The collection of unpaid child and spousal support in Chapter 13 stops once the case is filed. The collection does not stop in Chapter 7.
In the last blog, we discussed situations in which Chapter 7 would help if you’re behind on child or spousal support payments. We made clear that Chapter 7 “straight bankruptcy” provides only limited help. Mostly it gives you relief from your other debts so that you can concentrate on catching up on support. Chapter 13 “adjustment of debts” is a much more powerful option when Chapter 7 is not enough.
The Main Benefits of Chapter 13 When Behind on Support
Chapter 13 takes much longer than Chapter 7 and is generally more expensive. But it provides some remarkable benefits compared to Chapter 7. These benefits can make the longer time and greater expense of Chapter 13 more than worthwhile. The main benefits of Chapter 13 are:
1) Filing Chapter 13 immediately stops the collection of unpaid child or spousal support. Chapter 7 does not.
2) Chapter 13 gives you a relatively flexible and protected way to catch up on the support. With Chapter 7, you have to make your own payment arrangements, without any protection or much leverage.
Basically, have a serious conversation with your Kalispell bankruptcy lawyer about Chapter 13 if you need these significant benefits.
How Does Chapter 13 Stop the Collection of Unpaid Support?
Chapter 7 is a very straightforward kind of bankruptcy. It focuses on a point in time: the moment your bankruptcy lawyer files your Chapter 7 case. Your case essentially imagines your financial life frozen in time at that moment, including your debts and assets, income and expenses, and such.
Chapter 13 also cares a lot about your financial life at the moment of filing. But it also takes a longer view—the next 3 to 5 years of your court-approved payment plan. In particular, Chapter 13 protects you during that period from your ongoing creditors.
Chapter 7 mostly writes off (“discharges”) certain debts and does not discharge others. It leaves you on your own to deal with those debts you still owe, such as support.
In contrast, in Chapter 13, the protection from creditors—the “automatic stay”—can last the full 3-to-5 years. Specifically, regarding spousal and child support owed at the time of filing, the automatic stay protects your employment income earned after the filing. This protection means that as of your filing date, your paycheck is protected from wage garnishment or other kinds of forced payment.
Why Does This Happen under Chapter 13 But Not 7?
Here’s the answer. (You can skip this section if you don’t need this level of detail.)
The pertinent federal bankruptcy statute states that the automatic stay does not stop the collection of support out of “property that is not property of the [bankruptcy] estate.” See Subsection 362(b)(2)(B) of the U.S. Bankruptcy Code. This means that a bankruptcy filing stops the collection from property that is “property of the bankruptcy estate.”
In a Chapter 7 case, the bankruptcy estate is essentially everything you own at the moment of filing the case. See Subsection 541 of the Bankruptcy Code on “Property of the estate” generally. This does not include what you earn and the assets you acquire after that moment. Since those after-filing earnings and assets are not “property of the estate,” they can be targeted for support collection.
Chapter 13 is different for a simple reason: “the estate” does include after-filing earnings and assets. Only under Chapter 13, the estate consists of “earnings from services performed by the debtor after the commencement of the case.” See Subsection 1306(a)(2).
This means that the automatic stay in Chapter 13 legally prevents your ex-spouse or support enforcement agency from continuing or starting to collect on your unpaid child or spousal support, which includes your after-filing earnings. This is true even though a Chapter 7 filing would have absolutely no such effect.
This Chapter 13 Protection Comes with Important Conditions
We said that the automatic stay could last the entire 3-to-5-year period of your Chapter 13 payment plan. But especially when it comes to unpaid support that protection comes with some conditions.
Why are there conditions? Imagine the example of a vehicle loan. You want to keep the vehicle and prevent your lender from repossessing it. The automatic stay can protect your vehicle under Chapter 13 during the entire length of the case. But you have to meet some reasonable conditions like making payments and keeping the vehicle insured. If you don’t, the creditor can have the court exclude the debt from being covered by the automatic stay. It can get permission to repossess your vehicle after all.
It’s similar to child and spousal support debt. Here the conditions are very time-sensitive and are often enforced very strictly. Being able to stop support collection is a massive benefit of Chapter 13. It may even be a significant reason for choosing this more time-consuming option. You don’t want to lose this benefit because you didn’t clearly understand and comply with the conditions.
Because of the importance of these conditions, we’ll dedicate all of the next blog post to them.