Chapter 13 “adjustment of debts” has a special way of helping with your support obligation. How about Chapter 7?
Child and Spousal Support: Ways Chapter 7 Does NOT Help
As our last blog post made clear, support obligations are an extraordinary type of debt which cannot be discharged (legally written off) with any kind of bankruptcy. One of the most important other tools of bankruptcy—the “automatic stay,” which prevents creditors from pursuing you and your assets, also does not apply to support obligations under Chapter 7, as to either ongoing monthly support obligations or back support payments. A Chapter 7 filing would also does not stop a court proceeding to establish or modify support, or to establish paternity which could lead to a determination of a support obligation.
Very Limited Help Through Chapter 7
But Chapter 7 bankruptcy could help in two potential ways.
First, it discharges all or most of your other debts so that you can better afford to pay your regular monthly support obligations. This is the primary way that Chapter 7 helps.
And second, in certain rare “asset” Chapter 7 cases your support arrearage can be paid—in part or in full—by your bankruptcy trustee. This deserves some explanation
“Asset” Chapter 7 Case as a Convenient Liquidation Procedure
If you do have some assets that are not exempt—not protected from the trustee—and especially if they are assets that you can do without—then it can be a good idea to allow the bankruptcy trustee to sell them and pay the back support obligation out of the proceeds of that sale. The back support owed as of the date the Chapter 7 case was filed would be paid in full before any other debts would be paid anything.
That’s because bankruptcy law not only treats child and spousal support debt as a “priority” debt, but also treats such debt as the very highest priority among all the categories of “priority” debts. So even if you owed recent income taxes—another “priority” debt—not a dime of the income taxes would be paid out of the proceeds of the bankruptcy trustee’s sale of your unprotected assets until the support was paid in full.
We called this a rare situation because most Chapter 7 cases are “no asset” ones, meaning everything you own is protected, so that bankruptcy trustee cannot grab it (to sell and pay the proceeds to the back support).
And even if you do have an asset that is not protected, this is not necessarily a good way to pay the back support because 1) your asset is often sold for less than what it is worth since it is done in liquidation manner, and 2) the trustee gets to take his or her fee out of the sale proceeds ahead of the support obligation.
So, using an “asset” Chapter 7 case to pay your back support both requires a rare combination of circumstances and even then is a relatively expensive way to pay your back support. But if you have decided that Chapter 7 is your best option, and you have an unprotected asset to be liquidated by the bankruptcy trustee, having that asset go to pay your back support is a nice twist.