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Domestic Support Obligations: child support, alimony, and equitable distributions

There are two different sorts of domestic support obligations defined in the bankruptcy code.  The first kind of domestic support obligation encompasses things such as child support payments and alimony (called maintenance in Kentucky).  The second sort comes from an equitable distribution of property subsequent to a divorce. The term “domestic support obligation” first appears in 11 USC Sect. 101(14A), but these two different kinds of domestic support obligations only become apparent when one looks at how they are treated in terms of discharge of debt.

At first glance at 11 USC 523(a)(5) & (15) it looks like these two types of domestic support obligations are treated the same. That is to say, neither child support and alimony type obligations nor equitable distribution of property appear to be discharged in bankruptcy. This is true when it comes to Chapter 7 liquidation type bankruptcy. However, it is a different story in Chapter 13, but one has to look at the bankruptcy code carefully to discern this difference.

So, now we have to turn to 11 USC Sect 1328(a)(2) to see the rest of the story. This oddly written statute basically says that all debts except for certain ones get discharged once all the plan payments are made. The specific provision mentioned includes 11 USC Sect 523(a)(5) as an exception that does NOT get discharged. However, that provision conspicuously leaves our 11 USC Sect. 523(a)(15). This latter provision, 523(a)(15) pertains to equitable distribution of assets subsequent to a divorce.

Bottom line: if you agree to let your soon to be ex-spouse pay you later for your share of equity in the marital residence, then you may end up losing out if he or she ends up in a Chapter 13. That chunk of equity may well end up being treated as a general unsecured debt receiving only pennies on the dollar. However, child support and alimony (maintenance) will not be discharged in a Chapter 7 or a Chapter 13.

July 16, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, child support, Divorce, Family Law, Marital Assets, Pre-filing planning | , , , , , , , , , | 1 Comment

Domestic Support Obligations: child support, alimony, and equitable distributions

There are two different sorts of domestic support obligations defined in the bankruptcy code.  The first kind of domestic support obligation encompasses things such as child support payments and alimony (called maintenance in Kentucky).  The second sort comes from an equitable distribution of property subsequent to a divorce. The term “domestic support obligation” first appears in 11 USC Sect. 101(14A), but these two different kinds of domestic support obligations only become apparent when one looks at how they are treated in terms of discharge of debt.

At first glance at 11 USC 523(a)(5) & (15) it looks like these two types of domestic support obligations are treated the same. That is to say, neither child support and alimony type obligations nor equitable distribution of property appear to be discharged in bankruptcy. This is true when it comes to Chapter 7 liquidation type bankruptcy. However, it is a different story in Chapter 13, but one has to look at the bankruptcy code carefully to discern this difference.

So, now we have to turn to 11 USC Sect 1328(a)(2) to see the rest of the story. This oddly written statute basically says that all debts except for certain ones get discharged once all the plan payments are made. The specific provision mentioned includes 11 USC Sect 523(a)(5) as an exception that does NOT get discharged. However, that provision conspicuously leaves our 11 USC Sect. 523(a)(15). This latter provision, 523(a)(15) pertains to equitable distribution of assets subsequent to a divorce.  

Bottom line: if you agree to let you soon to be ex-spouse pay you later for your share of equity in the marital residence, then you may end up loosing out if he or she ends up in a Chapter 13. That chunk of equity may well end up being treated as a general unsecured debt receiving only pennies on the dollar. However, child support and alimony (maintenance) will not be discharged in a Chapter 7 or a Chapter 13.

February 1, 2012 Posted by | Uncategorized | , , , , , , , , , | 8 Comments

Discharge of Debt and Domestic Support Obligations

The changes in the bankruptcy code from the 2005 BACPA essentially eradicated a debtor’s ability to discharge their domestic support obligations. So, if you are divorced or pay child support, it is important to understand what you can do regarding debts arising from the divorce or child support. A recent decision by Judge Scott, Judge for the Eastern Distric of Kentucky Bankruptcy Court, offers a concise explanation of how domestic support obligations arise and how they are impacted by the automatic stay from collection activity of 11 U.S.C. Section 362.

Domestic support obligations (I’ll call these “DSO”s here on out) are defined liberally by the bankruptcy code at 11 U.S.C. Section 101(14A). When a DSO arises because it is “in the nature of” maintenance, alimony or child support, then the automatic stay of Section 362 does not prevent collection actions from property that is NOT part of the estate. The clearest example of this is when the divorce court ordered one party to pay his or her ex-spouse monthly payments (either alimony payments or child support) and the receiving party can still expect to receive those monthly payments from the debtor’s ongoing wages, which are not part of the estate of a Chapter 7. The receiving spouse need do nothing in the bankruptcy court to take action to enforce this order of support.

The recent decision referenced above gives a great example of a very different way that a DSO can arise. In that case, the debtor was ordered to maintain payments on the marital residence until it sold. However, he did not do so (perhaps he could not or maybe he thought he was pulling one over on his ex-wife, I have no idea) and the marital residence foreclosed. There was a deficiency of around $45,500 from the foreclosure as compared to the assessed value of the house. Presumably, the full debt on the house was covered by the sale proceeds and the $45,500 represented equity. So, the debtor had been ordered by the divorce court judge to pay 1/2 of that to his ex-wife. The debtor argued that since the house did sell and there was no net gain from said sale, that he did not owe his ex-wife one cent. Neither the divorce judge nor Judge Scott bought this argument.

The debtor went into bankruptcy with a $22,750 plus DSO as a result of the foreclosure on the marital residence. Since it was not in the nature of alimony, maintenance or child support, the automatic stay did prevent the ex-wife from pursuing collection activity, so she moved the court to lift the stay. She attempted to do so, but failed to sufficiently explain to the bankruptcy court the reason why she should be allowed to have the stay lifted.

The end result is that the debtor clearly has to repay his ex-wife the $22,750 that he theoretically could have realized if he had kept current on payments and sold the house on the open market. However, since the ex-wife did not fully carry her burden of proof, she is going to have to wait until the bankruptcy is closed to take action to collect this debt.

Several lessons come from this case. First, you really should consult with an attorney familiar with both family law and banruptcy law if you are going to allow property that was subject to a decree or court order in a divorce be repossessed or foreclosed upon. The long term cost to you may be far more than you want to incur. Second, remember that bankruptcy does not take care of every sort of debt and you need to recognize what debts will remain. This could help you decide between pursuing a work-out outside of bankruptcy, filing a Chapter 7, or filing a Chapter 13. Third, if you are owed a DSO, be sure to adequately provide evidence to the bankruptcy court of the “good cause” (the reason why you are harmed) required by 11 U.S.C. Section 362(d)(1) for the automatice stay to be lifted.

March 21, 2011 Posted by | Bankruptcy, Chapter 7, child support, Divorce, Family Law, Foreclosure, Planning, Pre-filing planning, Property (exempt | , , , , , , , , , | 1 Comment

Voluntary Underemployment & Child Support (or Roy’s Very Bad Day)

In a prior post discussing dischargeability of a Dodge Durango Debt from a Divorce, I said that in the case, Howard v Howard, 2008-CA-001059-MR (June 12, 2009)(to be published) the Kentucky Court of Appeals addressed two important domestic support obligation issues. This post reveals that second issue.

As we saw before, Roy lost his argument that the deficiency judgment debt on his Dodge Durango was discharged through bankruptcy. As to his ex-wife Sondra, he remained responsible for the payments because it was agreed to and decreed through the divorce. That made it non-dischargeable as a domestic support obligation and so Sondra could pursue payment through contempt proceedings.

Now, Roy also had left a nice paying job as a federal prison guard claiming a medical reason. Apparently it was not a very good medical reason (or he failed to prove it up) because the trial court determined that his new employment at half his former wages was voluntary. Because it was deemed a voluntary reduction in pay, Roy was ordered to keep paying the same child support as before while earning half the amount of wages as before. He wouldn’t even be able to put gas in the tank of a Durango now.

In order to modify child support, the movant must show “a material change in circumstances that is substantial and continuing.” KRS 403.213. Judges have considerable discretion to decide whether a job change resulting in much less income is voluntary or involuntary. If it is voluntary then that person does not get a break on the child support.

But what if Roy really had a medical problem and could not longer work at the federal prison? Well, if his medical condition was legitimate, and it may have been, then there should have been a trail of documentation that was produced as evidence to the court. If Roy had that evidence, then he needed to pull it together and convince the judge. This is where it actually saves money in the long run to invest in having a good attorney. A good attorney would have either told Roy he was wasting his time because an ingrown toe-nail won’t convice the court, or she would have made sure the evidence was there.

Unfortunately, losing on the Durango Debt and losing on the reduction of child support did not end his very bad day. Roy also had to pay $500.00 towards Sondra’s legal fees. I mean no offense to any of my colleagues that may have represented Roy, and if Roy reads this I am sorry if it seems I am rubbing salt in the wounds, but had he invested in legal counsel knowledgeable in bankruptcy and family law, he could have saved a heap of money in the long run.

June 16, 2009 Posted by | attorney fees, Bankruptcy, child support, Divorce | , , , , , , | Leave a comment

Child Support Intricacy: Tax credits

The Court of Appeals addresses the treatment of a couple of different tax credits in determining income for child support calculations in the to be published decision Brausch v. Brausch, 2007-CA-002198-ME (Sept. 12, 2008). The appellant, James Brausch, argued that the Earned Income Credit and the additional Child Tax Credit that his ex-wife, Tracy, received in 2006 should count as income for her.

One would have to have all the income figures and plug them into the Kentucky child support worksheet to know how exactly James would benefit from the inclusion of these tax credits. Adding income to either side of the equation can raise the overall support obligation, but also changes the percentage each party would be responsible to pay. So, one can assume that James percentage would be lowered enough to decrease his obligation.

The Kentucky child support definition of income in KRS 403.212 is very broad, but benefits from means-tested public assistance programs are specifically excluded as income. The Court determined that the Earned Income Tax Credit is a public assistance benefit because it is treated as a dollar for dollar payment of tax. Rather than just reducing one’s tax liability, it could actually result in a refund. They also determined it was means-tested because it is directed towards the neediest of families. For example, it is phased out for families with two or more qualifying children at just $11,600.00 earned income. So, the Court held that the Earned Income Credit should not be included as income.

The Child Tax Credit received different treatment by the Court. They point to the $110,000.00 ceiling for receiving this credit so it cannot qualify for exclusion from income as a means-tested public assistance benefit. However, the Court determined that because the Child Tax Credit is determined by and tied to the dependent child exemptions, it is not income. Basically, the Court treated the Child Tax Credit as an extension of the dependent child exemptions which have traditionally been within the discretion of the trial court to allocate between parents. In this particular matter, Tracy had already been awarded the dependent child deductions for the year in question, so she was allowed to keep the $3000.00 she recieved but not include the amount as income.

In going forward in this case and as a guide for others, the Court favors equally dividing such deductions in a simple and straightforward manner. This can be accomplished with an even number of children by assigning each parent one-half of the deductions each year or by rotating the deductions from year to year.

September 20, 2008 Posted by | child support, Family Law | , , , , , | Leave a comment

Income in divorce is not the same as with the IRS

People typically think of income in terms of how the IRS defines income, even when it comes to divorce. This makes sense because we deal with income and IRS on an annual basis (except certain notable celebrities) while we deal with divorce, if at all, only once (again with certain celebrities excepted). However, they are not defined exactly the same.

In the recently released Kentucky Supreme Court case, Gripshover v. Gripshover, (2005-SC-000729-DG & 2006-SC-000258-DG)(Feb. 21, 2008)(to be published), , one particular difference is illuminated. The IRS provides for certain business expenses to be fully depreciated (expensed) in the year of the expense rather than depreciated over time. 26 USC Sec. 179. The Gripshover Court held that KRS 403.212 provides only for straight line depreciation. This means that the IRS reported income will often be lower than the income used for determining child support in divorce cases where a business owner is one of the spouses.

It also means that the days of relying on a business owner’s 1040 with the various self-employment schedules to show income is gone. CPA’s will be needed who understand the difference definition of income in divorce in order to determine child support.

February 23, 2008 Posted by | child support, Divorce, Family Law, Marital Assets, property allocation | , , , | 1 Comment

The other child support law

I have had the honor of representing parents in dependency, neglect and abuse (“DNA”) actions in a few different counties. Along with working for the Cabinet for Health & Family Services in child protection, I have learned that there is little uniformity in how various issues in these actions are handled across counties. One of these issues is the handling of child support assessed against the parents who have lost custody of their child(ren). Many practitioners and few parents realize that child support in DNA actions is governed by a different statute than child support in divorce cases. The statutes that determine child support in divorce actions are in KRS Chapter 403. A hallmark of child support in divorce is the use of standardized guidelines shown in KRS 403.212. Deviation from the guidelines has to be justified by the court.

In contrast to the highly regulated child support of divorce, child support in DNA actions is governed by only one statute, KRS 610.170. The only standard this law provides is that the court shall order a “reasonable sum” and this only IF the parent is able to contribute. The statute makes no reference to the guidelines of KRS 403.212. This omission was purposeful by the legislature and the entire thrust of KRS 610.170 shows a legislative intent to give greater discretion to the judge presiding over a DNA matter and for greater leniency in the amounts levied. There are practical reasons for this policy of leniency that are beneficial both to the parents and to the State. Unfortunately, many courts do not recognize the nuances built into this law and automatically apply the standard guidelines as if a divorce were occurring. Not only do many counties stick to the guidelines, they also divide the proceedings so that the child support is handled through an entirely separate docket. This leads to other difficulties for both the county and the parents.

Becuase the child support often is handled on a separate docket, the parents end up without representation. They were likely appointed counsel in the DNA proceeding due to a low income, but the scope of representation for the court appointed counsel (“CAC”) is not expected to include other hearings, such as for child support. Becuase of the limited scope of representation and because the parents cannot afford their own counsel, they end up without legal assistance in understanding the differences in the child support laws.

Separating the proceedings also impacts the courts and the County Attorney’s office by creating double dockets. Instead of one County Attorney familiar with the details of the situation, handling one case and showing up to one set of hearings, there are two County Attorneys and two sets of hearings. This lead to judicial inefficiency. Already impoverished parents must take more time away from work or job searches in order to attend hearings that will demand money from them leading to inefficiency from an economic standpoint. In other words, it creates waste for everyone.

Of course parents who have chosen to be or have inadvertently been neglectful or abusive should still support their children financially. However, there are some differences inherent in the DNA situation that call for different treatment than a divorce. In DNA actions, a third-party, the Cabinet, is stepping in and asserting authority to take the child from the parents. Occasionally this was due to an overreaction by the Cabinet. In rare circumstances, the removal was an out and out mistake. Regardless, the parents are often devastated and have few emotional, social and financial resources to successfully navigate the turmoil this brings about. The neglect and abuse likely flowed from a mental health issue or at least a deficit of parenting skills. The Cabinet always requests, and the courts order, various assessments, education programs and treatment regimens. Almost none of these requirments are free to the parents and only the rare few parents have insurance. Thus, the parents are stressed financially beyond what one typically sees in a divorce situations.

In order to reunite the child with the parents successfully, these various assessments and treatments must occur. That means fees paid to programs and time taken off of work to attend the classes or treatments. In other words, more expenses out and less income in. It is within this context that we see why the legislature simply used “reasonable sum” as the standard for child support in DNA matters. There is no way to factor all of those variables into a set guideline like one finds in the divorce statutes. So, the legislature comtemplated giving the judge, who could see what expenses were being required of the parent, to use their discretion to set child support at a level low enough to allow for success. This sets the stage for the parents to have every advantage towards being successful.

When more parents are given greater opportunity to succeed in reunification by maximizing the resources at their disposal (i.e. by keeping child support low) the State can actually save money. Some judges and County Attorneys worry that they are holding back money from the Cabinet that will help finance sufficient workers to do the job right. In truth, the amounts contemplated would only amount to a small fraction of the budget. Rather, if children go home faster then the State will encounter greater financial savings. Consider it this way, if it typically costs around $15.00 a day for a child to be in foster care (not to mention all the indirect costs) and the parents child support per guidelines would be $10.00 a day, then the state is falling behind $5.00 a day. Mathematicians can help me here, but there comes a point where the cost of low child support with fewer days in care becomes more financially efficient than high child support with more days in care. True, there will still be parents who do not do what they need even with low child support, but that can be addressed at a three or six month review where the court reassesses matters. It is better to start out setting that stage with every benefit to the parent to encourage success.

To pull all these ideas together, the best practice would be for either zero child support or a nominal amount to be assessed at the Temporary Removal Hearing in the DNA proceeding. Then, at the Disposition hearing, for the judge to look at all the requirments of the Cabinet and the parent’s income and determine a “reasonable sum”. This cuts out any extraneous proceedings, involves only one County Attorney, and insures that the parent’s court appointed counsel can advocate for them on the child support issue. Most importantly, it allows the judge to make their best determination as to what balance of child support will best allow the parents to obtain the assessments and treatment needed to get the child home. Finally, if the parent does nothing for the first three to six months, the judge can send one more wake-up call to them by upping the child support since it would then be “reasonable” to take treatment costs out of the equation. I cannot take credit for the process I recommend, but must give that credit a very wise County Attorney (he knows who he is) who has refined it over years in one county’s Family Court (I will take credit for illuminating the rationales for the policies though).

January 11, 2008 Posted by | Family Law, Politics | , , , , , , | 2 Comments