Am I Required to Reveal My Intention to File Bankruptcy in a Divorce Settlement Conference?

Over the years I have received a number of questions from prospective bankruptcy clients regarding the impact of bankruptcy on divorce proceedings and vice versa.  A recent case from Texas suggests that a debtor’s failure to reveal his intention to file bankruptcy can result in the Bankruptcy Court finding that the debtor’s obligation to pay divorce related debts is non-dischargeable on the basis of fraud.

In the Wendt case, decided in the Southern District of Texas, involved a situation where Mr. Wendt entered into alimony settlement negotiations while at the same time planning to file for bankruptcy.   The Court found that Mr. Wendt’s silence about his intentions constituted a knowingly false representation upon which the plaintiff (Mrs. Wendt) relied.  As such, the Court would not allow Mr. Wendt to discharge those alimony obligations in his bankruptcy filing.

This decision is important for several reasons.  First, I think that it reaffirms the notion that divorce related obligations are increasingly difficult to discharge in bankruptcy.  Second, and more importantly, it greatly expands the idea of what constitutes fraudulent activity.

At what point does a debtor’s consideration of a bankruptcy option rise to the level of planning that will result in “knowingly false representations.”  Can you imagine a scenario where credit card lenders object to discharge on the grounds that the debtor incurred credit card debt fraudulently because the debtor may have considered filing bankruptcy before making a charge?

Further, what kind of evidence would be necessary to prove what was in a debtor’s mind.  Assuming that a bankruptcy lawyer will not reveal the substance of his meeting with a client, will the existence of a meeting with a bankruptcy laweyr itself be evidence that can be used against the debtor?

It seems to me that a careful lawyer can include a provision in a contract (like an alimony settlement) that specifically addresses the parties intentions regarding the discharge of a debt in a future bankruptcy.  In my view, contracts are a much more solid basis for denying dischargeability of a debt rather than the slippery slope of demonizing a debtor’s thoughts.