Tag: settlement

Do Divorce Settlements Survive Bankruptcy?

I have previously written about interplay between divorce, family court proceedings and bankruptcy, as well as other issues involving interplay between bankruptcy and family law.  One issue that is highly significant in situations where one of the former spouses is about to file a Chapter 7 Bankruptcy or Chapter 13 Bankruptcy is whether the bankruptcy trusee will seek to undo a divorce settlement agreement.

With bankruptcy filings being so common, and divorce being a major reason for seeking bankruptcy relief, divorce lawyers are frequently concerned as to whether a divorce settlement will be upheld in a bankruptcy proceeding.

There are valid reasons to be cautious since if a debtor transfers a valuable asset to a spouse (or soon-to-be ex-spouse) prior to filing for bankruptcy, and the debtor-spouse does not receive reasonable value in return, then the transfer may be deemed to be a “fraudulent transfer.” In such a case, the bankruptcy trustee can sue the person who received the asset to recover it for the bankruptcy estate, so that all creditors can share in its value.  As with any other situations involving fraudulent transfers, the debtor must have been insolvent at the time of transfer.

In order to demonstrate that a transfer was not a fraudulent transfer, the party who received the transfer would have to show that there was “reasonably equivalent value.” It is common for a divorcing spouse to settle the divorce case by giving the other spouse valuable assets such as an interest in real estate, bank accounts, investments, or other personal property. In those situations, both parties do not want a bankruptcy trustee to try to set such transfers aside.

There was a time when some of the bankruptcy courts have held that innocent spouses who received such a transfer were no different from any other party who received a large transfer without sufficient consideration. However, a case decided by the United States Circuit Court of Appeals in June of 2009 will give many divorcing spouses a greater degree of certainty that a trustee will not be able to set aside a divorce settlement.

The decision in Bledsoe v. Bledsoe, 569 F.3d 1106 (9th Cir. 2009) this issue by addressing when a bankruptcy court may avoid a transfer made pursuant to a state-court divorce decree. The Circuit Court affirmed that decision and held that a trustee can only set aside a matrimonial settlement if he alleges and proves “extrinsic fraud.”  The Court also held that a divorce decree that follows from a regularly conducted, contested divorce proceeding conclusively establishes “reasonably equivalent value” in the absence of fraud or collusion. Since the Second Circuit has not addressed this issue, Bledsoe is valid law in the bankruptcy courts in New York. At the same time, the bankruptcy court, here in Rochester, New York, and elsewhere, will always review the totality of the facts.

In order for a divorce settlement to be upheld by the bankruptcy court, it must be ratified by the matrimonial court. That means that any transfer should be accurately described in a stipulation of settlement.  In addition, the stipulation must be specifically referred to and incorporated in the judgment of divorce.  It is not enough that the parties merely stipulate to a settlement; the court must specifically approve the settlement.  In a typical judgment of divorce, this is accomplished by stating that the stipulation survives the judgment of divorce and is not merged into it.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, New York, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Debt Settlement – Does It Work?

Recently, I read a New York Times article, “Debt Settlers Offer Promises But Little Help“, that confirmed something that I already knew – debt settlement, in most cases, does not work and usually costs a lot more than a Chapter 7 or a Chapter 13 bankruptcy.  Also, most people working with debt settlement companies are likely to find themselves in the worse financial situation after entering debt settlement.  One quote summarizes how debt settlement industry does business:

Consumers who turn to these companies sometimes get help from them, personal finance experts say, but that is not the typical experience. More often, they say, a settlement company collects a large fee, often 15 percent of the total debt, and accomplishes little or nothing on the consumer’s behalf.

While I appreciate the fact that most debtors want to avoid filing bankruptcy, in my opinion, bankruptcy represents an opportunity for a fresh start for most people.  The critical difference between a bankruptcy and a debt settlement, despite what a debt settlement company may claim, is that the creditor does not have to agree to a debt settlement arrangement.  In a bankruptcy, under either Chapter 7 or Chapter 13, the creditor is obligated to follow the Chapter 13 repayment plan or accept results of the Chapter 7 discharge.

At the same time, if a debtor has a only a few debts, may have other alternatives to either filing a bankruptcy or working with a debt settlement company.

I have experience with “workouts” which is a term used to describe a non-bankruptcy negotiated modification of debt.  A workout is an out-of-court agreement between a debtor and his or her creditors for repayment of the debts between them, which is negotiated without all the procedural complications — and perhaps the stigma — of the bankruptcy process.  A typical workout takes form of either “composition”, which is a contract between the debtor and two or more creditors in which the creditors agree to take a partial payment in full satisfaction of their claims. Another option is an “extension”, which  is a contract between the debtor and two or more creditors in which the creditors agree to extend the time for payment of their claims. An agreement may be both a composition and an extension, i.e., an agreement to accept less money over a longer period of time.

There is no requirement that all of the debtor’s creditors agree to a composition or extension, but most of them must voluntarily support it for it to work. Creditors that do not agree to the workout are not affected by it and remain entitled to pursue other remedies to collect the debts owed to them. My role in this process is to negotiate such agreements on behalf of the debtor.

If you are dealing with debt problems in Rochester, New York; Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation.