Abstract
The following internal memorandum is written to provide research on a problematic situation involving bankruptcy, child, and spousal support arrears. It will explore strategies both on the Federal and State Texas levels.
Background
The client, Paul Player, presented for a consultation last week with several issues. Mr. Player and his ex-wife, Pam Player, were divorced in January 2010. Mr. Player retained custody of the couple’s two children, and Ms. Player was ordered to pay child support for $2,000.00 per month, and spousal support in the amount of $1,500.00 per month, for a total of $3,500.00. Ms. Player lost her job and is currently six months behind in child and spousal support arrears in the sum of $21,000.00. She filed a motion with the Family Court to reduce the amount of child support payments, and the motion was denied. To complicate matters, Ms. Player filed a Chapter 13 Bankruptcy. The debt owed to Mr. Player was not included in the Schedules and Statements provided with the Bankruptcy Petition. Mr. Player found out when a creditor attempted to collect on an unsecured loan that he co-signed for Ms. Player. The 341 Meeting of Creditors was held last week, the day after Mr. Player came in. Unfortunately, although Mr. Player had provided documentation as to the date, he was not represented at this hearing due to a miscommunication with this office. Since no objection was made on behalf of Mr. Player at the 341 Hearing, the Plan was approved by the Chapter 13 Trustee and the Bankruptcy Court. To assist Mr. Player, and rectify the situation, research was done to identify the various remedies that may assist Mr. Player in collecting the domestic support obligation that is due to him. Therefore, the following memorandum will outline the remedies available to Mr. Player in a resolution of these issues.
Before taking any action with the Court, it might be beneficial to begin by contacting Ms. Player’s bankruptcy attorney. If this attorney is cooperative, he can automatically file a Plan modification under 11 U.S.C. § 1329, which states that a debtor can modify the Chapter 13 Plan at any time. If Ms. Player’s bankruptcy attorney is willing, he can make modifications to the Schedules and Statements, and change the Plan to reflect the domestic support obligations. If this attorney is unwilling or unable to cooperate, other steps can be taken to ensure that Mr. Player receives the support obligations due him (the Cornell University of Law, n.d.).
Child support is not dischargeable in bankruptcy (Morgan, 2003). According to 11 U.S.C. § 507(a)(1), domestic obligations are a priority claim when filing a Chapter 13 Bankruptcy. The statute allows “…unsecured claims for domestic support obligations that, as of the date of the filing of the petition in a case under this title, are owed to or recoverable by a spouse, former spouse, or child of the debtor, or such child’s parent, legal guardian, or responsible relative, without regard to whether the claim is filed by such person or is filed by a governmental unit on behalf of such person, on the condition that funds received under this paragraph by a governmental unit under this title after the date of the filing of the petition shall be applied and distributed per applicable nonbankruptcy law.” (Doney & Associates PLC, n.d.). Furthermore, 11 U.S.C. § 1322(a)(2) states that all priority claims must be paid in full unless otherwise ordered by the Bankruptcy Court. This firmly establishes that Mr. Player is entitled to ALL domestic monetary obligations that should have been paid by Ms. Player before the bankruptcy filing (U.S. Courts Bankruptcy Basics, n.d.). Moreover, Ms. Player must continue to be current on all domestic support obligations post-petition as well. Thus, the only monies that can be included as a priority claim in Ms. Player’s Chapter 13 bankruptcy are the pre-petition arrearages (Fears, 2009). Post-petition payments are also subject to garnishment of various holdings, as discussed further in this memorandum. Regardless of filing for bankruptcy, a domestic obligation debt will remain (FindLaw, 2011).
In this case, the 341 Meeting of Creditors has occurred, and the Plan has been approved by the Court. However, according to Fed. R. Bankr. P. 3002(c), a creditor has 90 days to file a proof of claim from the date of the first 341 hearing. Therefore, Mr. Player is still well within the time limits to file a proof of claim. If the time limitation has passed, Fed. R. Bankr. P. 3002(c) has a provision in which a government agency can take up to 180 days to file a proof of claim. It can be suggested to Mr. Player that he contact the State of Texas Attorney General’s Child Support Division, who will then be able to claim the government, thus extending the 90-day time limit restriction imposed on a proof of claim (U.S. Courts Bankruptcy Basics, n.d.). In re Gellington, 363 B.R. 497 (Bankr. Nm.D. TX., 2007), the Texas Office of the Attorney General Child Support unit submitted a proof of claim on behalf of the child. The Bankruptcy Court determined that arrears were to be paid in full through the Chapter 13 Plan (Barnes, n.d.).
Regardless, it will be in Mr. Player’s best interest if it were suggested to him to contact the Attorney General’s Office so that future child and spousal support can be garnished directly from Ms. Player’s wages. This can be done online through the Texas Office of the Attorney General Child Support website. Once the child support obligation is registered with the Attorney General’s office, they will take over enforcement of the child support obligation (Texas Attorney General, n.d.). Enforcing the spousal support will have to be done directly through the Family Court (Granat, 2011), however, a Motion to Lift Stay will need to be filed with the Bankruptcy Court to proceed. This option will be discussed later.
11 U.S.C. § 343 is the statute that was written regarding the 341 Meeting of Creditors (Onecle, n.d.). Under this statute, the debtor is placed under oath before the Trustee and any creditors making an appearance at this hearing. Lying by omission can be constituted as perjury. By neglecting to include the arrears in the Schedules and Statements provided to the bankruptcy court, this action may potentially be construed as a lie by omission. Furthermore, the Internal Revenue Service began a unit to investigate fraudulent bankruptcies in 2009. Should the bankruptcy be suspect, it is well within the rights of the IRS to begin a criminal investigation of Ms. Player (IRS, 2009). This may be presented to the opposing counsel should he become uncooperative. Although these are legal options, they should be saved as a last resort. It would be beneficial if Ms. Player’s bankruptcy attorney would amend the plan willingly, rather than having to threaten criminal and/or civil action.
Alternatively, 11 U.S.C. § 1329(a) provides that a Trustee or creditor can also petition the Bankruptcy Court for Plan modification. Since there is an existing order through the Family Court in Texas for child and spousal support, there is more than ample evidence to submit a legitimate proof of claim and request that this domestic obligation is held as a priority claim. It is then up to the Trustee and the Court to review and approve the Amended Plan to include the domestic support obligations. Therefore, a Plan modification can be submitted on behalf of Mr. Player by this firm, rather than having the amendment be submitted by the bankruptcy attorney. This will be useful if the bankruptcy attorney and Ms. Player refuse to cooperate and request the Bankruptcy Court modify it (the Cornell University of Law, n.d.).
If all goes well, and the Court approves the modification of Chapter 13 Plan to include the domestic support arrears, then a Motion to Lift Stay must be filed so that Mr. Player can enforce the domestic support order, both for the Attorney General for child support and through the Family Court for spousal support. Since a Bankruptcy automatically provides a Stay for any legal proceedings, enforcement cannot be accomplished without filing this motion. There is enough evidence to show cause to the Court that Ms. Player has failed and is still failing to pay her current monthly domestic support obligation. Therefore, the Court should grant the Motion. Once the automatic stay is lifted, Mr. Player can then proceed with those court actions by providing a copy of the Lift Stay Order to the Attorney General and the Family Court (Kraft, 2009). It is imperative that the Motion to Lift Stay be submitted to the Court. In Gellington (id), the Texas Office of the Attorney General Child Support Unit submitted an Order for Withholding to the Respondent’s place of employment. The Bankruptcy Court held that the Attorney General’s Office violated the Automatic Stay. The Attorney General’s office was not sanctioned by the Court as they returned any monies collected to the Respondent. In Florida Dept. of Rev. v. Omine, 485 F.rd 1305 (11th Cir. 2007), the State of Florida also attempted to file a contempt charge against the Debtor for non-payment of support. A proof of claim was filed, however not a Motion to Lift Stay. The Bankruptcy Court sanctioned the State for violating the automatic stay. This is something that needs to be avoided, and for this reason, it is necessary to file the Lift Stay Motion and let the Bankruptcy Court determine the status. Enforcement of the domestic obligations to Mr. Player can proceed once the Order is signed (Barnes, n.d.). Additionally, a provision should be added to include garnishment of all tax refunds (Munden, 2009).
When an obligor is in arrears with child support, each state can impose interest upon the balance. In Texas, the interest rate is 6% simple interest per year. According to Tex. Fam. Code § 157.261, child support is considered delinquent on the 31st day after the original due date (Support Collectors, 2010). In Re Eichwedel, 06-81327, 2007 WL 2212396 (Bankr. C.D. Ill, July 30, 2007), the Court held that the child support obligation included in the Chapter 13 Plan can continue to accrue interest until the domestic obligation was paid in full. Furthermore, in Re Reid, 06-50147, WL 2077572 (Bankr. M.D. N.C. July 19, 2006), the Bankruptcy Court held that the interest accrued needed to be written into the Chapter 13 Plan. Right now, Ms. Player is in arrears of $21,000.00 and her interest rate accrual to date is $1,260.00. (Barnes, n.d.).
There should be some anticipation of Ms. Player’s actions to attempt to fight enforcement or to amend the Plan to include post-petition arrearages. In re White, 07-03870 2008 WL 682422 (Bankr. S.D. Miss. Mar. 7, 2007), the Debtor attempted to secure post-petition arrears into the Chapter 13 Plan. The Court denied the request, holding that because the arrearages occurred post-petition, they were not eligible for payment under the Chapter 13 Plan (Barnes, n.d.).
The Debtor may also attempt to dismiss the Chapter 13 Bankruptcy voluntarily. In Marrs v. Marrs and Taylor, 14-10-00186-CV, App. Lexis 2011 (Tx. Ct. Appls. 14th Dist., Houston 2011), the Debtor attempted to dismiss the Chapter 13 Bankruptcy when the Court ordered her to sign over a portion of her retirement account to pay for her former spouse’s attorneys’ fees, which the Court deemed a domestic support order. The Debtor’s former spouse objected to the request for dismissal, and the trial court granted his request, stating that the attorneys’ fees were a domestic support obligation. The Appellate Court determined that attorney’s fees are not a domestic obligation and reversed the decision. However, the Appellate Court also stated that if the obligation had fallen under the child and/or spousal support obligation, it would have allowed the garnishment. This case shows two things: that of Ms. Player’s attempts to dismiss the Chapter 13 Bankruptcy, an objection can be filed on behalf of Mr. Player requesting that the Bankruptcy Court denied the request. Additionally, if Ms. Player has any retirement plan, a request can be made on behalf of Mr. Player to garnish the retirement plan for pre-petition arrears. Furthermore, if Ms. Player owns any real property, a motion to the Court can be made for a lien to be attached to the real property (LexisOne, 2011).
Ms. Player’s attorney may counter with a 522(f) Motion to Avoid Judicial Liens for both any retirement plan garnishment or lien attachment to real property. However, 522(f)(1)(A)(i) holds that the avoidance of a judicial lien cannot be granted if the lien is for a domestic support obligation. Therefore, since the attachment will be made to satisfy the domestic support obligation, the argument can be made for dismissal of the Motion in whole or in part (Peck, 2010).
One remaining issue needs to be addressed. As stated at the beginning of this memo, Mr. Player was only made aware of Ms. Player’s Chapter 13 Bankruptcy filing by a creditor who called him in an attempt to collect on unsecured debt that Mr. Player had been a co-signer on. If this bankruptcy had been a Chapter 7, the creditor would have been allowed to secure repayment of the loan from Mr. Player. Since it is Chapter 13, the Bankruptcy Code holds that the co-signer cannot be held financially responsible for this debt. This provision has a two-fold cause and effect: it deters creditors from contacting co-signers to pressure the debtor to pay, and also understands that the debtor is reorganizing his or her debt, and therefore may be eligible for some sort of compensation through the Chapter 13 Plan (Gipson, n.d.).
As shown by this memorandum, some remedies can be used to correct the situation. The recommendation is that a proof of claim is filed immediately. Once that is complete, contact with Ms. Player’s bankruptcy attorney should be initiated. It would be in the best interest of both Mr. and Ms. Player if the bankruptcy attorney would submit an Amendment to the Court, to include amending the Schedules and Statements. In the best-case scenario, the issue will be resolved there. However, if the bankruptcy attorney refuses to submit the modification, the next step would be to submit a request to the Bankruptcy Court on behalf of Mr. Player to modify and include the priority claim of the domestic support obligation.
Once this action has been completed, it would be wise to submit the Motion to Lift the Automatic Stay, so that no sanctions are imposed upon Mr. Player, the State of Texas, or this firm for violating the automatic stay. It is necessary to collect current and past-due amounts of domestic obligation as quickly and efficiently as possible. By filing the Motion to Lift Stay, it will ensure that any court filings regarding the domestic support obligation do not violate the automatic stay.
There is enough case law in this memorandum to determine the correct course of action should this issue become more complicated than it needs to be. It has been proven that the Bankruptcy Court does not allow the debtor to shirk the responsibility of his or her domestic obligations; therefore, there should not be an issue in the collection of the past-due child and spousal support. As long as the appropriate steps are taken and guidelines followed, this matter should be able to be resolved quickly.
References
Attorney General of Texas (n.d.). Applying for Child Support Services. Web.
Barnes, G.M. (n.d.). Family Law and Bankruptcy. Web.
Doney & Associates PLC (n.d.).Bankruptcy – United States Code – Creditors, the Debtor and Estate. Web.
Fears, B. (2009). Child support obligations and bankruptcy. Web.
FindLaw (2011). Debts that remain after Chapter 13 discharge. Web.
Gipson, K. (n.d.). Which bankruptcy chapter is best for a co-signer? Web.
Internal Revenue Service (2009). Bankruptcy fraud-criminal investigation. Web.
Kraft, R. (2009). What is a motion to lift stay? Web.
LexisOne Community (2011). Marrs v. Marrs and Taylor, Web.
Morgan, K. (2003). The effect of bankruptcy on child support enforcement. Web.
Munden, K. (2009). How can a Chapter 13 case help me with delinquent child support? Web.
Peck, S. (2010). Avoidance of judgment liens in bankruptcy pursuant to U.S.C. 11 § 522(c) – child support judgment avoidance. Web.
Support Collectors (n.d.). Texas child support enforcement resource center. Web.
US Courts (n.d.). Bankruptcy Basics.Web.