Annual child support payments in the United States are supposed to total $33.7 billion, but fewer than one in two custodial parents receive all the child support they’re supposed to receive under either a court order or an informal agreement.
What happens to child support that doesn’t get paid? The debt grows just like any other unpaid debt. Those arrearages will add up fast, and the consequences are serious. Depending on where you live, the authorities can charge interest, seize wages, suspend your driver's license, or even throw you in jail.
You can’t use bankruptcy to eliminate past-due child support or alimony. However, you might be able to use bankruptcy to eliminate certain obligations under a property settlement. It may also help manage your domestic support obligations and keep you out of trouble with the law.
Types of Domestic Support Obligations in a Bankruptcy Case
The bankruptcy code defines a “domestic support obligation” (DSO) as a debt “in the nature of alimony, maintenance, or support” owed under a separation agreement, divorce decree, property settlement agreement, a court order, or other determination made under nonbankruptcy law (usually state law).
Note the hedging language, “in the nature of.” The bankruptcy code recognizes that the debt may be called one thing, but serve another purpose altogether. We see this often in property settlements that are intended to serve as a stand-in for alimony or spousal maintenance. Therefore, the bankruptcy court will scrutinize rulings from family court judges to determine whether they qualify as a DSO (which cannot be discharged in bankruptcy) or another type of marital property division (which may be eligible for discharge).
In Chapter 7 straight bankruptcy cases, many debts can be forgiven or discharged. Most credit card debt, personal loans, and medical bills will be eliminated to allow the debtor (the person who files the bankruptcy case) to get a fresh start.
While banks and other businesses may be able to absorb the losses from these discharged debts, single parents are not usually so flexible. They could be greatly burdened when the child support check is late or when it only covers a portion of the obligation. Families in this situation could end up on public assistance. Society has a high interest, both moral and practical, in ensuring that noncustodial parents make their child support payments as ordered. Therefore, delinquent parents can’t just eliminate that obligation by filing a bankruptcy case.
However, the parent who owes child support can use bankruptcy to manage those past-due child support payments.
Alimony and Spousal Maintenance
To be excepted from discharge, money owed to a spouse has to meet three requirements:
- The debt must be in the nature of alimony, maintenance, or support.
- The debt must be owed to a former spouse.
- The debt must be incurred in connection with a separation agreement, divorce, or property settlement agreement (or other order from a court of record).
In determining the issue of discharge, most litigation concerns the first requirement. If the divorce court and the parties intended the award to serve as maintenance, it will not be discharged. But, if the award is a division of property, it may be treated differently, even if it is labeled “alimony” or “support.”
A rule of thumb for determining whether the obligation qualifies as support is whether the money is necessary to help the receiving spouse maintain basic necessities. If the money goes toward basics, that means it's a form of support. Beyond that rule of thumb, courts look at several factors to determine if the debt is “in the nature” of support or maintenance:
- Is the obligation characterized as support in the divorce decree?
- Was the obligation placed in a section labeled “support”?
- Does the obligation terminate when either spouse dies or remarries?
- Is the obligation payable in installments over time rather than a lump sum?
- Is there a large difference between the parties’ incomes?
- Are the payments designed to balance income?
- Is there no other mention of support payments in the decree?
- Are there children who need support?
- Are the payments taxable to spouse who receives them?
Answering “yes” to these questions indicates the award is for support. Support is not dischargeable in a Chapter 7 case or a Chapter 13 case (though you can use Chapter 13 to manage the debt and pay it off).
These agreements are most often used in a divorce case to divide the assets that the couple owned during the marriage. They are often used to set forth the parties’ agreement concerning who will pay which debts.
Most property settlements are not dischargeable in a Chapter 7 case. There are at least two types of property or debt division that can be discharged in a Chapter 13 case: hold harmless agreements and cash in lieu of other assets.
Some of the debts in a bankruptcy case may have been taken out by one or both spouses for the benefit of the family. Either spouse can take on the responsibility for paying any of the debts. The property settlement agreement is an enforceable contract between the parties. But it is not enforceable against the credit card company. Therefore, as to the credit card company, the person who opened the account is still liable and has the responsibility to see that it’s paid. This is where the “hold harmless” provision comes in.
As an example, let’s say "Roger" opened up a credit card account with First National Bank in his name, but he used the card to pay for expenses incurred by the family or for the benefit of the family. "Mila," his spouse, agrees to take on that debt as a part of their property settlement. If Mila stops making payments, First National will look to Roger to make the payments because the account is in his name. But Mila and Roger's property settlement agreement includes a “hold harmless” requirement. This hold harmless provision makes Mila responsible for reimbursing Roger if he has to make payments on the account.
In this example, because of the hold-harmless provision, Mila owes a debt to Roger. That debt is not dischargeable in a Chapter 7 case, but it can be discharged in a Chapter 13 case.
Sometimes, it may not be practical to split assets 50/50. Let’s say that Roger and Mila have a house, but not much in the way of other assets. The couple has three kids, and Mila will have primary custody. She wants to keep the house for the family. The house has equity of $100,000. Under other circumstances, the parties might sell the house and split the equity. But, because Mila wants to keep the house, she agrees to pay Roger $500 per month until she’s paid $50,000 or until the house is sold and she’s able to pay off that obligation.
Mila’s obligation to Roger is not dischargeable in a Chapter 7 case. But, if Mila files a Chapter 13 case, that debt can be discharged.
Using Bankruptcy to Manage DSOs and Other Divorce-Related Obligations
Even though support and some other divorce-related debts cannot be discharged in a Chapter 7 case, they can often be managed in a Chapter 13 case. Chapter 13 is a repayment plan under the protection of the bankruptcy court. It is a global management plan in that all of the debtor’s debts are treated in the plan in some way.
Priority Debts Under Chapter 13
The bankruptcy code prioritizes debts to ensure that some debts are paid before others when there aren’t enough resources to pay 100% of creditors’ claims. For instance, domestic support obligations have a high priority, but most other unsecured debts, like credit cards and medical bills, are assigned a lower priority. This becomes important in a Chapter 13 case when the debtor doesn’t make enough money and cannot make a high enough payment throughout the plan to pay all of their obligations.
For a Chapter 13 plan to be approved by the court, it has to pay off certain high priority debts between three and five years. The exact length of the plan depends on the income of the debtor’s family. Those priority debts include non-dischargeable support and property division obligations. Priority debts do not include obligations that arise out of hold harmless agreements or any cash payments in lieu of assets. Those two are treated like credit cards and medical bills.
Even though a child support claim is not dischargeable, you can take up to five years to pay it off in a Chapter 13 while under the protection of the bankruptcy court. The child support creditor can take no action on that debt as long as you make your payments and keep up your current domestic support obligations according to your plan.
Non-Priority Debts Under Chapter 13
When the debtor doesn’t have enough disposable income to pay all their obligations, they can still propose a repayment plan that pays at least those priority debts. To the extent they have anything left over, the low priority creditors will share that in proportion to what they're owed.
Let's go back to Mila and Roger for an example. Mila pays child support to Roger, but when she lost her job, she couldn’t pay and the child support debt is now $15,000. When she gets a new job, she decides to file a Chapter 13 case. She will pay off that $15,000 over a five-year plan. She also has $20,000 in credit card debt and the $50,000 she owes Roger for his portion of the home equity. After paying all her reasonable and necessary expenses each month, she only has $400 left to devote to her Chapter 13 plan. Approximately $250 of the $400 payment will have to go to Roger to pay off the $15,000 by the end of the five-year plan. The Chapter 13 trustee will keep $15 as their fee for administering the case. That leaves $135 a month for all other creditors, or $8,100 total over the five years of Mila's Chapter 13 plan.
At the end of Mila’s 60-month Chapter 13 plan, Roger will be paid in full on his support claim, but the other creditors will have received just a fraction of their claims. It makes no difference because, under the bankruptcy code, Mila has put forth her best effort and prioritized child support payments. The rest of her debt will be discharged. The other creditors have to be satisfied with what they’ve gotten.
Those "other creditors" include Roger’s property settlement, since that's a non-priority debt that can be discharged. Roger will get the full child support payments, but his property settlement will be treated like the other unsecured creditors, and he will only receive a portion of the $50,000 he was owed.