The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) became effective October 17, 2005. The relatively new law has created some of the most sweeping changes to the Bankruptcy Code in over twenty-five years. Although the key purpose of the enactment of the BAPCPA was to minimize abuse of the bankruptcy system, perhaps primarily attempting to thwart the excessive discharge of consumer credit card debt, the BAPCPA has had some of the most profound effects on the practice of matrimonial law. 

Prior to BAPCPA, bankruptcies were often used as a device to discharge court-ordered family obligations. A former spouse could rush to the Bankruptcy Court to discharge various divorce obligations. Child support enforcement proceedings and other vital actions could be put on hold until the bankruptcy was final.

Now, under the amended Code, at least under Chapter 7 cases, it is virtually impossible to discharge or avoid domestic support obligations. Proceedings involving various family law issues such as child support proceed despite the pending bankruptcy. Under the new amendments, the family of the debtor has much greater protection. Domestic support obligations are a top priority in cases filed under Chapter 7. Child support arrearages are paid though Chapter 13 bankruptcy plans. Liquid assets of the estate can now be used to satisfy child support obligations. Debtors are required to be up-to-date with all domestic support obligations before a Chapter 13 plan will be confirmed.

There are numerous amendments and additions to the Code which greatly enhance the rights of those involved in a family law proceeding. The BAPCPA adds a uniform definition of a domestic support obligation. The definition encompasses all obligations that can arise under a settlement agreement or divorce dissolution decree. The courts now exempt certain family proceedings from the Bankruptcy Code’s automatic stay provisions, allowing actions to continue in contrast to being delayed in the past. The BAPCPA has elevated the status of domestic support obligations to a first priority. Exempt property from the bankruptcy estate is now reachable for domestic support obligations. No longer must a debtor spouse be forced to remain under the automatic stay protection of the prior rules of court. The Code has broadened the scope of domestic support-related debts, thus making most support obligations under Chapter 7 bankruptcies nondischargeable.  Domestic support obligation payments are exempt from preference actions in a bankruptcy. A petition under Chapter 13 requires certain conditions for domestic support obligations to be paid or made current, granting the domestic support creditor much more power. New trustee duties require heightened notice to state agencies and domestic support claimants. Lastly, the definition of “debt relief agencies” has been expanded, placing procedural and substantive requirements on attorneys while protecting debtors and their spouses even further.

Broadened Definition of DSO under 11 U.S.C. §101 (14A)

The BAPCPA amends 11 U.S.C. § 101 by inserting a new paragraph (14A), which creates a broadened definition of domestic support obligations, which now includes all obligations in the nature of alimony, maintenance or support that can arise under a separation agreement, divorce decree, or other property settlement agreement. Section 101 (14A) now defines a domestic support obligation as a debt that accrues before or after the entry of an order for relief, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision, that is-

(A)  owed to or recoverable by-

(i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or
(ii) a governmental unit;

(B)  in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;

(C)   established or subject to establishment before or after entry of an order for relief by reason of applicable provisions of –

(i) a separation agreement, divorce decree, or property settlement agreement;
(ii) an order of a court record; or
(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit;

(D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child, or parent, legal guardian, or responsible relative of the child for the purpose of collecting the debt.

Otherwise explained, the definition of domestic support obligations is designed to include all alimony, maintenance or child support payments and obligations regardless of whom they may be owed to. This definition provides consistence and a uniform understanding of domestic support obligations under the family law domestic support concept under the bankruptcy law. This section eliminates the distinction between property division orders and debtor, spouse, or child support orders (with the small exception in Chapter 13 cases).

Increased Automatic Stay Exemptions (11 U.S.C. § 362)

The BAPCPA include new exemptions for proceedings dealing with child custody, visitation, divorce proceedings, and protection from abuse cases. The automatic stay or stop to all claims and judgments against the debtor no longer applies to domestic support obligations under 11 U.S.C. § 362. Historically, the commencement of new support actions against the debtor required prior approval of the Bankruptcy Court. Family proceedings were often interrupted by the automatic stay and delayed debtor-spouses from enforcing debts and collecting support. 11 U.S.C. § 362 made a dramatic increase to the various types of proceedings that are not subject to the automatic stay of the Bankruptcy Court. 11 U.S.C. § 362 exempts the following proceedings from the Bankruptcy Court’s automatic stay:           

a. for the establishment of paternity;
b. for the establishment or modification of an order for domestic support obligations;
c. concerning child custody or visitation;
d. for the dissolution of marriage, except to the extent that such proceeding seeks to determine the division of property, that is property of the bankruptcy estate;
e. regarding domestic violence;
f. of the collection of a domestic support obligation form the property that is not property of the estate;
g. with respect to the withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation under a judicial or administrative order or a statute;
h. of the withholding, suspension, or restriction of a driver’s license, a professional or occupational license, or a recreational license, due to non-payment of support
i. reporting of overdue support owed by a parent to any consumer reporting agency
j. of the interception of a tax refund for overdue support obligations or collection of child support
k. of the enforcement of a medical obligation as specified under the Social Security Act.

The new additions to the automatic stay added by the BAPCPA allow a variety of collection activities for child support or alimony previously unavailable. The BAPCPA also allows the dissolution of a marriage (holding off a final property settlement) remedies such as contempt actions may also proceed.

As a result of the amendments, domestic support creditors can ensure that a debtor will repay his or her obligation by the potential withholding, suspension, or restriction of the debtor’s driver’s license or other professional license. Domestic support obligations now have priority over all unsecured claims and expenses, including the majority of administrative claims. This higher priority makes domestic support obligations much harder to discharge. Support obligations will be paid preferentially to other unsecured creditors, including those of most professionals. Lastly, after secured debts are paid, domestic support obligations are paid.

Priority of Domestic Support Obligations – 11 U.S.C. § 507 (a)(1)

11 U.S.C. § 507(a)(1) addresses the priority in which unsecured creditor’s expenses and claims are addressed in a Chapter 7 bankruptcy. The BAPCPA has created an elevated priority status for domestic support obligations. Section 507(a)(1)(A) of the Code states that “the support obligations owed to or recoverable by a former spouse, or the parent, legal guardian, or responsible relative of the child are given first priority of all unsecured claims.” The new language permits claims to be paid from property of the bankruptcy estate to a domestic support creditor at a much superior status than under previous legislation.

Exemption Changes Better for Domestic Support Creditors – 11 U.S.C. § 522 (f)

Certain exemption changes have been enacted under the BAPCPA. 11 U.S.C. § 522(f) allows a debtor to protect certain property as exempt from the bankruptcy trustee, as well as from creditors.

Section 522(c)(1) of the Bankruptcy Code allows domestic support creditors to proceed against exempt property, including property exempted under state law. Thus, a debtor’s exempt property as listed in the bankruptcy schedules can be used to pay support debt. 11 U.S.C. § 522(f) was also amended by the BAPCPA to prevent judicial liens for a domestic support obligation (including those assigned to a governmental agency) from being avoided. Property normally exempt from creditors under 11 U.S.C. § 522, such as a retirement plan or homestead exemption, could be used to satisfy the debt.

Non-Dischargeability of Debts – 11 U.S.C. §§ 523 (a)(5) and (a)(15)

11 U.S.C. §§ 523(a)(5) and (a)(15) address the nondischargeability of debts in a bankruptcy case. Under former § 523(a)(5) a debtor generally could not discharge his or her obligations to pay support, alimony, or maintenance to a child, spouse, or former spouse in divorce. Further, non-support obligations and property distribution obligations were usually excepted from discharge. However, a debtor still had the ability to seek to discharge non-support obligations and property distribution obligations. Under § 523(a)(5) the amended Code, all domestic support obligations as defined in § 101(14A) are nondischargeable. In addition, all debts to a spouse, former spouse, or child whether or not designated as a “domestic support obligation,” are nondischargeable in a Chapter 7 case.

Domestic Support Orders Treated as Preferential Transfer Actions – 11 U.S.C. § 547 (c)(7)

Section 547 of the Code broadens domestic support obligations to include additional debts that cannot be treated by the bankruptcy trustee as a preferential transfer. Under § 547 (c)(7), all bona fide payments on domestic support obligations (including those assigned to a governmental agency) are protected from preference avoidance suits. Historically, payments made for domestic support obligations were protected from preference actions. The new Code creates a broader definition, expanding it to be interpreted as any kind of debt arising under the divorce, including division of property.

New Trustee Duties – 11 U.S.C. §§ 704 (c), 1106 (d), 1202 (c), & 1302 (d)

Bankruptcy trustees must give expanded notice provisions under BAPCPA. Notice must be provided when there are domestic support obligations. Sections 704(c), 1106(d), 1202(c) and 1302(d) of the Code require a trustee to notify holders of domestic support claims of his or her rights to services of the state child support agencies, including the addresses and telephone numbers of the agencies. In addition, upon discharge, the trustee in all chapter cases must notify the state agency of:

1. The granting of the discharge;
2. The debtor’s address;
3. The last known name and address of the debtor’s employer; and
4. Creditors not discharged or reaffirmed.

These “checkpoints” are safeguards that ensure the ongoing payment of support obligations.

Debt Relief Agencies – Definition Expanded – Increased Liability of Practitioner – 11 U.S.C. § 101 (12A)

Under 11 U.S.C. § 101(12A), attorneys who represent individuals with respect to bankruptcy matters may be subject to penalties and loss of fees for failure to meet the requirements of a “debt relief agency.” The term includes “any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration…” “Assisted person” is defined at 11 U.S.C. § 101(3) as “any person whose debts consist primarily of consumer debts and the value of whose nonexempt property is less that $150,000.” The definition of “bankruptcy assistance” is very broad and could include many types of advice not solely in connection with the filing of a bankruptcy case for a client. This could open the door to liability. Once the attorney is determined to be a “debt relief agency,” there are added requirements under the Code.

Additional Safeguards

There are numerous other new safeguards and requirements under the new legislation. All filers must attend mandatory credit counseling prior to filing for bankruptcy. A Chapter 13 debtor must be current in all domestic support obligations before the Chapter 13 can be completed. Under § 1307(c)(11) of the Code, a Chapter 13 case will be dismissed or converted to a Chapter 7 case if the debtor falls behind in post-petition payments of domestic support orders. Further, a discharge will not be granted until a debtor who owes such obligation certifies that the obligation is current. 11 U.S.C § 1328 requires that a Chapter 13 discharge is now conditioned on the debtor being current on all post-petition domestic support obligations and pre-petition domestic support obligations to the extent that payment was provided in the debtor’s confirmed plan.

Conclusion

The BAPCPA has influenced the family law practitioner in ways that are yet to fully unfold. Despite the fact that the Act took effect on October 17, 2005, the courts have yet to fully interpret the new provisions. A family law practitioner should pay close attention to becoming a “debt relief agency” under the Code. Bankruptcy assistance could be interpreted very generally. Beware – if you violate the requirements, you could be sued for the return of your fees. The imminent possibility of future class actions against the family law practitioner may be on the horizon.