Once parties to a legal dispute have entered a settlement
agreement, the Defendant may jeopardize the Plaintiff’s ultimate recovery under
the agreement by filing for bankruptcy. In order to reduce the risk associated
with Defendant’s bankruptcy, the Plaintiff’s lawyer may: (1) Structure the
payments so that they do not exceed $5,475 in one 90-day period, as this is the
threshold for some preference actions under 11 USC 547. (2) Try to structure
the settlement so that most of the payments are made by third parties, or get a
third party to guarantee Defendant’s payments. (3) Get the Defendant to
represent that, as of the formation of the settlement agreement, they/he/she
are/is financially solvent. (4) As soon as possible, take a security interest
in Defendant’s (preferably non-exempt) property. (5) Be careful about including
broad language releasing all claims in the settlement agreement. Include
language in the agreement conditioning the release on Plaintiff’s ability to
reap the full economic value promised in the agreement. (6) Beware of novation,
which occurs where a settlement agreement converts otherwise non-dischargeable
debt, such as that for willful and malicious injury to person or property, into
a dischargeable contract debt. In cases where non-dischargeable debt is being
settled, have the Defendant specifically admit to the specific charges or other
facts that make the underlying obligation non-dischargeable.
Anyone with questions regarding bankruptcy-proofing
settlement agreements should contact Jim Shenwick.
