Today's guest blogger is Christopher McAvoy, a Taylor, Michigan attorney.
A discharge in a Chapter 13 filing does not eliminate any post-discharge child or spousal support payments. These are exceptions to the discharge and if you still owe support after the end of your Chapter 13 case, you have to keep paying until the support order is satisfied. A Chapter 13 may initially affect support payments while the debtor's reorganization plan is worked out.
Support Payments Are A Priority Unsecured Debt
When a debtor files a Chapter 13, he intends to repay some or all of the debt owed to creditors. The ex-spouse, who is owed support and/or a property settlement, is a creditor as odd as that may sound. The debtor comes up with a plan that is proposed to the court and the creditors. The plan lays out which creditor gets what. Each class of creditor will be treated differently depending on if their debt is secured, like a house loan, or unsecured, like a credit card, or an unsecured debt with priority. The ex-spouse to whom support is owed is a priority unsecured creditor and is paid in full over the length of the repayment plan. Any support arrears can be cured and brought current as well.
Property Settlements Can Be Discharged
While the ex-spouse is a priority unsecured creditor for support obligations, the same is not true for a property settlement. Let's say the judgment of divorce provides that the husband is awarded a cabin up north. However, he has to pay the wife $40,000 as her share of the house. The settlement provides that he doesn't have to pay her right away. Instead, he can make monthly payments or pay a lump sum within a certain number of years.
The ex-wife has a problem if he files for Chapter 13 bankruptcy. The property settlement is just an ordinary unsecured debt like a credit card. There is no lien to secure her payment. It's not a support obligation. It's a run of the mill debt. Bad news for the ex-wife. While she is the same person, she is treated differently depending on the classification of the debt. She can be a priority unsecured creditor for the domestic support obligations but an unsecured creditor, without priority, for the property settlement.
If the bankruptcy plan does not provide for payment in full to unsecured creditors, the ex-wife will get a discounted percentage of the $40,000 from our example. If the ex-husband completes all of his plan payments, any unpaid balance owed on the divorce property settlement is discharged and noncollectable. It sounds unfair but it really isn't. The creditor spouse is being treated the same as any other unsecured debt.
If you are considering a deferred property settlement payment in a divorce, consider getting a lien or security interest to secure payment to avoid being treated like a credit card
Christopher McAvoy is a Michigan family law attorney and consumer bankruptcy lawyer who helps people file Chapter 7 and Chapter 13 bankruptcy.
Joanne, I write in order to educate and empower people. I hope your clients will use my Blog for help whenever possible--especially if they are not able to reach you directly when they have an urgent question. Jeanne
Posted by: Jeanne M. Hannah | October 20, 2011 at 03:23 PM
Spousal support | Penalties for late payment dischargeable in bankruptcy
Support payments are not dischargeable in bankruptcy. But what about penalties imposed for failure to pay support? The 1st Circuit Court of Appeals held in a ruling released on November 12, 2009 that $50 per day penalties owed by the husband because his spousal support payments were late are not "in the nature of support." [Note the penalties had accumulated to some $75,000+ over a period of years.] Thus the former husband could discharge them in bankruptcy.
According to the court:
"The term "domestic support obligation" ("DSO") is a newly defined term in the Bankruptcy Code, as updated by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). See Pub. L. 109-8, 119 Stat. 23 (2005). As relevant here, a DSO is defined as ' . . . a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law [owed to] a former spouse [and that is] in the nature of alimony, maintenance, or support . . . without regard to whether such debt is expressly so designated. 11 U.S.C. § 101(14A).' "
Pursuant to the statute, for an obligation to a former spouse to be considered a DSO, it must actually be in the nature of support. This issue is one of federal bankruptcy law, and not state law.
The 1st Circuit Court disagreed with the lower bankruptcy court, which had said that the $50/day penalty "looks, smells, and feels too much like attorneys' fees collecting alimony and support payments, which have historically . . . been treated as in the same nature" as alimony. Rather, the 1st Circuit concluded that [the ex-wife's] claim is a general unsecured claim not entitled to priority status and can be discharged in [the ex-husband's] bankruptcy. See 11 U.S.C. §§ 523(a)(15), 1328(a)(2).
http://www.scribd. com/doc/22941950 /In-re-Smith
Posted by: Joe Jurecki | October 20, 2011 at 02:30 PM
You continue to amaze me Jeanne -this is such a good site you have
I don't know how you find the time. Do you ever sleep?
Joanne
Can I let my clients access your site?
Posted by: Joanne Adam | October 19, 2011 at 11:01 PM