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What If Your Spouse Declares Bankruptcy?

One of the more devastating circumstances we’ve seen at Gucciardo Law goes like this: two people split up, and the one that was ‘the breadwinner’ signs an agreement to split the marital estate in a certain manner with the spouse that was the ‘homemaker.’ At the same time that the breadwinner is signing the agreement, however, they’re also (secretly!) filing for bankruptcy.

You can imagine what happens to the homemaker when the money they expected to rely on while they went to school, got re-introduced to the workforce, and got their feet under them…just vanishes. They come to us, terrified and confused, and ask, “What can I do?”

The answer, sadly, is that by the time they arrive with the question on their lips, it’s almost always too late. Blame the breadwinner for being more than a little heartless if you like (though it’s often just the obvious solution to their own newfound monetary dilemma, in their eyes), but it’s still on your shoulders to figure out how to get by until you can get your finances back under your own control.

An Ounce of Prevention
The best answer — almost the only one that actually works out, in the end — is to not get caught in this situation. That means having a CPA at your side while you’re going through the details of the settlement, and going through the financial situation in minute detail, looking for certain factors that could indicate trouble.

  • If the martial estate is highly leveraged, it indicates that even a small downturn in the economy could leave the estate nearly bankrupt even while the proceedings are in course.
  • If the marital estate has little to no liquidity, your spouse is entirely dependent on keeping their job at the same or better hours and pay rate in order to continue making payments.
  • If the martial estate is highly in debt, and the court passes of even a modest majority of that debt on your spouse, they may find themselves in a position where it’s reasonable to declare bankruptcy even before the spousal support settlement is written up.
  • If your spouse is offering to pay a small amount for several months, then ‘ramp up’ or make one or more balloon payments significantly down the road? That could well be a sign that s/he is intending to declare bankruptcy and is trying to make minimum payments until it is successfully filed (at which point the payments will drop to zero!)
  • If your spouse is encouraging you to accept a large property settlement, especially one paid over time, when it would normally be more traditional to offer a small property settlement alongside a spousal support agreement, it’s likely they’re eyeing the potential of a future bankruptcy — property settlements are voided in case of bankruptcy; spousal support payments are not.
  • If the amount your spouse offers to pay out seems too good to be true, ask your CPA to re-run their financials with the payout taken into account. If the payout is sizable enough to result in a negative balance sheet month-by-month, it’s a near-certain sign of a planned bankruptcy.
  • If your spouse’s major income stream is from a closely-held business in which they only have a partial or minority interest, and the rest of the business interest is held by your spouse’s family or close friends, beware. It’s very easy for someone in that situation to give the appearance of being in dire straits and successfully apply for bankruptcy while being cared for by their friends and family through the business.

What Should You Do?
If you see one (or more!) of the above situations forming as you and the CPA go over the financial situation, there are a few steps you can take to mitigate the danger.

  • Find out if there is any collateral available that you can have put up as a part of the payment agreement. Often, there isn’t, but in those situations where there is, this can prevent an ill-intentioned spouse from going through with their plan at the risk of losing precious assets.
  • If there is a decent amount of liquidity in the marriage estate, you can simply ask for a large amount of assets up-front in lieu of support payments, entirely removing the risk.
  • If there is a dearth of liquid assets, ask the judge for permission to refinance one or more assets in order to obtain the necessary liquidity. (For example, if you have a house that you should be receiving a $200,000 property settlement on, but your spouse is living in it and reluctant to sell, request that it be forcibly refinanced so that the settlement can be paid in a lump sum.)
  • If there are simply no options for liquidating assets, consider strongly reducing the upfront payout that you expect from the split of the marital assets, and ask instead for a healthy spousal support payment. Because spousal support payments aren’t affected by bankruptcy filing, the more you suspect that bankruptcy is your spouse’s goal, the more reasonable this course of action becomes.

It’s always an enormous betrayal when you discover that your spouse is more than willing to allow your life to fall apart financially in order to save their own skin. Don’t get caught in that situation — pay attention to every detail of the financial discovery and consult an expert on how to structure your agreement appropriately. Call Gucciardo Law at (248) 723-5190, and we’ll help you find an expert who can help.

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We focus exclusively on family law matters so we are always available to answer your questions and help.

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