On an issue where the bankruptcy courts are divided, Bankruptcy Judge Suzanne H. Bauknight of Knoxville, Tenn., sided with the majority and held that back child support is not property of a chapter 7 estate.
Because she found that back child support is not estate property, Judge Bauknight did reach the question of whether support payments are exempt property under state or federal law.
Even though the debtor’s child reached majority a few days after filing, Judge Bauknight did not alter her conclusion.
In her schedules, the debtor listed an interest in some $56,000 in back child support payments and claimed the payments as exempt property. The trustee objected to the exemption but was overruled in Judge Bauknight’s March 1 opinion.
Before reaching the exemption issue, Judge Bauknight defined the threshold question as being whether back child support was estate property under Section 541(a) or was excluded from the estate under Section 541(b)(1) or (d).
From the estate, Section 541(b)(1) excludes “any power that a debtor my exercise solely for the benefit of an entity other than the debtor.” Section 541(d) excludes property in which the debtor has “only legal title but not an equitable interest.”
The majority of courts, Judge Bauknight said, have ruled that child support arrearages are not assets of the custodial parent’s bankrupt estate. The majority, she said, includes Chief Judge David S. Kennedy of the Bankruptcy Court for the Western District of Tennessee.
Judge Baunkight cited principles of Tennessee law taking the arrearages outside of the estate.
In Tennessee, Judge Bauknight said, the custodial parent holds the payments for the benefit of the child.
Although they are paid to the custodial parent, they are “intended for the benefit of the child,” even though the custodial parent can decide how the funds can be used, Judge Bauknight said. The Tennessee courts, she said, do not allow the obligor parent to offset the payments against debts owing by the custodial parent.
Consequently, she said, the support payments “are held by the custodial parent in a constructive, resulting trust.”
Judge Bauknight ended her opinion by noting that the debtor’s child reached majority a few days after the bankruptcy filing. Citing authority, however, she said that this fact was “irrelevant” because property of the estate is determined as of the filing date.