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"Protecting Yourself from Post-Divorce Bankruptcy"
This
article was first published in Divorce
Magazine and is re-printed with their full permission.
By Kalman A. Barson, CPA/ABV, CFE
Many divorce settlements have been undone by the filing of a petition in bankruptcy by the payor spouse - sometimes even before the ink has dried. As a direct consequence, what should have been a comfortable existence for the non-monied spouse will no longer be what had been anticipated.
It is reasonable to ask, "Were there warning signals I should have seen?" or "Could I have taken precautions to protect against this potentiality?". Whether the bankruptcy be the handiwork of a vindictive former spouse or simply the unfortunate consequence of uncontrollable or unpredictable happenstance, sometimes it can be prevented.
In many middle-class divorces, there is little margin of safety - the ability of the monied spouse to make payments is inexorably tied to the financial vagaries of a closely-held family business, leveraged real estate or an executive position which is subject to the mercies of corporate downsizing. It is important when fine-tuning a settlement to take a step back and view the financial package (perhaps with the assistance of a CPA) to see if it can pass the "smell test" of comfortable cash flow.
If the marital estate has little or no liquidity, if the ability of the payor to make the structured payments is totally reliant upon the continued good fortune of a business or employment at current income levels, you may have a financial problem in the making. Particularly if the marital estate is leveraged, the danger of potential default is magnified by the slightest of financial reverses. Much like analyzing the financial statement of a business and coming to the conclusion that its working capital ratio is inadequate to meet a business downturn, so too is it possible to look at a divorcing party's ability to make payments and conclude that any financial reversal, genuine or concocted, may cause bankruptcy.
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