Alimony and Child Support Debts in Bankruptcy
Many people who are struggling with debt and file bankruptcy owe alimony and/or child support. Alimony and child support are referred to as “domestic support obligations” under the bankruptcy code and bankruptcy lawyers refer to them by the acronym “DSO.” Alimony and child support debts in bankruptcy are treated as priority claims and receive payments before other creditors including recent tax obligations. Alimony and child support debts in bankruptcy are also usually not dischargeable under any circumstance and have special rules when it comes to their treatment under the bankruptcy code.
Alimony and Support Versus Property Settlements
To be classified as alimony or child support, the obligation must be for actual support or maintenance of a former spouse or a debtor’s child. Debts or obligations arising from a property settlement agreement are treated differently and can be discharged, but only in a Chapter 13 bankruptcy. So if you owe your ex-spouse a debt because you kept the house or a business and have to pay a portion of that asset to your ex-spouse over time, this amount can be discharged in Chapter 13 bankruptcy. There is a significant amount of complicated case law analyzing whether an obligation is for a property settlement or for maintenance and support (i.e., alimony and child support) and it can be factually intensive depending on the family law proceedings. It is not dependent on the classification of the debt or obligation by either the debtor or the claimant.
Chapter 13 Plans Can Bind Creditors to Specific Treatment if No Objection
Although alimony and child support debts in bankruptcy may not be dischargeable, case law is very supportive of the binding effect of a confirmed plan in Chapter 13 or Chapter 11. If a creditor does not timely object to a debtor’s characterization of an obligation as a property settlement agreement, they may lose the right to receive priority payments in a Chapter 13 case during the term of the plan. Alimony and child support creditors must carefully review the treatment of their claim in the plan and raise an objection if necessary to preserve their rights.
There Are Other Specifics With DSO Claims That Cannot Be Overlooked
Some other critical points regarding DSO claims in bankruptcy include:
- The automatic stay does not stop the collection of DSO claims. Therefore, the filing of bankruptcy will do little to stop ongoing wage withholdings or collection efforts by a claimant for alimony or child support.
- DSO claims cannot be recovered as a preference. As such, debtors can rightfully pay or catch up on domestic support obligations with non-exempt cash prior to filing without fear of a trustee seeking to set aside those payments.
- DSO claims can be enforced against exempt property once a debtor files for bankruptcy. This is a major exception to the state exemption laws which exempt or protect certain property to maintain a minimum standard of living. 11 U.S.C. § 522(c)(1). However, there is no indication that a trustee has authority to liquidate the debtor’s exempt property or be paid for such efforts. It appears to be the responsibility of the DSO creditor to pursue collection against the debtor’s exempt property under state law remedies even during the pendency of the bankruptcy.
- Judicial liens for alimony and child support claims cannot be avoided even if they impair exemptions.
- Debtors in Chapter 11 proceedings must be current on ongoing DSO obligations after filing in order to get a plan confirmed, although they can pay pre-petition arrearages in installments through the plan.
- Two distinct sub-categories of DSO claims exist for priority purposes. The highest priority if for support paid directly to a spouse, former spouse, or child of the debtor, or to the child’s parent, legal guardian, or other period responsible for the child. The second level priority is for a governmental unit that has been assigned collection amounts owed by the spouse or child.
If you have alimony or child support debts, bankruptcy may not be a good solution unless there are not other significant debts that you want to discharge. Bankruptcy is only a good solution if alimony is properly classified as a property settlement agreement. Consult with an experienced bankruptcy lawyer to determine whether an alimony order can properly be categorized as a property settlement agreement to be discharged. Likewise, be cautious about waiving your state law exemptions for alimony and child support debts if you file for bankruptcy.