Family Law and the New Bankruptcy Code
There are several major changes that the new bankruptcy code hereinafter referred to as the BACPA has made on the practice of family law. All domestic support obligations are now classified "first" priority claims under section 507(a)(1) of the Bankruptcy Code.
Second among the first priority debts are those domestic support obligations that are assigned to a governmental unit. Basically, any child support that is owed to probation or to the local county board of social services is also given priority status.
How has the 2005 BACPA affected Chapter 13 practice?
Section 1307 (c) of the Bankruptcy Code was amended to make the failure to pay post-petition support a grounds for dismissal of the bankruptcy case. Basically, if a debtor is not paying his child support then his Chapter 13 case can be dismissed. In addition, new section 1322(a)(4) of the Code provides that, although support owed is now a priority debt, it need not be paid in full if the debtor proposes a five-year plan that commits all of the debtor's disposable income and the debtor cannot pay the support obligation in full. This provision is intended to prevent large government support debts from making a mortgage cure and other chapter 13 remedies unavailable. Unpaid child support will of course not be discharged as is true under existing law.
New section 1325 (a)(8) of the Code makes the payment of post-petition support one of the standards for a chapter 13 plan confirmation. Section 1328(a) of the Code likewise is amended to require a debtor, in order to obtain a discharge, to certify that all post-petition support and all support requested to be paid by the plan has been paid.
In summary the net result of all of these amendments is that it gives domestic support creditors much more power in chapter 13 cases, and the ability to reject the plan if they are not paid.
How has the 2005 BACPA affected the automatic stay provisions for a family law case?
The 2005 Act adds many new exceptions to the automatic stay provisions for proceedings dealing with child custody, visitation rights, domestic violence, and divorce. These exceptions are common sense corrections for proceedings that do not have an impact on a bankruptcy filing. Many people had probably assumed that they were not stayed, though in fact they usually were, as legal proceedings that could have been commenced prior to petition. Basically, the new 2005 Act has given child support creditors the ability to ignore the automatic stay. Consequently, these new changes render the bankruptcy process subservient to the divorce case or child support hearing. The family law case now takes priority over the bankruptcy case. Therefore, the automatic stay will no longer automatically stop a divorce case or a child support hearing.
It is important to emphasize that a support creditor still remains bound by a confirmed plan, at least as long as the current support is being paid and the debtor is performing under the plan.
How has the 2005 BACPA affected the issue of the dischargeability of child support and of alimony?
Section 523(a)(5) of the Code now makes all support obligations non-dischargeable in all chapters. In addition, all property settlement debts that are owed to a spouse, former spouse, or a child of the debtor are non-dischargable in a chapter 7. Therefore, a non-debtor spouse is no longer technically required to file an adversary complaint to block a debtor spouse from trying to bankrupt debt that is owed under a property settlement agreement. However, it is my professional opinion that a prudent non-debtor spouse should still file an adversary complaint. A non-debtor spouse should make certain that a debtor ex-spouse is not successful in his or her efforts in trying to discharge martial debts that are owed under a property settlement agreement. Due caution should be exercised until the bankruptcy laws on these issues are settled.
The ability to pay and the balancing tests are eliminated from section 523(a)(15) of the Code. Section 523 (c) of the Code is amended to no longer require that dischargeability proceeding involving a property settlement be brought in the bankruptcy court. It is important to emphasize that these types of debts still remain dischargeable in a chapter 13 case. Therefore, I strongly believe that most future bankruptcy litigation over family law debts will be litigated in a chapter 13 case rather than a chapter 7 case.
How has the 2005 BACPA affected the issue of the exemption of certain assets in a bankruptcy case?
The new 2005 Act has also made some significant changes with regard to the treatment of exemptions in a bankruptcy case. Section 522(c)(1) of the Bankruptcy Code is amended to allow domestic support creditors to proceed against exempt property, including property exempted under state law. This change means that a debtor who files a bankruptcy case, and if he owes support debts then his exempt property as listed in his bankruptcy scheduled, can still be seized to pay for any of his child support debts.
Section 522(f) of the Code was also amended to prevent the avoidance of a judicial lien for domestic support obligations. The main effect of this change is to include any debts that are assigned or owned to probation or to a county board of social services agency among those protected from lien avoidance.
How has the 2005 BACPA affected the issue of preferences in a bankruptcy case?
Section 547 of the Code is amended to protect all bonafide payments on domestic support obligations from preference avoidance. The main effect of this amendment is that it adds protection for payments on child support to probation or to a county board of social services agency.
What are the new trustee duties in a family law case as required by the new 2005 BACPA?
The bankruptcy trustee must now give notice to all holders of domestic support obligations of the services provided by the state child support enforcement agency and the right to use such agency's services to collect child support during and after the bankruptcy case. The trustee must also send notice of the claim to the state child support enforcement agency. This notice can be combined with the notice to the hold of the support claim.
Another notice must also be sent to the hold of a support claim and the state child support enforcement agency when a discharge is granted. The notice must contain the last known address of the debtor and the debtor's employer. It must also contain the name of each creditor holding a claim that was not discharged under section 523(a)(2), (4), or (14A) of the code, or that was reaffirmed under section 524 (c) of the Code.
ABOUT THE AUTHOR
Theodore Sliwinski, Esquire, dedicates his practice to providing
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