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Prenuptial Agreements and Bankruptcy

Married debtors in New York bankruptcy are more likely to have signed prenuptial agreements than debtors elsewhere just because so many New Yorkers are wealthy and want to protect their wealth in the event of a divorce or early death. Because marriage and bankruptcy intersect—often unpleasantly, alas—some debtors wonder what effects a prenuptial agreement might have on their bankruptcies. Here are some answers.

To begin with, if married debtors are filing jointly, then the agreement is unlikely to play much of a role, if at all. A couple won’t file jointly if there’s no specific advantage, so undoubtedly some jointly owned assets or debts are involved. Otherwise, one or both of the debtors would file separately.

So what happens if one of the debtors is filing and the other is not? Here debtors might find that a prenuptial agreement might not protect them as much as they hope. The first place a debtor might want to use a prenuptial agreement in bankruptcy is when itemizing his or her current monthly income for a chapter 7 New York bankruptcy. If the agreement defines the spouses’ incomes as non-marital assets that are separate to each spouse, then shouldn’t debtors be able to argue the same point to avoid taking the means test?

The answer is no. Section 101(10A)(B) of the Bankruptcy Code specifies that “current monthly income,” “includes any amount paid by any entity other than the debtor … on a regular basis for the household expenses of the debtor or the debtor’s dependents.” That “entity” can be the debtor’s non-filing spouse. This can be quite a problem for the lower-income debtor in the marriage—not for bankruptcy purposes but marital ones—because a chapter 7 debtor might be forced to abandon bankruptcy or convert the case to chapter 13 simply because of his or her spouse’s higher income. Debtors can, however, subtract their spouses’ incomes to the extent they are not used to pay for household expenses, listing each item. Perhaps that can keep some debtors in chapter 7, but married debtors with high consumption lifestyles might not be able to do so.

A second place where a prenuptial agreement might complicate a bankruptcy is when one (usually former) spouse owes money to the other. Specifically, if the prenuptial agreement requires one spouse to pay the other money in the event of a divorce, then the paying spouse might file bankruptcy to try to discharge the debt owed to the other spouse based on the prenuptial agreement. The question becomes whether the debt is a “domestic support obligation” under the Bankruptcy Code and is therefore nondischargeable, even if the prenuptial agreement states otherwise. The answer is usually that it is because section 101(14)(A)(B) of the Bankruptcy Code defines “domestic support obligation” broadly enough that if the obligation is in the nature of support then it will be a “domestic support obligation” irrespective of whether a prenuptial agreement calls the debt that.

Prenuptial agreements do a lot less for debtors in bankruptcy than married debtors may think, but they can create thorny legal issues that are difficult to resolve. If your financial situation is deteriorating and it includes a prenuptial agreement with your current or former spouse, then consulting with an experienced New York bankruptcy lawyer is essential to strategizing your options.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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