Settlement Agreements in Bankruptcy

LexisNexis Practical Guidance

This practice note discusses settlement agreements and the various risks to the settling parties in a bankruptcy case. Settlement agreements, and the certainty that is supposed to be created by such agreements, are subject to several risks in the context of a bankruptcy filing by one of the settling parties.

First and foremost, there is the risk that the party against whom the claim has been asserted will obtain a release in exchange for a promise to pay (e.g., through a structured settlement) and then file for bankruptcy and discharge the payment obligation. Although this risk can be mitigated if the releasing party secures the payment obligation, the lien or security interest could be subject to claw back, as a preferential transfer, in the event the party that has granted the lien of security interest were to be in a bankruptcy case commenced within 90 days of the perfection of such lien or security interest. Even when a settlement payment is made up-front, in cash, there is a risk that the payment could be avoided as a preference or as a fraudulent transfer. Although these risks cannot be eliminated, they can be mitigated by careful drafting.

This practice note addresses settlement agreements in bankruptcy as follows:

  • The Discharge Risk
  • Avoidance
  • Bankruptcy Court Approval of Settlements
  • Settlement Agreement Checklist

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"Settlement Agreements in Bankruptcy," by Ira L. Herman was published on October 12, 2022, as a LexisNexis Practical Guidance® Practice Note. Reprinted with permission.