How may the Bankruptcy Court treat child support arrears owed to a Debtor who files Bankruptcy? In such an instance, the Debtor or the Bankruptcy Attorney, on behalf of the Debtor, may engage in an analysis of two important concepts in Bankruptcy.
The first question is whether child support or child support arrears are even to be included in the Bankruptcy Estate. How the property or asset in question is treated in its inclusion or exclusion from the Bankruptcy Estate, has a primary effect on whether such property can be subject to seizure or liquidation by the Chapter 7 Bankruptcy Trustee, or used to pay additional monies to the Debtor’s creditors, and in particular, the Debtor’s Unsecured Creditors, in a Chapter 13 Bankruptcy.
Bankruptcy Code Section 541 defines Property of the Estate as “……. all legal or equitable interests of the debtor in property as of the commencement of the case”. Therefore, all such legal or equitable assets as of the filing of the Bankruptcy Case are considered property of the Bankruptcy Estate, and such property may be subject to attachment or seizure by the Chapter 7 Bankruptcy Trustee, absent the presence of an available Bankruptcy Exemption to protect the property from such efforts by the Bankruptcy Trustee.
Although the Bankruptcy Code defines what is property of the Bankruptcy Estate, one must look to the applicable State Law to determine what is property, and how much property is treated. In the State of Florida, Florida Statute 39.01(15) defines child support as “a court-ordered obligation…for monetary support for the care, maintenance, training, and education of a child”.
Although child support in the State of Florida, as in presumably most other States is paid to the parent of the child, in the State of Florida, and many if not most or all other States, child support is considered to be ordered for the benefit of the child.
In Bankruptcy Law, there is a concept of Legal versus Equitable interests in property. While the parent who is the recipient of the child support monies may have what is referred to as legal title to such child support monies, the child is the party to whom such payments are to be made for the maintenance and support of such child. In such an instance, a resulting trust may occur in which the parent acts as the Trustee of such monies, to be held and delivered for the benefit of the child, who acts or is deemed, the beneficiary of such monies.
In such an instance, the parent might be argued to have legal title or ownership of such child support monies, but the child has full equitable interest in such monies. Such monies should not be subject to attachment or seizure by the Chapter 7 Trustee as child support monies are paid for the benefit of the child, and the parent recipient simply acts as a custodian or Trustee of such monies.
In the Middle District of Florida, Tampa Division, the Chapter 13 Trustees will invariably ask the Debtor to commit any child support arrearages paid to the Debtor, to the Chapter 13 plan. The Debtor or the Bankruptcy Attorney representing the Debtor should not consent to such request, without an order from the Bankruptcy Judge, for the same reason such monies should not be attached by the Chapter 7 Bankruptcy Trustee. Child support monies are under Florida Law and are designed for the benefit, maintenance, and education of the child and not to be used for the benefit of the parent recipient, who is simply a custodian or Trustee of such monies, in which a resulting trust occurs.
The response of the Chapter 13 Bankruptcy Trustee in such instance may be that even if the child support monies are the equitable property of the child, the child is included in the household of the Debtor, and all monies received by such household are to be considered in a determination of the disposable income of the Debtor parent in Bankruptcy Proceedings.
The second element to consider in an analysis of whether child support arrearages or child support monies are to be the subject of attachment or seizure by the Chapter 7 Bankruptcy Trustee is whether the child support or child support arrearages are protected by an available Exemption in Bankruptcy.
The State of Florida is an opt-out state, meaning the Debtor who files Bankruptcy in the State of Florida generally must use the Exemptions provided by the State of Florida, either Statutorily or through the Florida Constitution. Exemptions simply determine what assets or property the Debtor who files Bankruptcy may protect from attachment or seizure by the Chapter 7 Bankruptcy Trustee.
Although the State of Florida is an opt-out State, Florida Statute 222.201 provides for the availability of certain Federal Bankruptcy Exemptions, namely those provided under Section 522(d)(10) of the Bankruptcy Code. Bankruptcy Code Section 522(d)(10)(D) provides an Exemption for “…..alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor…and any dependent”.
Although the Statute provides such an Exempt for support, one must then consider whether such award is reasonably necessary for the support of the debtor or his or her dependents. A sizable child support arrearage may be determined to exceed that reasonably necessary for such support.
However, a responsive argument can be made by the Debtor or the Debtor’s Bankruptcy Attorney that such award of child support, to be paid on a monthly basis, as determined by the State Court to be reasonable, and the Debtor and his or her Dependents monthly available or disposable income was reduced by the absence of such child support payments. Based upon the State Court’s determination of the reasonableness of such child support payments, such monies or arrearages are reasonably necessary for the support of the child or children who are beneficiaries.
Finally, in Chapter 7 Bankruptcy one may refer to Bankruptcy Code Section 541 which determines that certain assets which are acquired after 180 days from the filing of the Bankruptcy Petition are not to be subject to attachment or seizure by the Chapter 7 Bankruptcy Trustee. The 180-day rule is most often invoked in a situation where the Debtor was included in an inheritance or will and the party who created such inheritance or will decease or dies, 180 days after the filing of the Bankruptcy.
However, Bankruptcy Code Section 541(a)(5)(B) also provides that “…. any interest in property received as a result of a property settlement or agreement with the debtor’s spouse, or of an interlocutory or divorce decree” is not the property of the Bankruptcy Estate if such monies or property is received more than 180 days after the filing of the Bankruptcy Petition. To contend that payment of child support arrearages is within the purview of 541(a)(5)(B) would likely be a failing argument as the Bankruptcy Code Section specifically addresses a property settlement or agreement and not child support or other forms of domestic support, such as alimony.
Please refer to a relevant article on our website regarding legal versus equitable interests and their treatment in Bankruptcy: https://www.jayweller.com/legal-versus-equitable-interests-in-bankruptcy/
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