Monday, September 22, 2014

My bankruptcy won't take my child support payments ... Right?

The short answer is probably not. But it isn't as cut and dried as many people seem to think when they come into my office. In 522(d)(10)(D) of the Bankruptcy Code, it states support is exempt "to the extent necessary for the support of the debtor and dependents." Since Pennsylvania Support Guidelines are directly connected to the estimated costs of rearing children, a creditor would be hard pressed to argue the support payments are not necessary for the support of the debtor and dependents. I suspect most states support orders are based on similar estimates; therefore, the exemption should apply.

Image courtesy of renjith krishnan at
But I ran into a different situation in a recent case. I met a debtor who has an outstanding support order and accrued arrearages that was in excess of $12,000.00. Her children had reached age of majority and were out of her home. During our initial, the debtor simply stated, "I received $10,000.00 of the arrears but it doesn't count because it's child support, right?" That statement triggered the preliminary review I'm discussing here.

As I stated above, normal support payments to a debtor with minor children are really safe under the exemption. Through the interview, I found the $10,000.00 payment had been spent down legitimately on living expenses. So, I think the exemption is not at issue here. But I believe the child support exemption could be challenged for cash that is accumulated in an account from child support. I think the fact the children have left the household reinforces the challenge. Finally, I would be concerned if the total arrears were still over $12,000.00 or more. I would be concerned a trustee might want to take the claim over as they do personal injury and other claims.

Now I'm not sure what the final result would be on many of these issues if a creditor or the trustee challenged the exemption. My preliminary research did not reveal any cases on point. I have discussed the issue with more experienced bankruptcy attorneys and they see the issues I'm raising but have no more insight than I have. I also believe this issue is not common when it is an issue, I suspect the value is not so great as to cause a challenge.

The main point here is I never want to surprise my client with bad news if I can prevent it. Even in what seems like a routine consumer bankruptcy case the devil is really in the details. (similar point in one of my earlier blogs - These are issues that need to be identified, reviewed with the client, evaluate the risk in light of the clients' goals, and identify alternate plans to maximize exemptions.

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