Child Support Debt in Bankruptcy: No Discharge of Obligation
Child support and domestic support obligation deficiency or arrearage debt is very specifically not discharged in either a Chapter 7 or Chapter 13 bankruptcy. Domestic support obligations are excluded from the debts for which a bankruptcy discharge of obligation is available under Section 523(a)(5) of the US Bankruptcy Code. Therefore, neither a Chapter 7 bankruptcy or a Chapter 13 bankruptcy will discharge in any part a child support or domestic support obligation that has been ordered by a Michigan state or family law court by way of a divorce judgement, order of Friend of the Court, or other judicial decree. Further, the "automatic stay" against collections which normally requires all collection efforts of creditors to cease upon the filing of a Chapter 7 or Chapter 13 bankruptcy does not apply to child support or other domestic support obligations. The filing of a bankruptcy, therefore, will have no effect whatsoever on a child support or domestic support deficiency or arrearage debt. However, that does not mean that a bankruptcy cannot help if you are unable to make a child support or domestic support obligation debt current on your own.
Child Support in Michigan Chapter 13 Bankruptcy: Get Some Breathing Space!
Child support and domestic support obligations are classified under the Bankruptcy Code as "priority" unsecured debts. That is, they are not "secured" by collateral, the way a home mortgage loan or car loan is secured by the home or car purchased with the loan, but they are of higher priority under the Bankruptcy Code than other "non-priority" unsecured debts such as credit card or medical debts are. In a Chapter 7 bankruptcy, what this means is that, if the Chapter 7 Trustee successfully liquidates any of your personal assets for the benefit of creditors (see our Michigan Chapter 7 Bankruptcy page for more information on Chapter 7 asset liquidation), child support and other "priority" unsecured debts must be paid in full before "non-priority" creditors receive anything. In a Chapter 13 bankruptcy, however, priority debts such as child support may be brought current through the Chapter 13 payment plan. Child support and other priority unsecured debts may be repaid in full at 0% interest over the life of a Chapter 13 bankruptcy payment plan. Click the link in the paragraph above for more information on how the Chapter 13 bankruptcy payment plan is structured, but, in short, a Chapter 13 payment plan runs 36-60 months long. In order to be approved by the Bankruptcy Court, certain factors must be met. One of them is that priority unsecured debts are schedule to be repaid in full by the end of the 60th month at the latest. You make a monthly payment to the Bankruptcy Court (to the Chapter 13 Trustee, actually) from which the Chapter 13 Trustee repays your debts. Non-priority unsecured creditors receive only what is left at the end of the payment plan after the secured and priority creditors have been repaid, and they may thus be repaid only a few cents on the dollar of what you owe, the balance to be discharged entirely. Child support and priority unsecured debts must be paid 100% of what is owed. Thus, if you owed, say, $2,000 in overdue child support payments, you would be able to pay this off at $55.56/month in a 36-month plan, or $33.34/month in a 60-month plan.
Child Support: When Is It a "Support" Obligation & When Is It Not?
Child support and other domestic support obligations do not need to be called "support obligations" in a divorce judgment explicitly to be a non-dischargeable domestic support obligation in Federal Bankruptcy Court. There are various factors that enter into a determination that an obligation is one or the other, including whether the required payments are to cease upon the death or re-marriage of the recieving spouse, whether they're based on future earning abilities of that spouse, whether the payments are periodically paid rather than paid once in a lump-sum, and whether the payments are directed specifically for medical needs, a mortgage, or other such ends. Michigan is a "no-fault" divorce state, and these duties are more often simply based in the needs of the parties involved. Regardless, the amount of the alimony or child-support payment may have been a reasonable decision on the part of the court at the time of the divorce, but, later, these payments can pose problems when the financial circumstances of the paying spouse change for the worse. Here in Michigan, we are part of the Sixth Circuit Court of Appeals in the Federal Court system, which, along with other federal cases, handles appeals arising from Federal bankruptcy courts. The Sixth Circuit has its own test for making this determination: if the intent of the family law court that oversaw the divorce or of the parties themselves was that the payments were "support," the court then decides whether the effect of the payments is "supporting" and whether that "support" is actually necessary for the spouse and children's daily needs. If it is found that the payment is supporting and is necessary in this manner, it will be non-dischargeable in a Michigan Chapter 7 or Chapter 13 bankruptcy.
Child Support: The Bankruptcy of the Recipient
The right to receive a payment is an asset that must be listed as a form of property and protected, if possible, with one of the "exemptions" available under Michigan state law or under Federal law via the Bankruptcy Code to remove property from the bankruptcy estate that is created automatically upon the filing of a bankruptcy petition (and thus protect it from the liquidation power of the Chapter 7 Trustee). The question of whether alimony or child-support payments being received may be exempted from the "bankruptcy estate" which is created when a debtor files a petition for bankruptcy differs depending on whether the petition is filed using the Federal exemptions defined under the Bankruptcy Code or the state exemptions allowed under individual states' own laws. Each individual state (and the District of Columbia) determines whether filing debtors may choose or not between these two separate sets of exemptions. Michigan allows debtors to choose either its state exemptions or the Federal exemptions. No combining of the individual provisions of each set is allowed. Under the Federal Bankruptcy Code exemptions, alimony and child-support payments are specifically exempted—but only to the extent that they are actually necessary for the daily support of the debtor him- or herself and any dependents. The burden of proof is on creditors to claim that any amount of this sort of payment claimed as exempt by a filing debtor is above and beyond the daily needs of the debtor, however. Under Michigan's exemptions, no exemption is specifically granted for the right to receive domestic support obligations of this sort. It clearly indicates that a stock-option or other retirement plan is not exempt to the extent that it is subject to a court-order pursuing an obligation to pay alimony or child-support, but it says nothing about the right of a debtor to receive that payment. Thus, if you are a debtor considering filing for bankruptcy in Michigan and are worried about protecting alimony or child-support payments that you depend upon, the question of whether to choose between the Michigan or Federal exemptions is a vital analysis that will require the counsel of an experienced bankruptcy attorney. If you are a southeast Michigan resident and are considering filing for bankruptcy, contact The Hilla Law Firm at (866) 674-2317 or click the button below to schedule a free, initial consultation. Schedule a Free Consultation