Where, Oh Where, Are the Child-Support Creditors?

By Hon. Elizabeth Gunn, Stuart Wilson-Patton and William R. Pursell1

It is axiomatic that bankruptcy law in the U.S. is designed to provide a fresh start to individuals weighed down by unfathomable debt (the honest, but unfortunate, debtor). Nevertheless, the relief afforded by the Bankruptcy Code comes subject to certain exceptions. Congressional history and the Code have long understood the critical importance of protecting domestic-support-obligation (DSO)2 creditors. Protections for DSOs are found, inter alia, in §§ 362(b) (exceptions to the automatic stay), 507(a)(1) (priority status) and 523 (discharge exceptions).3 Each of these statutory provisions is a vital tool unique to child-support creditors and apply to an individual debtor’s case, despite whether the case was filed under chapter 7, 11 or 13.

Notwithstanding the protection afforded by the Bankruptcy Code, the appearance and enforcement of these protections in bankruptcy cases is underutilized by DSO creditors. The U.S. Trustee Program reports that in fiscal year 2023, chapter 13 trustees collected $4.5 million toward the payment of ongoing DSO claims.4 Sixty percent of these DSO claims were by nine states, Puerto Rico and the Virgin Islands. Conversely, eight of the 33 participating states and territories collected less than a total of $4,500 for the year. Even more shocking is that 19 states collected zero dollars. Chapter 7 trustees report the collection of $6.7 million in DSOs, with just over half the states having a greater than $4,500 annual collection. Ten states collected zero dollars. Yet all states are subject to the same federal mandate to have state or locality agencies in place that implement and enforce title IV-D support collections.5

The data seems to suggest that if someone were to file a chapter 13 case in any of the 27 virtually nonparticipating states, it is certain that the debtor can achieve a discharge without any need to be concerned about a large DSO arrearage (except the nondischargeable nature thereof). This begs the following question: Where, oh where, are the child support/DSO creditors?

Child-Support Creditors Are Afforded Super Protections by the Code

Sections 362(b), 507(a)(1) and 523(a) work together to ensure that child-support obligations are treated with the highest possible (number 1) priority. In addition, §§ 1325(a)(6) and 1328(a)6 (and their chapter 11 equivalents7) not only ensure that pre-petition arrears are paid through a plan, but also that a debtor/DSO obligor makes all post-petition payments during the duration of the case (i.e., “pay to stay”).

Section 362(b)(2): The Automatic Stay and Exception to Stay

One of the most significant features for DSO creditors is the unconscious exceptions to the automatic stay. The exceptions result in a minor impact to the continued collection of the DSO. Section 362(b)(2)8 of the Bankruptcy Code provides an important exception to the stay by allowing DSO creditors to continue many collection activities — even while the debtor is under the bankruptcy court’s protection. Under this provision, child-support creditors can continue to garnish wages, seize certain property, maintain license suspensions and otherwise pursue identified collection activities without violating the automatic stay. (In chapter 11 or 13 filings, the creditor must not freeze accounts that are necessary to the plan’s performance.) This is a critical protection for custodial parents and their children, ensuring that child-support obligations are not delayed or diminished because of the debtor’s bankruptcy proceedings.

Section 507(a)(1): Priority Status

Child-support obligations, along with alimony and maintenance obligations, are considered priority debts in bankruptcy proceedings. Section 507(a)(1)9 of the Bankruptcy Code grants DSOs the top status of all priority claims (yes, even before taxes and administrative claims!). First-priority status ensures that child-support creditors are among the first to be paid. If there are insufficient funds to pay all creditors, child-support obligations are paid ahead of general unsecured creditors, thereby affording security for the custodial parent and children.

Section 523(a)(5): Exceptions to Discharge

One of the most significant protections for child-support creditors in bankruptcy is the exception-to-discharge provision found in § 523(a)(5)10 of the Bankruptcy Code.11 However, it might be possible that this automatic exception from discharge underlies some of the apathy exhibited by child-support creditors in bankruptcy: If there is “no harm, no foul” as to the obligation, why expend time and money to enforce the other rights protected in bankruptcy?

The exception-to-discharge provision under § 523(a)(5) is a powerful tool for child-support creditors. It ensures that child-support obligations survive the bankruptcy process — even if the debtor’s other debts are discharged. The exception is automatic; there is no need to file an adversary proceeding to enforce the exception. It is evidence of the emphasis that Congress places on the payment of DSOs and the continued financial support of children, regardless of the financial circumstances of the noncustodial parent.

The “Pay to Play” and “Pay to Stay” Requirements in Chapters 13 and 11

Both chapters 11 and 13 contain provisions that require full payment of all DSO arrears during the plan, unless the DSO creditor agrees otherwise, as the DSO obligor debtor must “pay” their arrears to “play” in either chapter. As part of the pay-to-stay requirement, the debtor must continue to make regular child-support payments during the bankruptcy. If the debtor fails to make these payments, the bankruptcy case could be dismissed and/or the automatic stay could be lifted, allowing the child-support creditor to resume collection efforts. These pay-to-play and pay-to-stay requirements ensure that child-support obligations remain a priority during the reorganization process and that custodial parents do not lose support while the debtor is attempting to restructure their finances.

Underutilization of Protections

Despite the clear protections afforded to child-support creditors, there is evidence that these protections are often underutilized in practice. In many jurisdictions, the responsibility for ensuring the enforcement of these provisions falls squarely on the child-support creditor — even if they have an open case with their state’s title IV-D agency. The level of enforcement by title IV-D agencies and support creditors without a title IV-D case varies wildly and can result in a significant delay in the collection of DSO arrears.

State Agency Enforcement

Some states — such as Virginia, Florida, Tennessee, Ohio, Mississippi, Washington and Texas — have proactive title IV-D agencies that assist child-support creditors in enforcing their rights in bankruptcy. These state agencies have dedicated resources and personnel that ensure that child-support obligations are properly treated in bankruptcy proceedings.

In these states, child-support creditors often benefit from vigorous enforcement, making it more likely that their claims are properly handled in bankruptcy cases. For example, many times the state agency files an objection to confirmation of a chapter 13 plan that does not provide for DSO payment in full.12 Debtors’ plans often seek to continue to pay pursuant to a state court order that has a small monthly arrears payment.

If no party objects to these plans, they can be confirmed to the detriment of the DSO recipient and the debtor. Payment of the DSO in a plan is a win for the debtor, as funds that otherwise might go to dischargeable unsecured creditors are instead paid to satisfy the nondischargeable DSO arrears.

However, in states without active agencies, or for those DSO recipients who do not receive title IV-D services (optional in some states), child-support creditors have to ensure that their claims are addressed. This includes not only filing objections to plan confirmation, but also filing of proofs of claim for arrears. For the creditor, filing claims and prosecuting the enforcement is critical to increased collections. For the debtor, including the DSO claim provides the best opportunity for a fresh start. The burden on the state title IV-D agency to file the claims is minimal. For example, a child-support creditor can file and prosecute claims in any bankruptcy court without the need for pro hac vice admission or engaging local counsel.13

Creditor Responsibility for Enforcement

While the Bankruptcy Code provides numerous protections for child-support creditors, it is ultimately the creditor’s responsibility to ensure that these protections are utilized. Debtors, trustees and the courts are not required to automatically address child-support obligations, and many creditors fail to take the necessary steps to ensure that these obligations are enforced. The lack of engagement of DSO creditors can lead to missed opportunities for the enforcement of DSO obligations under the Code’s heightened protections for DSO creditors.14

The Impact of BAPCPA and the 1994 Bankruptcy Reforms

As evidence of the emphasis Congress has placed upon the protection and payment of DSO claims, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)15 introduced several changes to the Bankruptcy Code, many of which affected (positively) how child-support obligations are treated. BAPCPA made it more difficult for debtors to discharge unsecured debts, including DSOs, by tightening eligibility requirements for chapter 7 and imposing stricter standards for repayment plans under chapter 13. In addition, the 1994 Bankruptcy Reform Act16 included provisions that strengthened the protections for child-support creditors. These reforms aimed to enhance the priority status of child-support obligations and reduce the ability of debtors to discharge these obligations through bankruptcy.

While these changes were intended to protect child-support creditors, there is concern that they may have had unintended consequences, as previously mentioned. The reforms may have resulted in child-support creditors becoming more apathetic or less engaged in bankruptcy proceedings. With the added complexity of the bankruptcy process and the increased difficulty in discharging debts, some child-support creditors might assume that their claims will automatically be handled correctly, leading to a lack of vigilance in monitoring bankruptcy cases. Some may have even myopically concluded that “the juice ain’t worth the squeeze.”

What Child-Support Creditors, Debtors’ Counsel and Trustees Should Know

What Child-Support Creditors Should Know

While it should go unsaid, it is incredibly important for child-support creditors to remain vigilant in monitoring bankruptcy cases involving their claims. The Bankruptcy Code offers strong tools and protections, but it is the creditor’s responsibility to ensure that these tools are implemented and protections are enforced. Child-support creditors should actively participate in bankruptcy proceedings, file proofs of claim when necessary, and raise any concerns regarding the treatment of their claims.

The proof of claim should include all liabilities owed at the time of filing. Due to different treatment, especially in chapter 7, separate claims should be filed for alimony and child support. When a state agency files a claim, arrears should separate obligations owed directly to the DSO recipient (afforded § 507(a)(1)(a) priority) and those where payment was assigned to the state, such as repayment of public assistance funds (afforded § 507(a)(1)(b)17 priority).18

Creditors should also be aware of, and aggressively enforce, both the pay-to-play and pay-to-stay requirements in chapter 11 and 13 cases. We are never, ever surprised to see how a debtor is able to magically find someone to help them cure a post-petition payment default when the issue is raised in a case.

What Debtors’ Counsel Should Do

Debtors’ counsel has a duty to advise clients on the proper treatment of child-support obligations in bankruptcy, including ensuring that DSOs are included in full in a proposed plan and that the debtor is making timely payments, as DSOs do not stop upon the filing of a petition. Debtors should be advised that even if arrears are scheduled to be included in the plan, the state court obligations remain intact until the plan has been confirmed. The filing of a petition might even be evidence to be used in support of a motion to modify support in the applicable court. Above all, trying to reduce the amount paid to DSO obligations in favor of other dischargeable debt only serves to frustrate the debtor’s “fresh start.”

What Trustees Should Do

Trustees play a critical role in ensuring that the bankruptcy process is fair and that creditors’ rights are respected. Trustees should monitor chapter 13 and 11 cases to ensure that child-support obligations are properly treated, and that debtors continue to make payments. Trustees should also be vigilant in ensuring that child-support creditors are not inadvertently left out of repayment plans.

Conclusion

Child-support obligations and DSOs are afforded vigorous protections under the Bankruptcy Code, but these protections are often underutilized. While certain states have dynamic enforcement mechanisms, the responsibility for ensuring that child-support creditors’ rights are upheld rests with the creditors. Child-support creditors, debtors’ counsel and trustees play vital roles in ensuring that child-support obligations have been properly addressed in bankruptcy proceedings. By remaining vigilant and proactive, these parties can help ensure that a debtor’s fresh start does not come at the expense of the well-being of children.

Hon. Elizabeth Gunn is a U.S. Bankruptcy Judge for the District of Columbia. Stuart Wilson-Patton is a Senior Assistant Attorney General for the Tennessee Attorney General’s Office in Nashville. Bill Pursell is an Assistant General Counsel with the Florida Department of Revenue in Tallahassee.