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Archive for the ‘support lien’ tag

Bankruptcy Does Not Write Off Child or Spousal Support Debts

March 11th, 2019 at 7:00 am

Child support and spousal support debts cannot get written off in bankruptcy. But is your specific divorce debt legally considered support? 

 

We’re in a series of blog posts about special kinds of debt which bankruptcy may not discharge—write off.  So far we’ve covered criminal fines and restitution, and income taxes.

Child and spousal support are more like criminal debts than like income taxes. Bankruptcy simply does not discharge a criminal debt, as long as it really is a criminal, not civil, obligation.  Bankruptcy does discharge income tax debts that meet certain conditions. Bankruptcy simply does not discharge child and spousal support, IF it fits bankruptcy’s definition of support.

No Discharge of Support

Bankruptcy law is clear that neither Chapter 7 “straight bankruptcy” nor Chapter 13 “adjustment of debts” discharges support debts.

Section 523 of the U.S. Bankruptcy Code lists the “Exceptions to discharge.” It includes that “A discharge under [Chapter 7] does not discharge an individual debtor from any debt—(5) for a domestic support obligation… “ Section 523(a)(5).

Chapter 13 says the same thing by incorporating this Chapter 7 exception to discharge in its own list of exceptions.  Section 1328(a)(2).

What’s Considered Support in Bankruptcy?

So if you owe a “domestic support obligation,” you’re not getting out of it through bankruptcy. But what does that phrase mean? What does it include and what might if not include?

The Bankruptcy Code’s definition of “domestic support obligation” is 221 words long, containing 10 clauses. Section 101(14) of the Bankruptcy Code.  It appears to be a broad definition, covering anything that would sensibly be considered child or spousal support. For example, the debt could be owed not just to your ex-spouse or your child, but also to a current spouse (through a separation agreement) or to the parent, legal guardian, or responsible relative of a child (based on a court order of support, even if not biologically your child). In other circumstances, to be considered support the debt does not necessarily need to be based on a court order. It can be based on a separation agreement or “a determination made in accordance with applicable nonbankruptcy law by a governmental unit.”

Yet there are some limitations. For example, support obligations are often assigned for collection to someone other than the ex-spouse or child. Usually it’s assigned to a state or county support enforcement agency—then it’s still considered support. However, a support obligation that was “assigned to a nongovernmental entity” for collection is no longer considered support in bankruptcy. That is, it isn’t “unless that obligation [was] assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.” Section 101(14)(D).

Obligations “In the Nature of” Child or Spousal Support

Sometimes a domestic relations court will call something support that really isn’t.  The bankruptcy court does not have to accept what your divorce court labeled as support.

The definition of a “domestic support obligation” (that is, support) includes the requirement that it really be “in the nature of alimony, maintenance, or support” on behalf of the pertinent person. Section 101(14)(B). If it’s not, the debt may be dischargeable.

“Support” That Might Be Dischargeable in Bankruptcy

For example, a debt that’s labeled as support might not really be “in the nature” of support if it’s actually a “property settlement” obligation that’s mislabeled as spousal or child support.

A property settlement obligation involves the resolution of a marital asset or debt. For example, you may owe money to your ex-spouse in return for receiving more than your share of marital assets. Or you may owe in return for your ex-spouse taking on what had been a joint debt. If a divorce judge requires you to pay “support” for what is really a property settlement, it may be discharged in bankruptcy.

The Difference This Can Make

Chapter 7 discharges neither support nor property settlement debts.  But Chapter 13 can discharge property settlement debts.

So if you have obligations called “support” but which are not “in the nature of support,” a Chapter 13 is worth looking into. Chapter 13 may especially be worthwhile if the debt at issue  is large.

Conclusion

If you owe a debt labeled as support by your divorce court, most of the time it will indeed be “in the nature of” support. But not always.

You can see that the interplay between divorce law and bankruptcy can get complicated. Talk with your bankruptcy lawyer about all of your divorce obligations to get all the relief you’re entitled to.

 

Unpaid Child or Spousal Support Never Discharged in Bankruptcy

April 18th, 2016 at 7:00 am

You can’t legally write off child support or spousal support.

 

Our last blog post was about the conditions under which bankruptcy can discharge—write off—all income tax debts that meet certain conditions. Those conditions are mostly met by the passage of time. In contrast, unpaid child and spousal support is simply not discharged through bankruptcy. Not now. Not ever.

Support is Not Discharged, IF It’s Really Support

There IS one possibility, although admittedly this doesn’t often come into play. The Section of the Bankruptcy Code that defines support refers to a debt “in the nature of” child or spousal support. (See Section 101(14A).)

This “in the nature of” language means that an obligation could be called support in a divorce decree or court order, and yet NOT actually be “in the nature of” support. The bankruptcy court is not bound by what your divorce court labeled as support. The bankruptcy court looks beyond the language used in your separation or divorce documents to the kind of debt it actually is under the specific facts of your divorce.

Practically speaking, if an obligation was labeled as support by your divorce court most of the time it will indeed be “in the nature of” support. But not always, so it’s worth looking deeper.

Debts Labeled “Support” That Might Not Be for Bankruptcy Purposes

So what kind of debt is called support but is not really “in the nature” of support? It would be a “property settlement” obligations disguised as spousal or child support.

A property settlement obligation in divorce is one that resolves the division of a marital asset or debt. You may owe your ex-spouse a certain amount of money to make up for receiving more than your share of marital assets. Or you may owe to compensate him or her by taking on a marital debt.

If a divorce decree calls an obligation child or spousal support when it is not really “in the nature of support” but rather is a property settlement obligation, then it may be treated more favorably in your bankruptcy case.

An Example of “Support” that Isn’t “In the Nature of Support”

Imagine a personal loan provided to the two spouses during their marriage by one of the spouse’s parents. In the subsequent divorce, the divorce decree could obligate one of the ex- spouses to repay that loan by paying making payments of “spousal support” until that loan was paid off. In that obligated spouse’s subsequent bankruptcy case, that obligation for so-called “spousal support” would likely be seen by the bankruptcy court as one not “in the nature of” support.

But This Also Cuts in the Other Direction

An obligation that IS “in the nature of” child or spousal support can be called something else in the separation or divorce documents, but could still be treated as a support obligation and not discharged in bankruptcy.

For example, one spouse may be obligated to maintain health insurance on behalf of a child, without the divorce court labeling that obligation as child support. The bankruptcy could determine that is “in the nature of support.”

What Difference Does This Make?

Under Chapter 7 “straight bankruptcy” neither support obligations nor property settlement obligations can be discharged.  But under Chapter 13 “adjustment of debts,” property settlement obligations from a divorce (or separation) CAN be discharged.

So if you have obligations called “support” but which are not “in the nature of support,” a Chapter 13 is worth looking into.

Chapter 13 does not discharge debts after only about 3-4 months of filing the case as happens most of the time under Chapter 7. Instead it happens after a 3 or more years in a court-approved partial payment plan. We’ll explain more about the discharge of debts under Chapter 13 in an upcoming blog post.

 

A Fresh Start with the Child or Spousal Support Lien on Your Home

February 5th, 2016 at 8:00 am

The good news is that if you are behind on child or spousal support, with a resulting lien on your home, you can safely protect that home.

 

If you are behind on your support payments, your ex-spouse and support enforcement agencies have tremendous tools to use against you to try to force you to catch up. And if you own a home, those tools include the support lien that is very likely imposed on your home’s title. Chapter 13 “adjustment of debts” gives you a powerful tool with which to fight back.

Child/Spousal Support and Bankruptcy

Bankruptcy is admittedly limited in its ability to help deal with child and spousal support debts. But the way it can help sometimes makes all the difference.

Chapter 7 “straight bankruptcy” is not able to directly help other than to free up money so that you can better afford to pay any ongoing monthly support, and to catch up on any previously unpaid support. Any lien that you might have on your home remains throughout that time. And you have no protection from collections under that lien.

However, Chapter 13 DOES stop the collection of any support that you are behind on as of the date the case is filed. The court-approved payment plan can give you a very flexible way to catch up on what you owe. And unlike with Chapter 7, you get “automatic stay” protection from collection by your ex-spouse and support enforcement, including through the support lien on your home. So you can escape the huge pressure that these aggressive creditors often put on you. Howevr, this huge benefit comes with conditions and responsibilities, so you have to really understand and follow the rules.

The Rules under Chapter 13

Chapter 13 protects you and your home from the collection of accrued unpaid support, giving you up to 5 years to catch up.

But Chapter 13 does not stop collection of ongoing monthly support payments. So you have to continue paying those if you are still required to do so according to the state family/divorce court.

In fact it’s crucial that you pay those regular monthly payments. You must do so unless and until you reduce or eliminate that monthly support obligation through the family/divorce court. It’s crucial because if you don’t keep making those ongoing payments perfectly, you jeopardize the protection Chapter 13 otherwise provides you on collection of the accrued back support debt you owe. If you don’t pay your ongoing support, your ex-spouse and support enforcement agency will have grounds to resume collection action on that support arrearage. That would include foreclosing on the lien against home and any of the other aggressive collection actions the law normally allows against you and your assets.

The rules also require your Chapter 13 court-approved payment plan to include enough money being paid to your ex-spouse or support enforcement agency to pay off the support arrearage within the 3-to-5-year life of the payment plan.

And besides earmarking enough money in the plan, you must also actually pay the required payments into that payment plan throughout its life. If you don’t make the agreed and court-ordered Chapter 13 payments, you’re not catching up on the support payment like you’re supposed to, and so you’d likely lose the protection you’d filed the Chapter 13 case to get.

But If You DO Play By the Rules

Chapter 13 gives you time to catch up based on your budget.

During Chapter 13’s 3-to-5-year payment plan, you usually pay only a part of your overall debts. You often pay only a relatively small part of, or maybe nothing at all on, many of your debts. You would usually have the entire length of your case to catch up on your support arrearage. The time you have to catch up is very generous compared to what most ex-spouses and support enforcement agencies would otherwise allow.

You also generally can pay other high-priority debts ahead of or at the same time as you are catching up on support. For example, you can often make payments on a vehicle or mortgage arrearage either ahead of or at the same time as making payments on the back support.

The reason you usually pay most of your other debts less and sometimes nothing is that, while you must pay the full support arrearage with many of your other creditors you only pay as much, if anything your budget says you can afford to pay. So the amount that you owe in support arrearage often just reduces dollar-for-dollar the amount you pay to most of your other creditors.

And throughout this time your ex-spouse/support enforcement can’t enforce the support lien nor take any other action to collect the support arrearage.

Conclusion

So, if you play by the rules you and your home will be protected from a support lien foreclosure. And as long as you follow those rules you’ll be protected from all other support enforcement actions as to your accrued support arrearage throughout the three to five years that your Chapter 13 case is active. Then at the end of the case you’ll be current on your support.

If at that time you continue to owe ongoing monthly support, the support lien would likely remain but would cover only that ongoing support. Or if by that time you no longer owe monthly support, that support lien would be taken off your home at the completion of your case.

 

Making Sense of Bankruptcy: 5 More Powerful Ways Chapter 13 Saves Your Home

August 17th, 2015 at 7:00 am

Here are 5 additional tools that come with Chapter 13, each one neatly solving a different challenge to your home.

 

Here’s a summary of today’s blog post:

Adding to the 5 tools in our last blog post, today’s 5 include: 6) protecting your home equity if it’s greater than the homestead exemption, 7) giving you much more time to live in your home before selling it, 8) dealing effectively with child/spousal support liens against your home, 9) resolving an income tax lien on dischargeable income taxes, and 10) preventing foreclosure from overdue property taxes.

6. Avoid a Chapter 7 Trustee from Taking Your Home for Having Too Much Equity

If you have more equity in your home than the homestead exemption allows, you risk losing your home if you file a Chapter 7 “straight bankruptcy” case. The homestead exemption amount can differ state to state. Chapter 7 trustees have a lot of discretion about pursuing assets, and so it’s difficult to predict how aggressive yours will be about your home. If the amount of your equity is anywhere close to the homestead exemption maximum, you take a risk in filing a Chapter 7 case.

In contrast, Chapter 13 “adjustment of debts” provides a much more predictable procedure for determining the value of a home, one which relies less on the whim of a trustee. And more importantly Chapter 13 provides a mechanism to protect the value of the home if it is in excess of the homestead exemption. That mechanism often involves paying extra to your creditors over the course of your overall payment plan in return for being able to keep your home and its too-much equity. But in some cases you don’t have to pay anything extra—overall the creditors just need to get paid no less than what they would have received in a hypothetical Chapter 7 “liquidation” case.

7. Get Lots More Time to Sell Your Home

If you have decided to sell your home but are now or expect soon to be under threat of foreclosure, Chapter 13 usually gives you much more time to sell than would a Chapter 7 filing. That means you’d have more market exposure, which gives you a better chance at selling at a better price. That’s especially true if you are being forced to sell during a traditionally slower time of the year, or are trying to sell on a short sale (in which the house is worth less than the amount of the mortgage(s) against it).

If you are behind on your mortgage payments and have a foreclosure scheduled, filing a Chapter 7 case will usually only buy you an extra three months or so. It may even get you less time if the creditor decides it wants to put pressure on you. Instead, in a Chapter 13 case you can usually stay in the home by making your regular monthly mortgage payments plus some progress towards paying the arrearage as you wait to sell your home. Or if there is enough equity in the property you likely wouldn’t have to pay any of the arrearage until the house sold and the entire balance owed to the mortgage lender would be paid from the proceeds of the sale.

8. Deal Effectively with a Child/Spousal Support Lien against Your Home

Filing a Chapter 7 case does nothing to stop collection efforts against you if you are behind on your child or spousal support obligations. This could be a problem for your home in two ways, both of which are solved by instead filing a Chapter 13 case.

First, support obligations usually turn into liens against the real estate you own, including your home. This gives your ex-spouse the ability to force the sale of your home to pay the support arrearage.

So assuming that a lien for unpaid support was already attached to your home before your bankruptcy is filed, Chapter 13 would stop the execution of that lien as long as you comply with your court-approved payment plan. Your plan must show how you are going to pay that support arrearage before your case is completed, and you must stay current on those payment obligations (plus any ongoing support payments). But as long as you do all this, the support lien cannot be executed against your home. Instead after the underlying support debt is paid off through your Chapter 13 payment plan, the lien would be released, with no further risk to your home.

Second, if no support lien has been placed yet on your home, Chapter 13 would prevent that from happening. Instead you’d have the opportunity to pay off the support arrearage while under bankruptcy protection, avoiding the need for a lien to be placed on your home.

9. Deal with a Recorded Tax Lien on a Dischargeable Income Tax

You may owe an income tax for which a tax lien has been recorded against your home. If the underlying tax is old enough and meets other conditions to be discharged (legally written off in bankruptcy), then dealing with the lien is likely much better under Chapter 13 than 7. Depending on the amount of equity you have in your home, under Chapter 7 the IRS or other tax authorities may well not release the tax lien even after the underlying tax debt is discharged. You may need to pay the tax anyway, or a substantial amount of it, to get the lien released.

In a Chapter 13 case, in contrast, there is an efficient court procedure for determining the value of that lien, and for paying it. As a result, at the completion of your case the tax debt is discharged and its lien is released.

10. Past Due Property Taxes Also Handled Well under Chapter 13.

If you are paying your home’s property taxes as part of your mortgage payment, and you’ve fallen well behind on those mortgage payments, your lender may have paid some of your past due property taxes with its own money. It does that to avoid a property tax foreclosure by the county or other tax authority, through which it would lose its own rights to your home (as would you).

If the lender did pay the past-due taxes, it would have added the amount of taxes paid to the total amount that you are behind to it. Your contract with your lender almost certainly allows it to do that. Then you would have the length of your Chapter 13 plan to pay your lender that tax amount, in the same way that you would catch up on the back mortgage payments.

If your mortgage lender hasn’t yet paid an overdue property tax, you would pay that tax directly to the county or other tax authority over time in your Chapter 13 payment plan. Your home would be protected from tax foreclosure in the meantime. So your lender would not be able to use the overdue property tax as justification to do its own foreclosure, as long as you make consistent progress on catching up, as well as keep current on new property taxes as they come due during your case (as well as kept up on the mortgage itself).

In the same way, if you pay your property taxes paid directly to the county or other tax authority (not through your mortgage lender), and you’ve fallen behind, your Chapter 13 plan would include payments to that tax authority until you were caught up.

 

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