Do the New Child Support Guidelines affect my Bankruptcy Case?

On Thursday, June 20, 2013 Chief Justice of the Massachusetts Trial Court, Robert A. Mulligan, announced via Press Release the latest revisions to the Massachusetts Child Support Guidelines which will become effective on August 1, 2013.  We have provided a summary of the new Guidelines here.

The new guidelines will result in a typical reduction of between 10 and 15% for most cases, which could also affect bankruptcy cases.

Here are a few of the ways in which a change in child support could affect your bankruptcy case:

1. If you pay child support and are in the process of filing for bankruptcy, the budget your are preparing as part of the required schedules and your means test qualification calculations can both change if your child support changes.
    
2. If you receive child support and are in the process of filing for bankruptcy, your income and your means test qualification calculations can both change if your child support changes.
    
3. If you receive child support and you have already filed a Chapter 7 liquidation bankruptcy but have not received a discharge yet, a change in child support could require amending your filings to update your current income (or you might be asked this question at your Section 341 meeting).
    
4. If you receive or pay child support and you are currently paying a Chapter 13 bankruptcy plan, your plan payment could be affected by a change in support and you may need to file an amended plan and notify the trustee of the change.

These are just a few of the ways that a child support change could affect a bankruptcy filing, and if you believe that you might be subject to a child support modification you should also discuss this issue with your bankruptcy counsel.

Bankruptcy & Litigation Series: #2 My Ex is filing Bankruptcy!

While we have previously posted about the many issues that can arise when a bankruptcy happens at the same times as a divorce, what happens if a bankruptcy is filed after the divorce is final?

If a Bankruptcy action is filed immediately after the divorce becomes final it is possible for the Bankruptcy Court to undo the Agreement or Judgment of the Divorce Court if it appears the parties were attempting to defraud creditors (for instance if all of the assets were transferred to the non-debtor spouse rather than split equitably).  If the division is equitable, though, then it is unlikely that the Bankruptcy Court would want to revisit the divorce division.

However, the debtor might be bound to make payments in the divorce case which could affect eligibility for bankruptcy, and might have made promises to divide property that is now an issue. Domestic Relations Orders are non-dischargeable in most cases and therefore the decisions made in a divorce settlement, will have significant impact on what can and can't be discharged in the bankruptcy. There are three main areas where a bankruptcy can affect or be affected by a divorce judgment:  property division issues, support issues, and joint debts.

Property Division Issues in a Post-Divorce Bankruptcy:

If a divorce judgement requires that certain property be transferred from the debtor to their ex-spouse then the bankruptcy could affect that transfer.  If the transfer is made within 1 year prior to the bankruptcy then this could be considered a transfer to an insider and if it is not for fair value (for instance if the property division was not equitable), then the bankruptcy court can, upon motion of the trustee, require that the property be returned to the debtor's estate.

If the transfer hasn't been made yet, then that property is included in the debtor spouse's bankruptcy estate and the ex-spouse becomes another creditor of the estate.  Whether they take priority or not will depend on the nature of the property to be divided, and whether their claim is a non-dischargable domestic relations order or not.  Domestic relations orders are treated slightly differently for Chapter 7 and Chapter 13 bankruptcies, so the type of bankruptcy that is filed may also affect whether the property transfer is required or not.

Usually a failure to transfer property required by a Divorce Judgment would subject the debtor spouse to a Complaint for Contempt in the Probate & Family Court.  However, the Bankruptcy Court takes precedence and the Automatic Stay prevents creditors (even ex-spouses) from proceeding in other courts without first getting the permission of the Bankruptcy Court.

Support Issues in a Post-Divorce Bankruptcy:

Alimony and Child Support are considered Domestic Support Obligations, which are non-dischargable and must be paid by the debtor in a bankruptcy.  Any child support or alimony arrears are non-discharable in a bankruptcy and take priority over other debts.  In addition, if the family court awards the costs and attorneys fees of collecting alimony and child support in a Contempt action, those debts are non-dischargable as well.  In a Chapter 13, arrears may be paid overtime as part of the plan, but in a Chapter 7 they remain due immediately.

Practically speaking, going through a bankruptcy, might gain a debtor spouse some leeway from the Probate & Family Court in obtaining a payment plan for payback of the arrears, but they will still need to be paid.  If the ongoing support order itself is incorrect or onerous, this cannot be changed in the Bankruptcy Court, but can still be revisited by the Probate & Family Court by the filing of a Complaint for Modification.

If the debtor spouse is receiving child support or alimony this counts towards their income for bankruptcy means test purposes.  If it is owed but is not being paid then it does not need to be included, though the arrears may be an asset that should be listed.

Joint Debt Issues in a Post-Divorce Bankruptcy:

Post-Divorce there may be debts for which both parties are liable to the creditor but one or the other party has agreed (or been ordered) as part of the divorce to pay these debts.  Some typical examples of joint debts are home mortgages, joint credit cards, joint tax debt, and co-signed car loans.  If a joint debt is not paid off in the divorce, then from the creditor's perspective it is still owed by both parties.  If the divorce judgment requires one spouse to pay the debt and they do not make payment, it will affect both spouse's credit and the creditor can come after either or both of them to collect.  The spouse who was supposed to be protected in the divorce can likely file a Complaint for Contempt against the other spouse but this won't undo any credit damage and doesn't stop the collection action by the creditor.

In a Bankruptcy, the debtor is required to list co-debtors and the Bankruptcy Court can discharge debts to the third party creditor.  Whether or not the obligation of a debtor spouse to their ex-spouse is also discharged will depend on whether or not it is considered a domestic support obligation or non-dischargable domestic relations order.  It is likely important for the ex-spouse to participate in the bankruptcy and file a Proof of Claim if they believe there is an obligation to them as well as the creditor.  However, it is also important to note that even if a debt is non-dischargable, as a practical matter it may still be difficult to collect.  A debtor with no assets, found in Contempt in the Probate & Family Court, may not be able to pay the joint debt and the creditor will still pursue the non-bankrupt spouse.  It is therefore important to anticipate potential issues such as this at the time of the divorce, especially if it is obvious that one spouse's budget will not allow them to pay the bills they are agreeing to pay.

The Interplay of the Automatic Stay, Child Support, and Alimony

One of the most significant benefits of filing for bankruptcy is the Automatic Stay. In short, the Automatic Stay halts other existing court proceedings that the individual filing for bankruptcy is involved in, as well as any collection efforts for the individual's debts, until the bankruptcy proceedings are resolved.

In certain situations, the Automatic Stay might not prevent other court proceedings from continuing, at least in part. For example, in any family law case involving child support and custody, issues involving visitation or current child support are not subject to the Automatic Stay, but issues involving past due child support will be continued until the Automatic Stay is lifted at the end of bankruptcy proceedings. It is possible that a judge in this instance will actually not hear any issues at all until the Automatic Stay is lifted, but the circumstances might be such that the issues of visitation or current support need to be addressed in a more timely manner.

It is important to understand that although the Automatic Stay will halt court proceedings, any existing order for current child support or alimony will still accrue. In other words, an individual that is obligated to pay child support or alimony each week will not be relieved of this after a filing for bankruptcy, whether the person filing for bankruptcy is the individual who is supposed to pay the alimony or child support, or the individual who is to receive the alimony or child support. The Automatic Stay should, however, suspend efforts to collect any arrearage.

Additionally, for individuals that file for bankruptcy who are to receive alimony or child support payments and are owed an arrearage, any past due child support or alimony obligations and any current child support or alimony obligations are exempt from the bankruptcy proceedings, meaning that a bankruptcy trustee may not use this support to pay other creditors.

Should you have any questions about family law matters or bankruptcy, contact Attorney Jonathan R. Eaton by calling 508.655.5980 to schedule a one hour initial consultation.

My Ex Owes Support and is Filing for Bankruptcy: What Now?

We previously wrote an article regarding the dischargeability of domestic support obligations, such as child support and alimony. But just knowing that the arrears are not dischargeable may not be enough. How do you collect them without violating bankruptcy law?

If you are owed child support, alimony, separate support or money or property pursuant to a divorce separation agreement, and the other party files for bankruptcy, it is important that you first know your rights regarding the dischargability (or non-dischargability) of those obligations. Each of the above are handled differently depending on the type of obligation (support versus a property settlement) and the type of bankruptcy (Chapter 7 or Chapter 13).

CHAPTER 7 CASES

In Chapter 7 Cases, the answer is simple: domestic support obligations and divorce property settlements are non-dischargeable. According to the bankruptcy code at 11 U.S.C. § 523(a):

“[a] discharge [in a Chapter 7 Case] does not discharge an individual debtor from any debt… (5) for a domestic support obligation; [or] (15) to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit."

So, if a payor owes you back child support, alimony or or property division payments pursuant to a divorce agreement you should file an objection to the discharge of those debts, and then pursue your rights in the Probate and Family Court to obtain payment.

CHAPTER 13 CASES

Debtors may use the bankruptcy protections of Chapter 13 to pay back child support arrears according to the chapter 13 plan and avoid a potential contempt in Probate and Family Court. Therefore, most issues regarding unpaid child support or alimony (and payment of support arrears) arise in Chapter 13 Bankruptcy Cases. However, while bankruptcy can provide some protection to the debtor to pay back support over the course of the plan, the debtor must meet all requirements of the Massachusetts Local Bankruptcy Rules and the U.S. Bankruptcy Code in order to ensure they receive their discharge upon the completion of their plan.

A discharge in a Chapter 13 Case does not discharge an individual debtor from any debt for a domestic support obligation, but may discharge other debts, including debts arising out of a divorce or separation agreement that are not dischargeable in a Chapter 7 case. See 11 U.S.C. § 1328(a).

In order to receive a discharge of other debts (but not domestic support obligations) in a Chapter 13 case, the debtor must successfully complete the repayment plan, and must file a Motion for Discharge, and certify that all obligations for child support, spousal maintenance and alimony due that were due on or before the date of the motion, including all payments due under the plan for amounts due before the petition was filed and any domestic support obligations that arose after the filing of the petition have been paid. The debtor must serve a copy of the motion and certification on the beneficiary of the domestic support obligation.

At that point, the beneficiary may object to the entry of the debtor’s discharge if there are outstanding obligations and a discharge will not be granted unless all obligations have been paid. See 11 U.S.C. § 1328(a). See also Massachusetts Local Bankruptcy Rule 13-22 and Official Local Form 12.

However, there is one exception: domestic support obligations that are assigned to a governmental unit (i.e., collected by the Department of Revenue and distributed to the beneficiary) may be paid less than 100% through the plan, but only if disposable income is dedicated to the plan for a full five years. In this case, the debtor would continue to owe any child support not paid at the completion of the plan and DOR would continue to be involved at the end of the bankruptcy case.

Finally, bankruptcy will not change the current support obligations following bankruptcy. At the conclusion of either a chapter 7 or chapter 13 bankruptcy, the debtor’s obligations to pay child support remain unchanged, and must pay any obligations unless and until amended by an order of the Probate & Family Court. If you want to know more about amending support orders in the Probate & Family Court in Massachusetts view our information on Modifications.

If my ex-spouse files for Bankruptcy, can they discharge support they owe?

Under the current Bankruptcy Code, a debtor who files a Chapter 7 bankruptcy will not receive a discharge from debts defined in paragraph 5 of 11 U.S.C. § 523(a) as "domestic support obligations" or debts under 11 U.S.C. § 523(a)(15) owed "to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit."

"Domestic support obligations" are defined by 11 U.S.C. § 101(14A) as debts "in the nature of alimony, maintenance, or support" owed to a spouse, former spouse, or child.

These limitations on dischargability therefore apply to both child support and alimony, as well as other potential obligations under a divorce decree, such as agreements to pay joint debts or obligation to pay an ex-spouses attorney fees.

If your ex-spouse does file for bankruptcy, you may need to file responsive pleadings and argue this issue in front of a Judge if the debtor seeks to discharge the debt. If you fail to dispute the discharge, that could result in the debt being discharged. Though this is very unlikely, if you are not sure how to protect your rights you should consult with an attorney.