If you are behind on child or spousal support, Chapter 13 is better because it stops collection of this unpaid support. Chapter 7 doesn’t.
Last week 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, 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 that:
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.
You should have a serious conversation with your 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 is designed to protect you during that period of time from your ongoing creditors.
Chapter 7 mostly just 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 means that as of your filing date your paycheck is protected from wage garnishment or other kinds of forced payment.
Why Doesn’t This Happen under Chapter 13 But Not 7?
Here’s the legal 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 does stop 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 Codeon “Property of the estate” generally. This does not include what you earn and 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 includes “earnings from services performed by the debtor after the commencement of the case.” See Subsection 1306(a)(2).
This means that the automatic stay legally prevents your ex-spouse or support enforcement agency from continuing or starting to collect on your unpaid child or spousal support you’re your after-filing earnings the moment your Louisville bankruptcy lawyer files your Chapter 13 case. 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 can 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 get the court to exclude the debt from being covered by the automatic stay. It can get permission to repossess your vehicle after all.
It’s similar with 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 huge benefit of Chapter 13. It may even be a major 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 how important these conditions are, we’ll dedicate all of next week’s blog post to them.