BAPCPA: Changes That Impact the Family Law Practitioner

Palm Beach County Bar Association Bulletin, September 2006

As you probably know by now, on October 17, 2005, the “Bankruptcy Abuse Prevention and Consumer Protection Act for 2005” (”BACPA”) went into full effect. However, what you may not know, is how significant the changes were with regard to the treatment of domestic support obligations (“DSO”). For the bankruptcy, as well as family law, practitioner, knowledge of these changes is essential. This article will highlight only some of the more significant changes.

Perhaps the most significant change is that a bankruptcy trustee can now liquidate exempt property for the benefit of DSO claimants. For example, if a debtor with a DSO creditor files bankruptcy, the bankruptcy trustee can now sell the debtor’s homestead or other exempt assets in order to satisfy the outstanding DSO claim. Clearly, this new bankruptcy trustee power needs to be considered by counsel for a debtor with a DSO creditor before filing bankruptcy.

Another significant change is the increase in the priority status of DSO’s. Post-BABCPA a DSO’s priority was raised from seventh place to first. This means that DSO claimants get paid before all other unsecured creditors. Now, only the trustee’s administrative expenses get paid before DSO creditors. Some now consider DSO’s to have a super-priority.

BAPCPA also includes several revisions which broaden the scope of the of the exceptions to the automatic stay for support related proceedings. Now, the exceptions to the automatic stay include the commencement or continuation of civil actions or proceedings to establish paternity, establishing or modifying a domestic support order, and any action or proceeding concerning child custody or visitation, dissolution of marriage, or domestic violence. BAPCPA also permits as an exception to the automatic stay the “withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation under a judicial or administrative order.” These changes could have a significant impact on child support collection practices.

BAPCPA has also made it easier to exclude domestic obligations from discharge. Pre-BAPCPA, domestic obligations for alimony, maintenance or support, were excepted from discharge; however, a debtor maintained the ability to seek to discharge for non-support obligations and property distribution obligations, under certain circumstances. Post-BAPCPA, all marital and domestic relations obligations, whether in the nature of alimony, maintenance or support or property division, so long as they were incurred in the course of a divorce or separation or established in connection with a separation agreement, divorce decree, or other order of a court of record, are excluded from discharge.

As a whole, the changes brought about by BAPCPA basically aim to prevent debtors from using the bankruptcy system as a way to avoid support obligations, while at the same time attempting to ease the support creditor’s ability to obtain payments. Family law and bankruptcy practitioners should be aware that with the enactment of BAPCPA came additional significant changes not addressed in this article but which may impact how you represent your clients.

The Bankruptcy Code defines a “domestic support obligation” as a debt that accrues before, on, or after the date of the order for relief, and which includes interest that accrues pursuant to applicable nonbankruptcy law. This definition broadens the scope of the obligations covered by the Bankruptcy Code, as it includes a debt owed to or recoverable by “(i) a spouse, former spouse, or child of the debtor, or such child’s parent, legal guardian or responsible relative; or (ii) a governmental unit.” To qualify as a “domestic support obligation,” the debt must be “in the nature of alimony, maintenance, or support of such spouse, former spouse, or child of the debtor or such child’s parent.” The full definition of a Domestic Support Obligation can be found at 11 U.S.C. §101(14A).

Presumably, the homestead will still be protected if it is held as tenancy by the entireties.