Bankruptcy Domestic Effects



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Bankruptcy Domestic Effects

July 15th, 2007 by Shenron

Filing for bankruptcy does not discharge one from his child support responsibilities. While the creditors are prohibited from filing lawsuits and repossessing property when bankruptcy is filed and automatic stay has been enforced, the custodial parent can still demand that support obligations be paid. In fact, in a Chapter 7 bankruptcy case, domestic support obligations precede other creditors in terms of payment priority. Domestic support actually has higher priority than taxes. If the debtor could show solid proof of the amount needed for child support, most of his liquidated estate can be used to pay off his child support obligations. In a Chapter 13 case, the debt resettlement plan is proposed by the court in a span of three to five years, with five years being the maximum period. Child support, being a priority claim, must be paid in full during the duration of the Chapter 13 plan.

Although automatic stay does not relieve one of his child support obligations, it nevertheless makes it easier for him to pay off the support. This is because, upon enforcement of the automatic stay, creditors are prohibited from claiming payment; thus, the debtor, having “fewer debts”, can easily plan how to pay off his child support debts. The parent having custody of the child should not be too worried about the long – term effects of bankruptcy on child support payments. On the short – term basis though, problems may arise as the debtor may not have enough money at present to fulfill his domestic obligations.

There are cases wherein the debtor may be exempted from paying for child support. The United States Bankruptcy Code, in Section 523, states that a) the debt will not be paid when it has been assigned to another entity, voluntarily, by operation of law or otherwise; or b) when such debt includes a liability designation as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance or support .

For example, Joe owes Lisa $1,000 every month for child support. Since Joe wasn’t able to pay, Lisa borrowed the same amount from a friend. The friend now has the right to claim that amount from Joe. However, since the debt was assigned to a third party, the debt can be discharged if Joe applies for bankruptcy.

Joe is also not liable to pay Lisa in this case: During divorce, a decree states that Lisa be paid a certain amount as marital debt. If Lisa claims the money, indicating that the money will be used as child support, Joe may argue to discharge the debt as it was not originally a child support debt.

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