2.01 (G)(2)(h)

HOSTED V HOSTED  No 299116 December 20, 2011 The COurt of Appeals  remanded the issues of spousal support back to trial court for specific finding as to the alimony factors., but did not reverse the trial court's finding that the defendants business records could not support his lifestyle and imputed income of $61,280 pr year to him. Comparable factors MCSF 2.01 (G)(2)(h)

e. Cash Flow analysis see Cunningham

f. Earning capacity

RIEBSCHLEGER VS RIEBSCHLEGER No 270226 February 21 2008. The court of Appeals differentiates between imputed income and earning capacity. Court can impute additional money to arrive at spousal support award.

GEORGE VS GEORGE  no 277186 August 2008 unpublished . The court held the use of  the Department of labor statistics in determining income attributable to child support payer MSCF 2.01 G 2 a b c

MORRIS V MORRIS No 301555 January 31 2002 unpublished. The COurt of Appeals found no error in imputing income $35,000 per year to plaintiff /payer who flipped hjouses and an expert was used to present an analysis of plaintiff business income.

RUGIERO VS RIEGRO No 301829 June 19 2012 unpublished. The trial Court did not err in treating bank deposits as income. Plaintiff/payer was employed in a family restaurant business. The trial court added bank withdrawals to determine the amount plaintiff needed to cover his expenses and multiplied by 12 to determine plaintiffs yearly income deducted payments related to car expenses and added 25 percent(for taxes) to determine plaintiff had a gross income of $88,000 per year.

2. Voluntary termination versus loss of job

CHIPPS VS CHIPPS No. 291755 February 23, 2012 (unpublished)

The Court of Appeals upheld the trial court’s decision to impute income to defendant of $113,000 per year consistent with his prior employment where defendant voluntarily left his job to work at  his church for $36,000. This was despite the fact that defendant testified he could no longer get his job back. The Court of appeals noted the defendant was free to file a petition to modify  the child support in the future if defendant finds that “due to the economy or some other factor” he was unable to find employment at the imputed level by the trial court. MCSF 2.01 G 2 a b h

WILSON V WILSON No 31719 June 21 , 2011 [unpublished] Imputation to woman payee was found to be appropriate where parties had owned a business neither wanted to continue to operate. The imputed income amount was between what she would earn working full time at minimum wage  and what she would earn as a dental hygienist which she was trained to do. MCSF 2.01 (G)(2)(a)

a. The impact of divorce on someone's income, how skeptical should it be when someone's income goes down.

a. ANDREWS VS ANDREWS No 274338 March 11 2008 unpublished, Signing over interest in income producing partnership voluntary and bad faith reduction in income.

a .ASHBAKER VS ASHBAKER no 296947 October 18 2011 unpublished

The Court affirmed the trial courts decision not to impute income to a 62 year old spousal support payer who elected to retire and receive social security after he sold his business and experienced health problems MCSF 2.01 (G)(2)(a)(c)

b. What income averaging will you use--three years.

b.SPAGNUOLO VS SPAGNUOLO no 275439 May 21 2009 unpublished. The Court of Appeals found no error in income averaging over a three years to determine defendant/payers income when there was a significant variation in defendants yearly income.

c.What about a spouse who has been a stay at home mother or dad and out of the market for more than ten years. Do you impute income?

3. What about the economy since 2008.

A. Look to the Michigan Child Support Formula

B. Applicable Case law and Equivalent Factors under 2008 MCSF 2.01 (G)(2)

C.MICHIGAN OCCUPATIONAL WAGE GUIDELINES

c. LANDON VS SHELTON No. 297064 December 21, 2010 Unpublished.

The Court of Appeals reversed the trial court adoption of the referee's recommendation that the defendant / payers income be imputed at $51,800 based on the Michigan Occupational Wage guidelines for a property and real estate manager because there was no additional findings to support imputation to defendant in this amount.

D.BALANCING OF INCOMES

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Imputation of income by Henry Gornbein, & Betty Lowenthal Presented at  American Academy of Matrimonial Lawyers Michigan CHapter, Advanced - Level Family Law Seminar Thursday May 02 2013 Birmingham Michigan

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