Bankruptcy and Pension in Divorce Actions

By: Marvin Snyder

Can a bankruptcy filing frustrate a divorce settlement concerning pension benefits? Yes, No and Maybe. If there has been a bifurcation so that there is a divorce decree but the financial matters have not yet been settled, there is the possibility of the diminutions of pension values to the detriment of the non-pension-holding-spouse.

Courts have been divided on the issue of whether pension benefits are assets of the debtor to be included in the bankrupt estate, or whether the pension rights are excludable. Some of the variables that inform cases are the status of the pension, be it inchoate, vested, matured, in pay status, and the type of plan - Individual Retirement Account (IRA), Keogh, Corporate, Defined Benefit or Defined Contribution.

The existence of a Qualified Domestic Relations Order (QDRO) further complicates the situation, with two distinct existences - an attachment on a pension plan for a future payment, or a current payment from the plan on account of the retirement of the pension-holding-spouse. The U.S. Eighth Circuit Appeals Court held in January 1990 that the bankrupt husband's obligation to pay a portion of his pension to his former wife is dischargeable. N.B.: This was a case of the husband personally sending a check to his former wife each month when he received his pension check; it was not done by QDRO. It is at least arguable that had the plan as an entity been paying monthly to the former wife, the bankruptcy of the ex-husband would not have affected the payments under a QDRO.

Pension plans that are under the total control of the bankrupt filer are vulnerable to inclusion as assets. This may be more evident when the plan is in the form of a Keogh plan, which is a retirement plan for a self-employed individual, often a professional person. Also, an IRA is vulnerable to consideration since it is the result of the person's own savings.

In negotiating a property settlement, in representation of either spouse, counsel should be alert to the type of pension plan involved, if any, and to the potential consequences of a bankruptcy filing by the pension-holding- spouse. Query the possibility of a bankruptcy-proof settlement or Qualified Domestic Relations Order.