The Intersection of Bankruptcy Bankruptcy Filing and Fraudulent Conveyances in Dissolution of Marriage In Colorado Springs, CO

Are you involved in a Colorado legal proceeding involving bankruptcy and dissolution? An experienced Colorado Springs, Colorado divorce and child custody lawyer can guide you through the legal process and assist you in exploring your options. You have one bite at the apple in the court system so make it count.

Timing as a critical decision when bankruptcy and dissolution intersect. Regardless of whether one or both parties file for bankruptcy, if dissolution is contemplated joint planning between the parties often works best for cooperative and advantageous timing of both actions. Dissolution and bankruptcy can substantially impact each other. For example, if either spouse files for bankruptcy while the dissolution is pending, the bankruptcy action will stay any part of the case dealing with property or debt division until the bankruptcy case is closed or dismissed. Many domestic relations courts take a conservative approach and stay the dissolution case completely, other than for allocation of parental responsibilities and child support, until the bankruptcy case is resolved due to an automatic stay of proceedings imposed by the federal court.

Bankruptcy can be filed, before, during or after filing for dissolution. The most common approach is to complete the dissolution first. In this way support obligations are already set and property and debt divided going into the bankruptcy. A second approach is to complete the bankruptcy first and then file for dissolution. This can work potentially well for a Chapter 7 bankruptcy. For example, the trustee may collect no assets and all debt may be discharged. In the divorce any remaining assets are divided between the parties. However, when bankruptcy is filed first and not completed before filing for dissolution or filed during the course of the dissolution, the automatic stay can halt property distribution in the dissolution case. Cody Farms, Inc. v. Deerman, 482 B.R. 344 (2012). Filing for and completing a bankruptcy before initiating a dissolution of marriage can provide several advantages:

Discharge of Joint Debt: Filing a joint bankruptcy case before dissolution may allow both spouses to discharge their joint debts, thereby reducing the financial obligations that would otherwise have to be addressed during the divorce proceedings. This can simplify the division of marital property and debt.

Minimizing Avoidance of Post-Dissolution Financial Disputes: By addressing debt through bankruptcy before divorce, the couple can avoid future disputes over who is responsible for paying joint debt. This is particularly beneficial in cases where creditors might pursue one spouse for debt assigned to the other in the divorce decree.

Preservation of Assets: Bankruptcy can help preserve marital assets and increase the pool of assets available for division during the divorce.

Equalizing Bargaining Power: Completing a bankruptcy before divorce can equalize the bargaining power between spouses. Without the potential of one spouse filing for bankruptcy after the divorce and leaving the other responsible for joint debt, the couple can negotiate a more balanced and fair property settlement agreement.

Administrative Convenience: Filing a joint bankruptcy case facilitates the consolidation of the spouses' estates, reducing administrative costs and simplifying the process. In re Shjeflo, 383 B.R. 192 (2008).

Sometimes parties engage in fraudulent conveyances in dissolution proceedings in anticipation of filing for bankruptcy. Fraudulent conveyances those made for the purpose of hindering, delaying, or defrauding creditors and are subject to recapture by the trustee. 11 U.S.C. § 544(a), § 548. One example of a marital fraudulent conveyance is where parties enter into an agreement in contemplation of bankruptcy where the filing debtor receives only exempt assets while transferring all non-exempt assets to the non-filing spouse. Also, if a person transfers valuable property right before filing for bankruptcy, that can be considered a fraudulent transfer.

There are consequences of fraudulent transfers. The trustee can also look back at a marital property settlement to determine whether it may constitute a fraudulent conveyance. If the settlement appears to favor the non-debtor spouse to the detriment of other creditors, the trustee can seek to recapture the property transfers. 11 U.S.C. § 548(a)(1)(B). Additionally, the filing debtor’s case may be dismissed if there was a fraudulent transfer. 11 U.S.C. § 727(a). Under 11 USCS § 548, a trustee may avoid transfers made within two years before the bankruptcy filing if the debtor:

1. Made the transfer with "actual intent to hinder, delay, or defraud" creditors; or
2. Received less than "reasonably equivalent value" in exchange for the transfer, and the debtor was insolvent or rendered insolvent as a result of the transfer. 11 USCS § 548, Rodriguez v. Nelabovige (In re Kirst), 559 B.R. 757 (2016).

Whether there was a fraudulent transfer may be an issue of fact for the court to decide. Courts may infer fraudulent intent from circumstantial evidence, such as:

• Transfers to insiders (e.g., a spouse or family member);
• Retention of control over the transferred property;
• Concealment of the transfer;
• Transfers made shortly before or after substantial debts were incurred or litigation was initiated;
• Transfers of substantially all of the debtor's assets; and
• Lack of reasonably equivalent value in exchange for the transfer. Zubrod v. Kelsey, 270 B.R. 776 (2001).

A highly knowledgeable and experienced Colorado Springs divorce and child custody lawyer can guide you through Colorado Springs divorce and child custody matters by negotiating, mediating and litigating on your behalf. You can focus on moving to a better future instead of spending your time attempting to navigate complex legal rules and procedures.

Sabra Janko from Janko Family Law has more than 20 years of legal experience and has written “the book” on Colorado divorce and family law – “Colorado Family Law With Forms”, published by LexisNexis, which you can find here. Contact us at 719-344-5523 or complete our online scheduling request for a free 30-minute informational consultation. We also offer paid advice sessions for a more in-depth analysis of your case.