13 Jul Collecting Child Support from a Bankrupt Debtor, Part Two
In Part One, collecting support and other family obligations was discussed. Let’s take a look at what happens when a Chapter 13 is filed. In a Chapter 13 context, we’ll talk about three kinds of debt: 1) child support or alimony that was past due at the time the bankruptcy was filed; 2) child support or alimony that comes dues after the case is filed; and 3) non-support obligations, like responsibility to pay certain debts, or reimbursement for the equity in an asset (lawyers refer to this as “property settlement”).
Like Chapter 7, Chapter 13 does not change the obligation to pay ongoing support. In South Carolina, where I practice, the Chapter 13 trustees will not recommend confirmation of a Chapter 13 plan if post-petition child support is behind, if the trustee is aware of that default. Before filing a contempt action to collect past due child support, a child support creditor may need to get a order from the bankruptcy court. Although the automatic stay does not apply to collection of child support against property that is not property of the estate, in a Chapter 13, the debtor’s earnings are property of the estate, and most of the time that’s all there is to collect. Where an order is needed, however, the courts in this jurisdiction generally grant them as a matter of course, usually without a hearing. And, while the Chapter 13 is pending, any collection activity outside the bankruptcy court must be limited to support payments that came due after the Chapter 13 was filed. For example, let’s say Jane Debtor owes back child support of $1,000 when she files her bankruptcy case on July 1. Then, in September and October, she falls behind again, to the tune of another $200. If John Creditor files a contempt action at that time, it will be to collect $200, not the entire $1,200 that is then due. That’s because any support that is past due at the time of the bankruptcy will be paid through the Chapter 13 plan.
Past due support obligations are generally required to be paid in full through the debtor’s plan. (An exception can be made if the creditor agrees.) Support debts have a first priority, meaning they are paid before other kinds of priority debts, like taxes. But, that does not mean that the trustee will begin disbursing money on those claims as soon as the debtor starts to make payments. Custom varies from district to district, but here the trustee is not permitted to make disbursements until a Plan is confirmed by the court, which usually takes a minimum of two months, and four to six months is not unheard-of. There may be other considerations as well, so consult a bankruptcy lawyer in your district to determine when you should start to receive payments.
A support creditor must also file a claim to receive any payment at all from a trustee. Most courts send out claim forms along with the notice of the initial bankruptcy filing, and will include instructions for filing the claim with the court. But, the form itself can be confusing, and must be filled out properly for you to be paid. You may also need to attach supporting documentation, especially if the amount that you are claiming is different from what the debtor reported was owed (and I find that is almost always the case). It may be wise to seek counsel to help with this process, especially if the amount in question is significant. Don’t rely on the trustee to help you file a claim. The trustee cannot give you legal advice, including advice on how to fill out the claim form.
Obligations that arise out of domestic court actions, but are not related to support, (referred to as “property settlement” debts) are not treated as favorably in Chapter 13. The Chapter 13 will prevent actions to collect those obligations outside bankruptcy, and allow the debtor to restructure those debts, or to discharge a portion of them. Payment on those claims will also be made through the Plan, but will not be paid on a priority basis, and may not be paid in full. Again, a claim form must be filed to receive any payment at all on these claims. The bankruptcy court may approve a plan that pays less than 100% of claims if the court is convinced that the debtor has met the requirements of the bankruptcy laws, and did not file the case in bad faith (i.e., just to delay creditors, for example.) Once the court approves a plan, it becomes like a new contract, binding on the parties, and may have the affect of altering domestic court orders. A lawyer can advise you about what to expect given the circumstances of your particular case.
There may be other concerns in addressing these matters. For example, bankruptcy courts have a long history of looking beyond the labels used by a domestic court to determine whether an obligation is in the nature of support, or is property settlement. Most of the time it’s pretty clear, but there are occasional exceptions. For example, an order requiring a party to make mortgage payments on the marital home is usually property settlement. But, say the other party waived alimony in lieu of that payment. A court might find that to be a support provision. Many able domestic lawyers routinely consult with bankruptcy lawyers in drafting agreements in divorce and custody cases, so your family court lawyer may be able to advise you, or send you to a bankruptcy lawyer who has some expertise in such matters.
One final note about these issues: The one thing that is certain when a bankruptcy is filed is that no one is going to be happy. The debtor didn’t want to file, and the creditors just want to get paid. Even those creditors who ultimately get paid in full have to wait for payment, and often have to spend money on lawyers to get paid. Many times I start out representing someone whose former spouse filed bankruptcy, and end up filing a bankruptcy for that client as well. Often divorce means that two households are being run on the same income that used to run just one. Sometimes bankruptcy for both parties is the only way to balance the budget.
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