Creditor’s Rights: Domestic Support Obligations in Bankruptcy
Creditors and Cramdowns

 

When a marriage ends, one spouse is often dependent on court-ordered payments from the other spouse to meet basic financial needs. These court orders are called domestic support obligations, and they most commonly come in the form of alimony or child support. These special types of debts can often be collected on, even if the debtor enters into bankruptcy.

Although bankruptcy law usually allows indebted people to discharge their financial obligations through liquidation sales under chapter 7 or payment plans under chapter 13, the law recognizes that not all debts are created equal. 

The bankruptcy code often gives special preference to domestic support orders, giving ex-spouses many rights that other creditors do not have. This preference comes up at many points during a bankruptcy proceeding. Ex-spouses may continue to collect on domestic support orders during the bankruptcy proceedings, receive payment before other unsecured creditors, and they do not lose their claim at the end of bankruptcy like most creditors do.

Thus, although creditors often believe bankruptcy will limit their rights and prevent them from receiving much of what they’re owed, this may not be the case when the creditor is the debtor’s former spouse. Possibly through negotiations with creditors about their options, a bankruptcy attorney can usually make sure that an ex-spouse entitled to payments under a domestic support obligation continues to receive them throughout the bankruptcy.

What Is a Domestic Support Obligation?

Section 101(14)(c) of the bankruptcy code defines a domestic support obligation as a debt owed to a debtor’s child or former spouse in the nature of alimony, maintenance, or support arising out of a court order. In short, a domestic support obligation is any ongoing payment that a person is obligated to pay to their child or former spouse because of a divorce or separation.

It’s important to note what this definition does not include. For bankruptcy law purposes, only ongoing payments like alimony or child support are considered domestic support obligations. That means one-time payments resulting from divorce or another legal proceeding between former spouses are not domestic support obligations, so they aren’t always subject to the same preferential treatment. 

These one-time payments are treated like any other unsecured claim in bankruptcy: they are paid only if the debtor has enough assets to cover them after paying secured debts and priority unsecured debts. In a chapter 13 case, one-time payments are also discharged and no longer due once the debtor has completed their payment plan.

Preference Payment and Automatic Stay Exemption Do Not Apply

When a person files for bankruptcy, all of their debts are consolidated into a single proceeding. The bankruptcy code has specific rules for which creditors receive which assets or payments from the debtor. To enforce these rules, the trustee in charge of administering a bankruptcy is allowed to demand that creditors return payments received from the debtor before the debtor filed for bankruptcy.

Another way the bankruptcy code ensures assets are distributed according to the rules is through the automatic stay, which prohibits creditors from attempting to collect any debts from the debtor after the debtor has filed for bankruptcy and throughout the remainder of the proceeding. This includes garnishments of wages that are already in progress.

Domestic support obligations are exempt from both of these provisions. Section 547(c)(7) of the bankruptcy code specifically states that payments for domestic support obligations are not preference payments, so the trustee cannot demand that a spouse or child return the money. 

Similarly, section 362 of the code creates a set of exemptions from the automatic stay. First, a domestic support order may be collected from property that isn’t part of the bankruptcy estate, such as money in a retirement plan or wages earned after the filing of bankruptcy. Second, a debtor’s wages can be garnished to pay for a domestic support obligation even if they are part of the bankruptcy estate.

In short, the filing of a bankruptcy petition does not disrupt domestic support obligation collections in the way it disrupts most other types of collections. If a debtor tries to use the automatic stay to withhold payment on a domestic support obligation, a lawyer can usually get the court to require payment.

Priority Among Unsecured Creditors

The law’s special protection of domestic support obligations extends throughout the bankruptcy proceeding. Whether a bankruptcy is filed as a chapter 7 liquidation or a chapter 13 repayment plan, the end result is the division of a limited amount of money among all the creditors. 

Normally, unsecured creditors (those who cannot repossess property) receive an equal share of what’s left after the secured creditors (who can repossess property) are paid. However, section 507 of the bankruptcy code specifically gives domestic support obligations priority over all other forms of unsecured debt. Domestic support obligations are thus paid even before lawyers’ fees, back taxes owed to the IRS, wages of the debtor’s employees, and other forms of priority debt.

The first priority treatment for domestic support obligations makes a real difference in many cases. In one recent celebrity bankruptcy, a debtor with only $52,000 per year in income listed $9.3 million in debt to 49 different creditors, including his wife. Without priority, his wife would almost certainly receive pennies on the dollar or nothing at all.

It’s important to note that secured debts are still paid before domestic support obligations. Thus, if the only assets a debtor owns are a house and a car still subject to mortgages or financing arrangements, the lenders may receive payment while the domestic support obligation holder does not.

Non-Dischargeability of Domestic Support Obligations

Finally, and most significantly, domestic support obligations cannot be discharged in bankruptcy. Section 523(a)(5) of the bankruptcy code specifically exempts domestic support obligations from discharge, no matter what form the bankruptcy takes. Thus, even after the bankruptcy proceeding is over, domestic support obligations continue to be due to the child or ex-spouse.

There is one difference between chapter 7 and chapter 13 bankruptcies regarding debts arising from divorce or separation. Some obligations from divorce or separation take the form of one-time property transfers (such as shares of stock or a house) rather than ongoing payments. These obligations are not considered domestic support obligations. These one-time transfers cannot be discharged in a chapter 7 liquidation, but they can be discharged in a chapter 13 repayment plan. 

Phone and LetterWhat Should I Do if My Ex-Spouse Files for Bankruptcy?

If your ex-spouse has filed for bankruptcy contact Rosenblum Law for a free consultation today. Although the bankruptcy code has special protections for domestic support obligations, bankruptcy is a complex legal proceeding with many deadlines, meaning it’s easy to accidentally forfeit your rights. Our experienced bankruptcy attorneys will guide you through the process and ensure you and your children continue to receive the payments you are owed. Call 888-815-3649 or email us.

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