Posted on Tuesday, 15th February 2011 by Toby Duncan
A prospective client from Miami wants to file bankruptcy. He is in the process of getting divorced. He and his spouse each has an attorney. The spouses have a tentative oral agreement for the divorce which agreement includes payment of $100,000 of child support in equal payments over a four year time frame. The client’s principal asset is a money market account with $225,000. He asked me if he can pre- pay the child support in a lump sum to dispose of his cash and then file Chapter 7 bankruptcy. After all, he reasons, the child support is a priority debt in bankruptcy and would have to be paid before his unsecured creditors.
It’s ok to pay a priority debt , like taxes, before filing Chapter 7 bankruptcy, but the debt has to be owed at the time its paid. Generally, a debtor cannot pay a third party money for future debts not yet due. Payment without bona fide debt is a form of a fraudulent transfer.
I think this debtor could structure his divorce settlement to include an immediate obligation to pay his wife $100,000. If the spouses negotiate an arms length divorce agreement they may include, as one of the many negotiated rights and obligations, a current debt of $100,000 0wed to the spouse for alimony or support. The client would argue that his debt was due now, or as soon as the final divorce agreement is signed, and that there was consideration for his immediate payment because it was one of many negotiated terms in a divorce resolution. If someone argued that the $100,000 legal obligation was structured for the debtor’s benefit as part of a “conspiracy” of the spouses, the debtor would point out that the divorce negotiation was adversarial with each spouse having their own attorney..
I’m not sure this alternative plan would work but it has a much better chance than simply pre-paying a debt due in smaller increments over a period of future months. Making future child support debt into an immediate priority debt and the debtor may be able to losing his cash in a bankruptcy proceeding..
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Tags: Bankruptcy
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