Divorce is usually thought of as draining on your assets because the couple’s marital assets are divided between the spouses, but there are some situations in which divorce can actually be used to protect your assets. By transferring most of a couple’s assets to one spouse, divorce is sometimes used as an attempt to shield assets.
Derek Chauvin’s Attempt to Protect Assets
Former officer Derek Chauvin, who was convicted of murdering George Floyd in Minneapolis, may have tried to protect his assets using divorce. Chauvin’s wife Kelli filed for divorce as soon as Chauvin was charged with murder. The couple then settled their divorce and transferred nearly all of their assets to Kelli. Under the terms of the settlement, she would have received both homes, their bank and investment accounts, as well as all of his retirement account and pension.
The judge rejected the settlement stating, “The Court has a duty to ensure that marriage dissolution agreements are fair and equitable. One badge of fraud is a party’s transfer of ‘substantially all’ of his or her assets.” It is likely that the family of George Floyd will sue Chauvin for civil financial damages stemming from the murder, and the divorce may have been an attempt to transfer assets out of Chauvin’s name to make them unreachable in any lawsuit. The court likely recognized this, and that is why the settlement was rejected.
Divorce as Protection from Lawsuits
If you or your spouse is being sued or anticipates being sued as part of a personal injury lawsuit or related to business deals, it may be possible to shield some assets from recovery through a divorce. Marital property is accessible in lawsuits, but separate property that belongs to the ex-spouse who is not named in the case is not reachable. Therefore, a divorce that is structured to classify large portions of assets as separate property can shield some assets.
It may also be possible to transfer at least half and possibly more of the marital assets to the innocent spouse to shield them. However, just as the judge in the Chauvin divorce pointed out, the result has to be fair and equitable. Working with a skilled attorney who understands the law, you can likely protect a significant amount of your assets in this type of situation.
Some couples have attempted to evade creditors by getting a divorce and transferring assets to the spouse who is not indebted. This is actually illegal under the Uniform Voidable Transactions Act (UVTA) because it is simply an attempt to defraud creditors and avoid paying off debt. This applies to uncontested divorces, where the parties agree on the outcome of the financial settlement. A contested divorce, in which the court distributes the assets, is generally not subject to this law.
If one or both spouses are in financial difficulty, bankruptcy is an option available to erase the debt. Divorce and bankruptcy often go together because financial problems can breed marital trouble. However, sometimes divorce can be used as a strategy in planning for bankruptcy. If a married person files for bankruptcy alone and has their debt discharged, the other spouse remains liable to the debtors for any joint debt (so in this instance, a divorce is a way to remove liability from yourself and potentially leave it all on your spouse).
Any separate property owned by the other spouse is not reachable in the bankruptcy filed by the first spouse. Filing for divorce allows you to classify specific property as marital and separate. Through the divorce, a lot of property can be classified as separate, belonging to the other spouse and thus protected from bankruptcy. However, if the other spouse ends up filing for bankruptcy, then that separate property would be accessible to creditors.
The timing matters when it comes to bankruptcy and divorce. Generally, the divorce needs to be filed and completed before the bankruptcy. This is because when a bankruptcy case is filed, an automatic stay is put into place by the bankruptcy court, which immediately freezes and prevents any actions impacting the debtor’s assets and debts, and divorce falls under that umbrella.
This type of action is not uncommon when a couple anticipates that one spouse will need nursing home care. To qualify for Medicaid, a person must spend down their assets to a specific level in order to qualify. Getting a divorce and transferring assets to the healthy spouse is a way to protect the assets while allowing the ill spouse to qualify for Medicaid without using up all of the couple’s assets.
Transferring assets through a divorce can provide some protection in certain circumstances. Still, there is generally strict court oversight in these situations, making it impossible to shield all assets from the financial threat. An experienced attorney can offer you personal advice on how best to protect yourself and your assets and whether divorce is a useful option.