Treatment Domestic Support Obligations in Bankruptcy


Domestic Support Obligations, sometimes referred to as DSO’s, are Classified as Priority Debts in Bankruptcy.  Please refer to Bankruptcy Code Sections 11 USC 507(a)(1), 523(a)(5) and 523(a)(15).  Priority Debts are generally paid first in a Chapter 13 Bankruptcy through the monthly payments the Debtor makes to the Chapter 13 Trustee, or through a Chapter 7 Bankruptcy, through any Distribution of Assets that may be available through the Liquidation of the Assets of the Debtor, that are not Exempt Assets.  Priority Debts must also be paid in full in a Chapter 13 Bankruptcy.

Please refer to the first Part of this Series on Domestic Support Obligations for the Definition of a Domestic Support Obligation.

All Domestic Support Obligations must be paid in full in order for a Chapter 13 Bankruptcy to be Confirmed by the Bankruptcy Judge.  If a Debtor fails to pay a Domestic Support Obligation after the filing of the Chapter 13 Bankruptcy, the Bankruptcy may be Dismissed, pursuant to 11 USC 1307(a)(11) of the Bankruptcy Code.

In a Chapter 13 Bankruptcy, the Debtor may not obtain a Discharge until the Debtor certifies that all Domestic Support Obligations are paid and that the Debtor is current on all such Obligations.

Bankruptcy Code Section 1328(a) further states that Domestic Support Obligations survive the Bankruptcy.  If one is ordered by the Family Court to pay Child Support or Alimony, on a continuing basis, such obligation does not cease with the filing of the Bankruptcy.

In A Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy, there is portion of the Bankruptcy referred to as the B22, or the 122(c) Current Monthly Income/Disposable Income Form, which Documents the Debtor’s  Monthly Allowable Expenses.  The B22 determines whether the Debtor is eligible to file either a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy.  If the Debtor has Disposable Income after the calculation of his Debts and Expenses, pursuant to the B22, then the Debtor may be required to file a Chapter 13 Bankruptcy.   The B22 not only determines whether the Debtor is eligible for a Chapter 7 or a Chapter 13 Bankruptcy, but further determines what the Debtor’s monthly payment may be in the Chapter 13 Bankruptcy.

Domestic Support Obligations, such as Alimony or Child Support, are Allowable Expenses pursuant to the B22, and such Expenses are permitted in full, without restriction.  The presence of the Domestic Support Obligations necessarily means that some other Creditors may receive a smaller Distribution of monies through a Chapter 13 Bankruptcy.

Some Marital Debts may be Classified as Domestic Support Obligations, and therefore Priority Debts, whereas other Marital Debts may be treated as General Unsecured Debts.  The overriding question is whether the Debt created by the Separation Agreement, Divorce Decree, or other Order of the Family Court, is in the Nature of Support.  For example, the Family Court may Order that one Spouse pay the Mortgage Payment of the Former Marital Home (meaning a Third Party Payment to the Bank), or that one Spouse pay the Medical Insurance for the Children of the Marriage, or possibly even the College Tuition of the Children.

Generally, a Debtor who files Bankruptcy is granted the protection of the Automatic Stay, which prevents Creditors and other Parties, from taking Legal Action against the Debtor.  However, the filing of a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy does not grant the Debtor an Automatic Stay, in matters of Child Custody, Child Support Modifications, Visitation, Dissolution of Marriage or Divorce, and Proceedings to establish Paternity.  There is no Automatic Stay for the Post Petition collection of Child Support or Alimony.  The only Exception is where there is a Proceeding regarding the Division of Property of which the Bankruptcy Estate has an Interest.

For example, a Debtor may own an Automobile, the Fair Market Value of which, greatly exceeds the Value afforded under the Bankruptcy Exemption Statutes available to the Debtor in the State in which the Debtor files Bankruptcy.  The Chapter 7 Trustee may be seeking to Liquidate or Sell the Automobile, in order to make a Meaningful Distribution of monies to the Creditors of the Debtor.  The Automatic Stay in Bankruptcy will apply here, to prevent the Family Court from making a determination regarding the subject Automobile.  The Family Court Judge, for example, would be enjoined, at least temporarily from granting an ownership Interest in the Automobile to the opposing Spouse.

It is in the Financial Interest of the Debtor to Discharge the maximum Amount of Debt possible in his or her Bankruptcy.  In the area of Domestic Support Obligations, the most obvious argument the Debtor may make is that a particular Debt is not a Domestic Support Obligation, is not in the Nature of Maintenance or Support, and therefore is an Unsecured Debt, treated as any other Unsecured Debt, in the Debtor’s Bankruptcy.

Part Three on our Series on Domestic Support Obligations will deal with the treatment of Attorney Fees awarded in the Family Court that become one of the subjects of the subsequent Bankruptcy.

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