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Child Support

Divorce and Child Support Can Impact a Bankruptcy

June 7, 2016 by TomScottLaw

Divorce is one of the major causes of bankruptcy. If your divorce agreement includes child support payments, your ex-spouse can play a significant role in determining whether or not your bankruptcy will be discharged.

We recently discussed several aspects of bankruptcy with Christopher Holmes and Jess M. Smith, III, partners at Tom Scott & Associates, P.C. The discussion covered several topics, including the means test, the differences between Chapter 7 and Chapter 13, how divorce and child support can affect bankruptcy, and the discharge process. Below is Part 3 of 4 of the transcript of that conversation.

Q: Have you been dealing with any unusual circumstances recently?

Jess Smith, III: I have a gentleman who completed his Chapter 13 plan; he made all of his payments and was getting ready to file his motion for discharge. However, his ex-wife objected to it because he fell behind—not on his post-petition child support—on his share of the uninsured medical expenses for the child. She had taken him back to the divorce court and got a judgment against him for not paying his share of those medical expenses, which is classified as a domestic support obligation. She objected to his discharge under Chapter 13.

Chris Holmes: Before anyone can get a discharge under Chapter 13, they have to certify they have paid every single penny of child support that came due after the filing of the case up until the day of discharge. In this poor guy’s case, he had paid every single penny of child support, but then because that other expense—which is in the nature of child support—had not been paid, it became an issue. Child support is not just the weekly amount that’s paid, sometimes people are ordered to pay a percentage of medical and dental and optical expenses. Evidently, he didn’t pay his fair share, so she sued him and got a judgment against him.

JS: She filed a contempt on him in the divorce court. She also filed an objective to his bankruptcy discharge.

Q: If he was denied a discharge, would that mean his personal liability on all of those other debts would still be there?

JS: The bankruptcy judge waited to see if he was going to make any headway on it. No resolution was made, so the judge said to the debtor, “Either I’m dismissing this case or you might be able to convert to a Chapter 7 and there might be ramifications of that or not.” So, we converted to a Chapter 7 and we got his discharge. So, all of his other debts were discharged, but he did not get a Chapter 13 discharge, In this case, it was really of no consequence, because he was not paying taxes in the plan.

I’ve got another case in which the debtor had a Chapter 13, with taxes being paid in the plan. He also owed his ex-wife child support and he estimated that he owed her $5000 of child support. So the ex-wife got notice of the bankruptcy and was given a claims form. She never filed a claim. So, eventually the trustee was sitting on this money and he paid the taxes first. Then he said to the debtor, “We’ve got this $5000; you better file a claim for your ex-wife, otherwise I’m going to have to disperse it to Visa and MasterCard, and you won’t receive any child support credit for it.

CH: The ex-wife hadn’t file a claim and if you don’t file a claim you can’t get paid through a Chapter 13 plan.

JS: About a year and a half ago, I filed a claim for the ex-wife and I put the state court divorce number—the Indiana Support Enforcement and Tracking Number. Instead of sending the money directly to the mother, the debtor scheduled a flat $5000 payment and we had it go through the state address where they basically put that money onto a Visa debit card. The trustee pays it through the Indiana Child Support Collection Unit. In the meantime, he’s having his regular support deducted out of his wages. We’re getting close to the plan length, so we tell the debtor that he needs to come in to sign off that he is current. He says, “My kids are 19 and they’re still yanking it out of my check.” I ask, “Are you current or are you not?” So he hired me to find out why they are still taking out child support from his wages. I went to the state court, pulled 17 years worth of records, and did a hand audit. There were periods within those years during which he would miss eight months at a time, and despite the fact that he continued to pay support beyond the child’s 19th birthday, his estimate of what he owed his ex-wife was way low.  I created a spreadsheet that accounted for every nickel of child support he ever paid and then told him that he still owes about $5900, even after the recent $5000 payment. I tell him that I can’t file the certification for his Chapter 13 discharge, because it would be a false representation of his bankruptcy. For him to get a Chapter 13 discharge, he has to certify to the bankruptcy court that he has paid all post-filing and all pre-filing child support, unless there was an order in the state court to the contrary stating he doesn’t have to do it.

CH: He has to swear, under the penalties for perjury, that he has paid every single penny of child support from the date of filing to the date of discharge.

JS: The bottom line is I tell him we can’t do this. Meanwhile, the child is 19, so we file a motion to emancipate the child and determine an arrears. There’s a hearing set in June. Basically, I’ve talked to the ex-wife and she said, “I don’t care about the medical expenses, but I want every support payment that’s due. I’m not going to hold up his discharge, but I want my money.” What had happened is when he swore to me that he had paid everything, I filed a motion to terminate his withholding order. His employer received a copy of it, but with no order from the state court they just quit paying the ex-wife. She hasn’t received any money in about four months. But she says, “I want every nickel that is due to me, but I’m not going to hold up his discharge.” I then talked to the bankruptcy court and asked if they had ever had a case like this. They said, "No," and that we should make up a waiver form, have the mother sign it. and the judge will set up a hearing and grant the discharge, because the mother is not objecting to the discharge going through despite the fact that he has not technically complied with the bankruptcy code. If the mother did contest it, just like the other case, the judge would say, "I can’t grant the discharge."

Q: What would have happened if the mother contested the case and forced the judge to actually say, "I can’t grant the discharge."

JS: This particular debtor has only been in the bankruptcy about three years. I would probably put him back into the bankruptcy to stretch the plan out and pay it. But, I don’t want to do that because the trustee charges a fee on the money she collects to disburse to the state, so I’ve got the waiver worked out.

CH: That would be a remedy, if he had the luxury of stretching it out.

JS: If he had more time. We probably have about 16 months left now to delay, but I’m not going to go there.

CH: If it was a five-year plan, we couldn’t extend it. If she objected, the only other option would be to convert to a Chapter 7.

JS: If we converted to a Chapter 7, he would have to deal with some potential past issues in his particular case where he wouldn’t get the same benefits.

CH: Otherwise, he would be out of a bankruptcy without a discharge. So, if he only paid ten cents on the dollar on all of his debt, he would still owe his creditors the remaining 90%, plus interest and whatever late charges are nondischargeable.

JS: They could have closed the case without a discharge. It’s one of those gray areas. There’s no black and white in the code to deal with that issue. We have to kind of make it up as we go and see if the judge will bite on it.

CH: We’ve been doing this a long time. I’ve been doing nothing but bankruptcies since October 1997, when I joined Tom Scott, and Jess started focusing on bankruptcy shortly thereafter. There are attorneys out there who dabble in bankruptcy and there are lots of young lawyers right out of school. I can’t believe that without the experience that there is any way they render as effective legal representation to their clients as we do, because we’ve been there, we’ve done that, and we’ve seen so many strange situations.

In addition, we have the background to relate bankruptcies to other law. There are people who get out of law school now and just go straight into bankruptcy, not knowing how it impacts family law, personal injury, taxation, and other issues. Jess and I are both diversified lawyers. We started out as general practitioners, where we did criminal, divorce, probate, and everything that came through the door—we figured out how to do it.

Part 1 of Conversation: Means Test Helps Determine Filing For Chapter 7 or Chapter 13 Bankruptcy

Part 2 of Conversation: Differences Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

Part 4 of Conversation: Being Discharged From Bankruptcy

Filed Under: Chapter 13, Chapter 7, Marriage & Divorce, Wage Garnishment Tagged With: Child Support, Indiana Child Support Collection Unit, Indiana Support Enforcement and Tracking Number

Divorce and Bankruptcy

July 27, 2015 by TomScottLaw

We recently interviewed Christopher Holmes and Jess M. Smith, III, the senior partners at Tom Scott & Associates, P.C. Below is Part 1 of that interview, which focuses on a few aspects of how a divorce can impact bankruptcy.
Q: We know that divorce is one of the major unfortunate events that cause people to file for bankruptcy. For someone who is considering a divorce or who is already divorced and is considering whether or not to file for bankruptcy, what circumstances might they encounter and how can those be handled to their advantage?
CH: We had a client from Avon, which is in Hendricks County, in his thirties, who was divorced not so long ago. In the divorce decree, his ex-spouse was awarded a property settlement of over $46,000. He had some other financial woes, but this property settlement was the biggest, so he wanted to file bankruptcy.
I told him that under Chapter 7 of the bankruptcy code that the divorce settle was a non-dischargeable debt, so he would be wise to file under Chapter 13 of the bankruptcy code, because we could discharge the vast majority of that settlement.
Q: What was the nature of the debt that would make it different under the those two chapters of the bankruptcy code?
CH: Because it was a property settlement, the bankruptcy code states that it is a non-dischargeable debt under Chapter 7. He was going to keep the properties and she was going to get money in exchange for her equitable interest in those properties. So this settlement was a debt that, according to Chapter 7, you cannot get rid of, but the United States Congress made it a dischargeable debt in Chapter 13.
JS: Congress created the legislation on the theory that if you do the best you can and pay what you have to pay, and the ex-spouse gets in line with the other debtors and receives a portion of what you owe, that’s fine under Chapter 13. But you just can’t file under Chapter 7 and walk away from the property settlement debt completely.
CH:  So as long as the settlement debt is not deemed to be in the nature of alimony, maintenance, or child support,  he pays back a few pennies on the dollar. Then, upon the discharge of his bankruptcy, the rest of the debt is wiped out, rendered null and void. So, the ex-wife thought after the divorce was finalized that she was was going to be receiving money in exchange for the physical properties he kept as part of the divorce settlement. But that money owed to her went into the Chapter 13 and she had no recourse but to accept those pennies on the dollar.
JS: The other time where property settlement comes into play is when you have one credit card that both divorced spouses used while they were married. One spouse is ordered to pay that credit card debt and says, “I didn’t incur that credit card debt,” but the divorce judge say, “I don’t care. You’re paying it.” That is a debt in Chapter 13 in which they can list the bank or financial institution that issued the credit card and the ex-spouse as creditors, so they pay pennies on the dollar to the original creditor and the ex-spouse – and then the credit card company goes after the ex-spouse for the difference.
CH: In that situation, she can’t go back to the divorce court and ask the judge to hold her ex-husband in contempt for not paying the debt as he was originally ordered to do in the divorce decree. In addition to that debt, to further this gentleman’s problems, he has a child support obligation that he has been unable to pay in full, so he has what is called a child support arrearage. so, in a Chapter 7, he is pretty much at her mercy with a non-dischargeable debt. The benefit of a Chapter 13 would be that he can force the woman to accept the cure of that child support arrearage over the life of the Chapter 13 plan. Meanwhile, she can’t go back to divorce court to ask that judge to hold in in contempt for not paying all of the child support. So, he has a very powerful remedy to keep his ex-spouse at bay on both the back child support and the non-payment of the property settlement.
Q: If alimony was a part of the divorce settlement, would it be covered in this situation as well?
CH: Alimony is non-dischargeable, but if he is behind in paying the alimony, he could use a Chapter 13 to, as we say, cure, or catch-up on that situation. It also forces the ex-spouse to accept that cure or re-payment over a 3 to 5 year period, as opposed to being forced to come up with it in a much shorter period of time.
Q: Does this individual’s employment status affect the case?
CH: He is a self-employed home remodeler with two children, so unfortunately his income is variable, which prevents him from paying his child support in a timely manner, because his income goes up and down. What we are hoping to do in his plan is to buy him more time to resolve that problem.
Q: What is the process you would go through to make his case or a similar case to the divorce court judge?
CH: Luckily, the bankruptcy code has provisions that make it pretty clear-cut that if we propose this plan, unless there is some legitimate objection, whether the ex-spouse likes it or not, she is compelled to comply with the terms of it,or at least accept the terms of the plan.
Q: Were there any legitimate exceptions that you feared might come into play when proposing the plan on his behalf?
CH: My fear was that her divorce court lawyer might try to assert that this property settlement was in fact in the nature of maintenance. I’ve had that happen in the past where even though it clearly stated “property settlement” in the divorce decree, they convinced the state court judge to say, “Oh no, what I really meant was that this is in the nature of maintenance, which makes it a non-dischargeable debt,” and therefore the client couldn’t get rid of it in the Chapter 13 bankruptcy.
JS: I’ll give you an example of an experience our associate Andrew DeYoung had. The bankruptcy code says that an above median debtor can contribute to the retirement accounts during the bankruptcy – basically shielding money from their creditors. Andrew had a case recently in which the debtor, his client who is a divorced woman, proposed to still contribute big chunks of money into her retirement account. Her ex-husband’s attorney said, “This plan is not being proposed in good faith, because she could stop these contributions to put more money into the plan.” The judge agreed the contributions were in contravention of the code and basically said, “I don’t think you should fully fund your retirement account and I’m going to make you offer some more money to the bankruptcy plan.” The judge didn’t state what that amount would be, but it forced them to eventually reach a deal that both sides could live with.
I think had Andrew’s client had the money to go up to the Court of Appeals, he might have won the case for her, but she didn’t have the money to pay for an appeal. That particular judge did not like the – quote, exorbitant, unquote – amount, about $800 per month, being put into her IRA, which her employer would then match on top of that, so she had great incentive to contribute to her protected retirement fund. Her ex-spouse objected and the judge agreed that she could not soak all of that money away from the settlement and just pay three cents on the dollar, so she had to do something else. As I stated, they eventually worked it out and agreed upon an amount she could put into her IRA.

Parts 2 and 3 of This Interview

Part 2: An Experienced Bankruptcy Attorney Can Help You Keep Your Personal Property
Part 3: Tax Returns, the Affordable Care Act (Obamacare), and Bankruptcy

Filed Under: Chapter 13, Credit Card Debt, Marriage & Divorce, Non-Dischargable Debt Tagged With: Arrearage, Child Support, Dischargeable Debt, Individual Retirement Account, IRA, Median Debtor

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