Bankruptcy and Child Support Enforcement: The Basics (and Maybe Just a Little Bit More) for IV-D Attorneys and Agencies John L. Saxon Professor of Public Law and Government School of Government The University of North Carolina at Chapel Hill Chapel Hill, North Carolina I. Bankruptcy Basics A. Bankruptcy Law 1. The purpose of the federal Bankruptcy Code is to allow an overburdened debtor to pay all of her creditors to the extent she is able to do so and in an organized and equitable manner and then permit her to make a “fresh start” by relieving her of all or most of her preexisting debts. 2. The federal Bankruptcy Code is codified as Title 11 of the U.S. Code. The Bankruptcy Code is supplemented by the federal Bankruptcy Rules and local bankruptcy rules adopted by bankruptcy courts in each federal court district. 3. The “new” bankruptcy reform statute applies to bankruptcy cases that are commenced on or after October 17, 2005. The “old” bankruptcy law applies to cases that were commenced before October 17, 2005 and are pending on or after October 17, 2005. This outline is based on the “new” law. 4. Under the U.S. Constitution’s supremacy clause, federal bankruptcy law supersedes state law to the extent state law is inconsistent with the federal bankruptcy law. In re Jackson, 55 B.R. 343 (Bankr. M.D.N.C. 1985). 5. Federal bankruptcy judges have original and exclusive jurisdiction over all bankruptcy cases, over the property of the bankruptcy estates of debtors, and over all “core proceedings” under the Bankruptcy Code. 28 U.S.C. 1334; 28 U.S.C. 157. • State courts, however, may exercise concurrent jurisdiction with respect to some issues that may arise in connection with pending bankruptcy cases and retain, subject to the Bankruptcy Code’s limitations, their jurisdiction with respect to family law or domestic relations matters, including child support enforcement, that may be “related to” a pending bankruptcy proceeding. See also 28 U.S.C. 1452 (removal of proceedings to bankruptcy courts); 28 U.S.C. 1334(c) (abstention and remand by bankruptcy courts). B. Bankruptcy Cases 1. Chapter 7 a. A chapter 7 bankruptcy case is known as a “straight” bankruptcy or “liquidation.” Individuals usually file chapter 7 bankruptcy cases when they have few nonexempt resources, incomes that do not exceed their necessary living expenses, and large unsecured debts (like credit card or medical bills). • The “new” bankruptcy law, however, imposes a “means test” that will require more debtors (especially those with incomes that exceed the state’s median income) to file chapter 13, rather than chapter 7, bankruptcies. See 11 U.S.C. 707(b). b. In a chapter 7 bankruptcy, the debtor’s equity interest in nonexempt property is liquidated by the bankruptcy trustee and the proceeds from the liquidation of the Eastern Regional Interstate Child Support Assn. John L. Saxon April 1, 2009 UNC School of Government debtor’s nonexempt assets are used to pay all or part of the claims of the debtor’s unsecured creditors. • Unsecured creditors with “priority” claims are paid before general unsecured creditors. See 11 U.S.C. 507. • Secured creditors are paid through the liquidation of property securing their claims or, if the property is not liquidated, retain their security interests in the debtor’s property unless those security interests are “avoided” under the Bankruptcy Code. • The debtor retains her interest in exempt property and generally is discharged from personal liability for all “dischargeable” pre-bankruptcy claims and debts. c. Most chapter 7 bankruptcies are “no asset” cases. In a “no asset” case, the debtor does not own any nonexempt assets that can be used to pay the claims of creditors. Creditors, therefore, are not required to file claims and do not receive payments because there is no nonexempt property that can be liquidated. Bankr. Rule 2002(e) and 3002(c)(5). 2. Chapter 13 a. A chapter 13 bankruptcy case is known as a “wage earner” bankruptcy. Chapter 13 bankruptcies usually are filed by debtors who have enough regular income to pay their reasonable and necessary living expenses (including support of their spouses and children) and to cure their default in paying secured debts (such as home mortgages or car loans) and pay their unsecured debts in whole or in part over a period of up to five years. b. In a chapter 13 case, the debtor’s nonexempt property is not liquidated to pay the claims of creditors unless the debtor’s chapter 13 plan expressly provides for the liquidation of the debtor’s property. 11 U.S.C. 1306(b). • Instead, the debtor makes payments to the chapter 13 trustee from the debtor’s “disposable income” for a period of up to five years and the trustee uses these payments to make payments to creditors in accordance with the debtor’s chapter 13 plan (which must be confirmed by the bankruptcy court). 11 U.S.C. 1322, 1325, 1326. • In general, priority claims (including most but not all unsecured claims for domestic support obligations that were due and owing at the time the debtor filed for bankruptcy) must be paid in full. 11 U.S.C. 1322(a)(2). • A chapter 13 debtor may retain property that secures a claim if the debtor “cures” his or her default with respect to a long-term obligation (for example, a home mortgage loan) or, with respect to other secured claims, pays the secured claim in full. 3. Chapters 11 and 12 • Chapter 11 bankruptcy cases may be filed by businesses that need to reorganize their affairs and by individuals whose debts exceed the limits for chapter 13. Chapter 12 bankruptcy cases may be filed by farmers whose debts exceed the limits for chapter 13. The law and procedures in chapter 12 bankruptcy cases are similar to those in chapter 13 cases. 2 Eastern Regional Interstate Child Support Assn. John L. Saxon April 1, 2009 UNC School of Government C. Bankruptcy Terminology 1. Automatic Stay. The automatic stay generally takes effect as soon as a debtor files a bankruptcy case. It generally prohibits creditors from taking any action that affects the bankruptcy estate of the debtor or any action against the debtor involving a pre- bankruptcy claim or debt. See 11 U.S.C. 362. The automatic stay and its exceptions are discussed in section III of this outline. 2. Bankruptcy Estate. The bankruptcy estate is the property that is subject to the bankruptcy court’s jurisdiction. The bankruptcy estate is created as soon as the debtor files a bankruptcy petition. Determining what is and isn’t property of the bankruptcy estate may be important in determining the scope of the automatic stay. a. The bankruptcy estate generally consists of any legal or equitable interest of the debtor in any real, personal, tangible, or intangible property (including property that the debtor owns jointly with another person) at the time the bankruptcy petition is filed (or, in certain instances, property acquired within 180 days of filing for bankruptcy and property that is brought into the estate by the trustee’s avoidance of pre-bankruptcy transfers). See 11 U.S.C. 541. b. In a chapter 13 case, the bankruptcy estate includes wages, income, and property that the debtor receives after she files for bankruptcy. 11 U.S.C. 1306. • In a chapter 7 case, a debtor’s earnings for services performed after she files for bankruptcy are not property of the bankruptcy estate. 11 U.S.C. 541(a)(6). 3. Claim. In general, a claim is a creditor’s right to payment from the debtor that exists at the time the debtor files for bankruptcy, regardless of whether the claim is disputed or undisputed, reduced to judgment, fixed or contingent. 11 U.S.C. 101(5), 502(b)(5). The Bankruptcy Code generally classifies claims as allowed or unallowed, secured or unsecured, and priority or nonpriority. The payment of claims for child support and other domestic support obligations through bankruptcy proceedings is discussed in section IV of this outline. 4. Discharge. The bankruptcy discharge releases the debtor from personal liability for all “dischargeable” claims. a. Some claims, including claims for domestic support obligations and other obligations arising from divorce or separation, are not dischargeable in bankruptcy. See section V of this outline. b. The bankruptcy discharge does not affect (i) valid security interests that have not been avoided in bankruptcy, (ii) claims that arose after the debtor filed for bankruptcy, (iii) most debts that were not “scheduled” by the debtor, or (iv) other claims that are nondischargeable under the Bankruptcy Code. 5. Disposable Income. In a chapter 13 case, a debtor’s disposable income is the amount of her income that exceeds her reasonable and necessary living expenses (including expenses required to pay the debtor’s current, ongoing spousal and child support obligations). A debtor’s disposable income is considered in determining whether the debtor’s chapter 13 plan is feasible and proposed in good faith. See sections IV(C) and IV(D) of this outline. 6. Exempt Property. Exempt property is property that may be retained by the debtor and is not subject to liquidation or distribution to creditors in a chapter 7 case. In a chapter 13 case, property that the debtor claims as exempt is not considered in determining the extent to which the claims of unsecured creditors must be satisfied. 3 Eastern Regional Interstate Child Support Assn. John L. Saxon April 1, 2009 UNC School of Government a. If the state of the debtor’s residence does not “opt out” of the federal bankruptcy exemptions, the federal bankruptcy code determines what property the debtor may claim as exempt.