Court Calls Divorce Asset Distributions A Fraudulent Transfer

Often, clients facing a significant judgments ask me whether they should divorce their spouse for asset protection. They consider a legal divorce in which their non-debtor spouse would receive all of the debtor’s non-exempt assets. The issue is whether a court’s divorce decree immunizes the debtor and his ex-spouse from fraudulent transfer actions.

I read a case where a particular debtor divorced his non-debtor wife and transferred almost all assets to the ex-spouse in the amount of approximately $2 million. The debtor retained no significant assets. The debtor husband had a judgment against him for over $200,000.

The creditor alleged that the divorce amounted to a fraudulent transfer. The debtor and his ex-wife argued that the family court’s divorce decree requiring the asset transfers constituted a defense against fraudulent transfer actions.

The appellate court concluded that the family court’s approval of the dissolution did not insulte the debtor from the creditor fraudulent transfer claim. The divorce, the court daid, did dnot alter the creditor’s rights under the fraudulent transfer statutes. The court noted that the couple’s division of assets was so unequal that it could not be characterized as an equitable distribution, and that the dissolution terms suggested that the debtor and spouse were mainly intent on defrauding the creditor.

The result may have been different if the couple’s distribution of assets reflected an equitable dissolution where both spouses received similar asset values. The case should be a warning to debtors who believe they may circumvent fraudulent transfer laws though a divorce.

Last updated on May 22, 2020

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