Must support obligations be paid in full in chapter 13 before the debtor’s attorney’s fees?

Must support obligations be paid in full in chapter 13 before the debtor’s attorney’s fees?

Not in the case of In re Reid, Case No: 06-50147 ( Bkr. MDNC, July 19, 2006), where the United States Bankruptcy Court for the Middle District of North Carolina overruled that part of the trustee’s objection to a debtor’s chapter 13 plan because it did not pay Domestic Support Obligations (“DSOs”) in full prior to payment of compensation for Debtor’s counsel.

In Reid, the husband debtor filed a chapter 13 bankruptcy case listing two county child support enforcement agencies as creditors holding claims for past due child support arrearages.  Child support is a “domestic support obligation” as defined in 11 U.S.C. 101(14A), entitled to priority claim status in bankruptcy.  The chapter 13 plan in Reid provided that the child support arrearages would be paid in monthly payments at the same time as payments to secured creditors and the attorney’s fees of the debtor’s counsel.  There were no payments provided in the chapter 13 plan for general unsecured, non-priority creditors.  The husband debtor had filed the certification required under 11 U.S.C. 1325(a) indicating that he was current in the payment of all post-petition domestic support obligations.  The chapter 13 trustee objected to confirmation of the plan on the grounds that the plan did not pay prepetition arrearages on domestic support obligations in full before payment of the administrative expenses of attorney’s fees of the debtor.

At the chapter 13 confirmation hearing on the objection, the United State Bankruptcy Court judge first recognized that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) introduced new protections for domestic support obligations such as spousal support and child support.  In particular, section 1325 requires that post-petition domestic support obligations be current before a chapter 13 plan can be confirmed; section 1307 allows conversion or dismissal of a chapter 13 case if the debtor fails to pay “any domestic support obligation that first become payable after the date of the filing of the petition”; and section 1328 requires that all domestic support obligations be paid in order for the debtor to receive a discharge.

The court noted that while section 507 of Title 11, the Bankruptcy Code, establishes the general rule that priority debts shall be paid first in full before other debts, specific provisions in chapter 13 displace the priority of domestic support obligations to allow for the payment of the debtor’s attorney’s fees.  In particular, section 1326(b) provides as follows:  “(b) Before or at the time of each payment to creditors under the plan, there shall be paid – (1) Any unpaid claim of the kind specified in section 507(a)(2) of this title;…

The kind of claim specified in section 507(a)(2) is an administrative claim under section 503(b).”  An administrative claim under section 503(b)(2) is a claim for compensation and reimbursement awarded under section 330(a) of the Bankruptcy Code.  Under section 330(a)(4)(B), the court may award reasonable compensation to the debtor’s attorney in a chapter 13 case.

While BAPCPA changed the precise language of section 1326, the court ruled that the revised section maintained the pre-BAPCPA treatment of administrative expenses in chapter 13 – that they be paid before or concurrent with payments to other creditors.

The bankruptcy court judge also noted that while section 726(a)(1) requires that the distribution from a chapter 7 liquidation be paid in the order specified in section 507, section 1322(a)(2), governing the contents of a chapter 13 plan, includes no such requirement.  In addition, section 1325, governing confirmation, similarly does not require that plan follow the distribution order in section 507.  In fact, section 1325(a)(1) requires for confirmation that the plan comply with chapter 13, and “other applicable provisions of this title”, instead of all provisions of title 11.

The judge in Reid denied the trustee’s objection to confirmation based on the full payment of the priority claim for past-due child support before debtor’s attorney fees, but sustained the trustee’s objection based on the failure of the plan to provide for interest on the DSO claim.

In addition to the judge’s reasoning in the Reid case, there are public policy reasons for allowing debtor’s counsel to be paid at the same time as prepetition domestic support obligation arrearages.  Most chapter 13 attorneys allow for the majority of their attorney’s fees to be paid in the plan, rather than requiring the debtor to pay most of the fees before filing.  Requiring all DSOs to be paid in full before debtor’s counsel’s compensation would discourage debtors’ counsel from representing chapter 13 debtors who owed domestic support obligations and would not further the purpose of chapter 13 bankruptcy to allow consumer debtors to repay their creditors while receiving the protection of the automatic stay in bankruptcy.

You should consult with your Virginia bankruptcy and divorce attorney or Richmond divorce lawyer James H. Wilson, Jr., to discuss the proper treatment of domestic support obligations in a bankruptcy case.

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