Divorce and Bankruptcy - Your Divorce Lawyer's Fees May be at Risk

Not surprisingly, the financial strains that drive clients to our office also create problems in marriages.   Clark and Washington regularly meets with clients who are separated from their spouses or who are actually going through a divorce.

Recently we met with a client who wanted and needed to file for bankruptcy, but who had just paid his divorce lawyer a $7,500 retainer.   Despite the pressing need to file bankruptcy, we advised our client to wait until 90 days had passed from the date the check to his divorce lawyer cleared.

The basis for our advice arises from an area of bankruptcy law known as "preferences."  Simply stated, Section 547 of the Bankruptcy Code provides that the trustee may recover payments to non-insider creditors paid within 90 days prior to the date of filing when such payments are not in the "ordinary course of business"  (for insiders - relatives, business relations, etc. the lookback period is 1 year).  Section 541 of the Code provides that the unused retainer, sitting in the divorce lawyer's trust account constitutes property of the bankruptcy estate.

In the case of our client, the $7,500 transfer would not be "ordinary course of business"  unless there was a series of $7,500 payments.  Our concern was that if we had filed a Chapter 7 on behalf of this client, the trustee would demand the $7,500 from the divorce lawyer.  As you might imagine, this would make for a very unhappy divorce lawyer.

Preference issues arise in other situations, of course, meaning that you need to reveal to your lawyer any "out of the ordinary" payments to anyone made within the year prior to your projected filing date.