An Interesting Twist in the Collection of Domestic Support Obligations in Bankruptcy
In bankruptcy, a “domestic support obligation” (DSO) is generally defined as a debt that is in the nature of “alimony, maintenance and support.” DSOs are never dischargeable and are priority claims for distribution purposes. However, the analysis does not end there. Can the holder of a DSO claim continue to pursue all collection remedies when his or her spouse files for bankruptcy? It depends upon a lot of factors, including the chapter of bankruptcy at issue.
In 2019, Congress enacted the Small Business Reorganization Act of 2019 (SBRA), known as Subchapter V under Chapter 11 of the Bankruptcy Code, which went into effect in February of 2020. Under Subchapter V, an individual engaged in commercial or business activities with debts less than $7.5M (this amount was increased in the CARES Act and is set to decrease after March 27, 2021) may be a debtor under Subchapter V. Generally, Subchapter V enables a debtor to reorganize a lot easier than the regular Chapter 11 process.
What happens if the Subchapter V debtor owes a DSO? Generally, the “automatic stay” provisions in the Bankruptcy Code prohibit efforts to collect from a debtor. The Bankruptcy Code, however, contains certain exceptions from the automatic stay for certain domestic relations matters. One of the exceptions allows for the collection of a DSO from “property that is not property of the estate.” How does that exception apply in Subchapter V?
In a regular individual chapter 11 case (and in a chapter 13 case), property of the estate includes post-petition earnings. Thus, the automatic stay would prohibit post-petition collections from post-petition earnings. However, in a Subchapter V case, an interesting twist occurs, such that post-petition earnings are not included in property of the estate, unless a “nonconsensual” plan is ultimately confirmed (as compared to a consensual plan, which generally means the debtor received support from creditors). Note that the Bankruptcy Code appears to retroactively include post-petition earnings in property of the estate (as of the filing of the case) upon confirmation of a nonconsensual plan.
This raises some interesting issues that have not been decided by the courts due to the recent enactment of the SBRA. It appears that a DSO creditor can collect from a Subchapter V debtor’s post-petition earnings during the case, but what happens if a nonconsensual plan is confirmed? What happens if a nonconsensual plan is confirmed and the case is later converted to another chapter? Is the DSO creditor at risk for being sued for receipt of estate property? Probably not because the DSO claim is still a priority claim in another chapter. Could another creditor argue that the plan cannot be confirmed because the debtor no longer possesses all property of the estate? The point is that with all new legislation, there are always unresolved issues. Whether you’re on the debtor side, or the creditor side, my advice is to consult counsel who is familiar with both domestic relations matters and bankruptcy matters.
ABOUT STEPHEN METZ
Stephen Metz is a Principal attorney and Chair of the Creditor’s Rights, Reorganization and Bankruptcy practice group. In 20 years of practicing law, he has garnered a reputation for being a tremendous advocate for his clients. While typically meeting clients and opposing counsel under less-than-favorable conditions, Stephen applies his signature techniques to each situation: he is fair-minded, a good listener and a straight shooter, providing his best advice and legal tactics in a calm but decisive manner. In addition to earning the respect and appreciation of those he represents, Stephen has been referred to by his legal colleagues as one of the best bankruptcy attorneys in Maryland.
ABOUT OFFIT KURMAN
Offit Kurman is one of the fastest-growing full-service law firms in the United States. With 14 offices in seven states, and the District of Columbia, and growing by 50% in two years through expansions in New York City and Charlotte, North Carolina, Offit Kurman is well-positioned to meet the legal needs of dynamic businesses and the individuals who own and operate them. For over 30 years, we’ve represented privately held companies and families of wealth throughout their business life cycles.
Whatever and wherever your industry, Offit Kurman is the better way to protect your business, preserve your family’s wealth, and resolve your most challenging legal conflicts. At Offit Kurman, we distinguish ourselves by the quality and breadth of our legal services—as well as our unique operational structure, which encourages a culture of collaboration and entrepreneurialism. The same approach that makes our firm attractive to legal practitioners also gives clients access to experienced counsel in every area of the law.
Find out why Offit Kurman is The Better Way to protect your business, your assets and your family by connecting via our Blog, Facebook, Twitter, Instagram, YouTube, and LinkedIn pages. You can also sign up to receive LawMatters, Offit Kurman’s monthly newsletter covering a diverse selection of legal and corporate thought leadership content.
DELAWARE | MARYLAND | NEW JERSEY | NEW YORK | NORTH CAROLINA | PENNSYLVANIA | VIRGINIA | WASHINGTON, DC