BANKRUPTCY FILINGS
Support Payments and Bankruptcy
By Michael L. Matuska

Effect of the Automatic Stay • Effect of Discharge • Priorities

It’s a common story. Following a divorce, the debtor spouse often files a bankruptcy petition. How does a bankruptcy filing affect the creditor spouse? Most people are aware that child support and alimony obligations receive special status in bankruptcy. But what does bankruptcy mean for 1) enforcing the property settlement order; 2) collecting child support and alimony arrearages; and 3) enforcing future support payments.

EFFECT OF THE AUTOMATIC STAY

Once the debtor spouse files a petition in the United States bankruptcy court, all efforts to collect money from the bankrupt are automatically stayed. It is impossible to fully delineate the scope of the automatic stay. The automatic stay supercedes most, but not all, remedies that the creditor spouse might have under state law.

For instance, a bankruptcy filing will not stop a state court from entering an order for the "establishment or modification of an order for alimony, maintenance, or support" or for the "collection of alimony, maintenance, or support from property that is not property of the [bankruptcy] estate". [11 U.S.C. § 362(b)(2)]. In other words, the automatic stay might not interfere with a pending divorce proceeding. The bankruptcy court could also grant relief from the automatic stay to conduct the divorce proceeding. However, the automatic stay will prevent the creditor spouse from taking steps to enforce an order of support against property belonging to the bankrupt estate.

The effect of the automatic stay also depends on whether the debt arose before or after the bankruptcy petition was filed. The automatic stay, on its face, only stops efforts to collect pre-petition debts. The creditor spouse only has a claim for amounts due as of the date the bankruptcy petition was filed. [11 U.S.C. § 502(b)]. The creditor spouse may still proceed in accordance with state law to collect post-petition debts. Accordingly, if the debtor spouse fails to remain current on support obligations after filing the bankruptcy petition, the creditor spouse may invoke state court remedies to collect. As a practical matter, however, the automatic stay will operate to prevent any collection efforts that have the potential of disrupting the bankruptcy proceedings. A creditor spouse who seeks to collect post-petition support payments may be well advised to wait until after discharge in a Chapter 7 bankruptcy and after plan confirmation in a Chapter 13 bankruptcy before trying to collect post-petition arrearages. Chapter 7 discharge and Chapter 13 confirmation can occur within approximately 90 days of the filing of the bankruptcy petition.

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EFFECT OF DISCHARGE

A debtor in bankruptcy court expects that his or her debts will be discharged at the end of the proceedings. The order of discharge in a Chapter 7 liquidation proceeding comes after the trustee has liquidated all of the debtor’s non-exempt assets. [11 U.S.C. § 727]. The order of discharge in a Chapter 13 consumer debtor’s workout comes after the debtor has completed payments under the plan which lasts between 3 and 5 years, unless the court approves a waiver of discharge. [11 U.S.C. § 1328].

Whether an obligation imposed by the divorce decree is dischargeable depends on whether the obligation is characterized as a support obligation or property settlement obligation. Obligations for child support and alimony cannot be discharged in bankruptcy. [11 U.S.C. § 523(8); 11 U.S.C. § 1328]. Obligations for property settlement can be discharged in many instances. Contrary to what many people believe, bankruptcy law, not state law, determines whether an obligation is a support obligation or a property settlement obligation.

Although obligations arising from the property settlement award can be discharged in many cases, there are two important exceptions. First, any creditor in a Chapter 7 proceeding may object to the discharge if the debtor used the bankruptcy court to "take undue advantage" of a creditor. [11 U.S.C. § 727(a)]. Evidence of a debtor spouse’s attempt to use the bankruptcy proceeding to take undue advantage of the creditor spouse includes filing the bankruptcy petition immediately after signing the dissolution agreement. Second, in either Chapter 7 or Chapter 13 proceedings, obligations arising under the divorce decree are only dischargeable if the benefit to the debtor spouse would outweigh the harm to the creditor spouse. [11 U.S.C. § 523(a)(15)].

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PRIORITIES

In addition to being non-dischargeable, support payments enjoy a priority status in bankruptcy proceedings. Support obligations must be satisfied before the bankruptcy trustee can distribute any funds to unsecured creditors. [11 U.S.C. § 507(a)(7)]. As stated above, the creditor spouse can proceed under state law to collect support obligation that remain unpaid after a Chapter 7 bankruptcy. This priority status also means that a debtor who proceeds under Chapter 13 of the bankruptcy code, must provide for payment in full of the support obligations in the Chapter 13 plan. [11 U.S.C. § 1322(a)(2)].

In conclusion, although filing a bankruptcy petition provides considerable protection to the debtor spouse, the bankruptcy code also provides a number of limitations on the debtor’s ability to avoid obligations arising from the divorce decree.