Bankruptcy and Divorce: What If I Just Paid My Divorce Lawyer?

21 Jan Bankruptcy and Divorce: What If I Just Paid My Divorce Lawyer?

Along with medical bills and excessive credit card debt, one of the leading causes of bankruptcy filings is divorce. If a family is barely getting by when it is intact, adding a divorce or separation is sure to cause a worse financial hardship, which might only be able to be remedied through a bankruptcy filing. The bankruptcy could be filed by one or by both spouses, and it could occur either during or after the divorce. Sometimes, a problem can arise if the divorce lawyer has received a large attorney fee payment just before the bankruptcy filing.

The problem arises due to two factors: section 547 of the bankruptcy law, which allows the trustee to recover debt payments of over $600.00 made in the 90 days before the bankruptcy is filed, and section 541 of the bankruptcy law, which defines “property of the bankruptcy estate” to include bank accounts of the debtor, even bank balances in a divorce lawyer’s trust account which technically still belong to the client/bankruptcy debtor.

To illustrate this problem, let’s say the debtor paid her divorce lawyer $3,000.00 on December 1, for work the divorce lawyer performed in August. The debtor wants to file bankruptcy on February 1. If she does, the trustee will be able to recover the $3,000.00 payment from the divorce lawyer; the trustee will then use the funds to pay all her creditors a pro-rata dividend. This is bound to cause a rift between the debtor and her divorce lawyer, especially if the debtor still needs services from the divorce lawyer.

This problem can be avoided by waiting to file the bankruptcy case until more than 90 days has elapsed from the date of the payment to the divorce lawyer. It can also be avoided by the simple expedient of paying the divorce lawyer after the bankruptcy is filed. Also, paying the divorce lawyer every month, on a fixed schedule, for services performed in the prior month, immunizes the payments to the divorce lawyer from being recovered by the trustee. This is because the trustee cannot recover regularly scheduled debt payments, or payments for services which are rendered at substantially the same time as the payment occurs.

The problem with the divorce lawyer’s trust account balance arises when the debtor has a large positive balance in the trust account, intended to be used to fund the ongoing divorce proceedings, and where the divorce lawyer has not yet performed the work. Section 541 says that this money still belongs to the debtor, even though the money is in the divorce lawyer’s trust account. It is the debtor’s property just as if it were on deposit in her regular checking account.

Because the trust account is the debtor’s property, it will become property of the bankruptcy trustee upon the filing of the bankruptcy case. The money will have to be turned over to the trustee for distribution to all creditors, unless the debtor has an exemption available to exempt this money from the bankruptcy estate. There may be no exemption available, or the exemptions may be needed to exempt other property.

If so, steps should be taken before filing the bankruptcy to eliminate the problem. The easiest solution is probably for the debtor to get the money back from the divorce lawyer, and then use it to buy groceries or clothing, to make house or rent payments, or it can be used for some other living expenses. Another solution is for the divorce lawyer to quickly perform the needed services in the divorce, and then pay herself from the trust account to deplete the balance. That way, the debtor will not have any ownership interest in the funds in the divorce lawyer’s trust account when the bankruptcy is filed.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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