By Nicholas Brown
Experienced family lawyers are adept at helping their clients secure alimony, child support, property settlements and other financial relief. But what happens to these claims when the party obliged to make payments files bankruptcy?
This article takes a look at how domestic support obligations are treated in a bankruptcy case. The article also highlights some common issues for dispute and ways to protect your client.
What Is a Domestic Support Obligation?
The “domestic support obligation” is a defined term in bankruptcy law, referring to a debt “in the nature of alimony, maintenance or support” that is owed to a current or former spouse or child. In order to qualify, the obligation must be established under a formal agreement, court order or state law.
Common examples of domestic support obligations are alimony and child support. On the other hand, property divisions under equitable distribution orders typically do not qualify. In some instances, the nature of the claim is uncertain which could lead to litigation.
Domestic Support Obligations Receive Favorable Treatment in Bankruptcy
A. Domestic Support Claimants Cut To the Front Of the Line
The Bankruptcy Code grants domestic support obligations priority over most unsecured claims. If there is property or money available in a bankruptcy case, domestic support obligations will be among the first paid. In a Chapter 13 case, a debtor will not receive a discharge unless his domestic support obligations are paid in full.
B. Domestic Support Obligations Are Not Dischargeable
In a bankruptcy case, most creditors receive just pennies on the dollar or nothing at all. Unlike most debts, however, domestic support obligations survive the bankruptcy case intact. This is because domestic support obligations are not dischargeable. If your client’s claim is not paid through the bankruptcy case, you may pursue collection of a domestic support obligation after the case is over – and sometimes while the case is pending.
C. The Automatic Stay Does Not Apply to Certain Actions Regarding Domestic Support Obligations
Although a bankruptcy filing will stop most civil proceedings against the debtor, actions to establish or modify orders for domestic support obligations are not subject to the automatic stay. Under certain circumstances, efforts to collect such obligations are exempt from the stay.
Is it a Domestic Support Obligation or Not?
Because domestic support obligations are difficult to avoid, litigation frequently arises when there is a question about the true nature of a domestic claim. This is especially the case in Chapter 13 cases, where the discharge provisions are more favorable to debtors.
To answer this question, bankruptcy courts look to the intent of (i) the parties at the time of the agreement or (ii) the state court that issued the order, as applicable. Relevant factors include: the nature of the obligation, the relative earning power of spouses and attempts to balance it, adequacy of spouse’s support, timing of payments, waivers of maintenance, and the tax treatment of the obligation.
In recent years, North Carolina bankruptcy courts have applied this test to everything from child custody claims, retirement accounts and attorneys’ fees, to public assistance overpayments and mastopexy expense obligations.
Protecting Your Client in Anticipation of Bankruptcy
If you are uncertain whether your client’s claim is a domestic support obligation, the prudent lawyer can take preemptive steps to minimize the risk that the claim will be discharged.
If the claim is being memorialized in an agreement, add language to clarify what distributions are intended for maintenance or support. If the claim will arise from a court order, emphasize at trial and in your proposed findings any factors in favor of maintenance and support. Because state court judgments are entitled to collateral estoppel effect, a successful litigant may avoid retrying the case in bankruptcy court if the nature of the award is clear in the court’s order.
Once a bankruptcy case is filed, it is important to file a proof of claim in the case. In cases involving a repayment plan, review the treatment proposed and consider whether an objection is warranted. If the claim was incurred as a result of fraudulent conduct by the debtor but does not qualify as a domestic support obligation, your client may qualify for a separate exception to discharge.
If you are unsure about your client’s rights in a bankruptcy case, consider consulting with a bankruptcy attorney.
Nick Brown is a board certified specialist in business bankruptcy law. He is an owner with Howard, Stallings, From, Atkins, Angell & Davis, P.A. and practices in Raleigh. If you have a question or comment, you can reach him at firstname.lastname@example.org