Addressing Debts in Postnuptial Agreements

Spouses can use postnuptial agreements to manage debt and avoid joint liability. Through the postnuptial agreement, spouses define which debts and assets are separate and which are marital. This establishes who is responsible for specific debts.  However, it may not control what assets creditors are readily able to collect against if there are joint debts (see below). If you enter a postnuptial agreement for debt liability purposes, the agreement must be written in light of debt collection law, and the terms of the agreement must reflect the way you and your spouse actually handle finances.

Both spouses are responsible for marital debt. Separate debt is typically only the responsibility of the spouse who incurred the debt. Generally, the separate property of one spouse will not be used to satisfy the separate debt of the other spouse. However, this requires more than simply saying that finances are separate in a postnuptial agreement. You and your spouse must actually treat your finances as separate in order to be protected from liability. If not done correctly, there could be unanticipated difficulties, especially if debt problems escalate.

Postnuptial agreements are contracts between spouses. As a general concept of contract law, a contract cannot bind those that are not parties to the agreement. This means that if both spouses were jointly liable on a debt, there needs to be another agreement with the creditor to officially change liability to only one spouse. Even when debt is created after a postnuptial agreement, your behavior could eliminate debt protection. If you and your spouse do not treat your finances as separate, then outsiders will not be required to either. In this case, a creditor could contest the separate status defined by the postnuptial agreement because your actions imply that finances are not separate.

Problems become even more abundant if one spouse needs to file for bankruptcy. The bankruptcy court will look beyond the postnuptial agreement and evaluate all circumstances surrounding debt and assets. Again, if you and your spouse are not acting like your finances are separate, then the court does not have to treat your assets as if they are separate. Separate property of both spouses will be investigated, and the separate status can be disputed by creditors. The bankruptcy court, through the bankruptcy trustee, has the power to track where debt and assets originated. The bankruptcy trustee can inquire as to whether, in recent years, funds were comingled, if a spouse contributed to the purchase of the other’s assets, and if a spouse’s assets were used to repay any debts of the other spouse.

Bankruptcy courts have held that certain postnuptial agreement had the effect of concealing assets and preventing payment of creditors. In these situations, it was when the parties entered the postnuptial agreement in close proximity to when the bankruptcy was filed. The courts were then able to avoid the asset transfers between the spouses because the transfers had the effect of defrauding creditors. Even in situations when the transfer is not fraudulent, the bankruptcy trustee can avoid certain property transfers.

When entering a postnuptial agreement in response to debt, spouses need to be careful of both state and federal fraudulent concealment (i.e., fraudulent conveyance) statutes. To be enforced, a postnuptial agreement cannot be interpreted as a means of defrauding creditors. Since proving actual fraud is extremely difficult, courts rely on circumstantial evidence. Courts have used a variety of situations that may occur in postnuptial agreement property transfers to prove fraudulent concealment. These include gifts of substantial value to family members, continued possession of property after the transfer of title, and transfer of property for substantially less than market value.

One of the best ways to defend against a claim of fraudulent concealment is through the passage of time. Courts are much less skeptical of a postnuptial agreement being used to improperly shield assets when the agreement was not entered contemporaneously with debt collection actions. If a postnuptial agreement is to be useful in protecting against debt liability of your spouse, it is best to enter the agreement as soon as possible. If you wait until things get really bad, it may be too late to protect yourself.