Must a chapter 13 bankruptcy debtor pay a child support arrearage in full for confirmation of the plan in Virginia?
Not necessarily in the U.S. Bankruptcy Court for the Eastern District of Virginia, Alexandria Division, according to In re: Edwards, Case No. 09-16765-SSM, (Bankr., E.D. Va, January 20, 2010), and In re: Sosa, Case No. 09-13389-SSM, (Bankr., E.D. Va, January 21, 2010). The issue in both cases was whether a claim entitled to priority under Section 507 of the Bankruptcy Code must be paid in full under the chapter 13 plan.
In the Edwards case, the debtors filed for bankruptcy relief under chapter 13 with priority claims of $80,038 in taxes and unpaid child support. Their budget showed an income withholding order for child support to the California Department of Child Support Services (DCSS). The debtor husband had two adult children for which he owed child support arrearage and it was not clear whether the unpaid child support would be paid over by DCSS to the mother of the children or retained by DCSS to recoup public assistance paid or welfare paid, such as Aid to Families with Dependent Children (AFDC) or its successor Temporary Assistance to Needy Families (TANF). In their proposed modified chapter 13 plan, the debtors were to pay priority claims with no payout to the general unsecured creditors. The plan provided that priority taxes would be paid 100%, but the priority domestic support obligations would be paid less than 100%. Domestic support obligations, including spousal support or alimony, and child support are priority claims under 11 U.S.C. 507(a)(1), even when the domestic support obligation is owed to a governmental unit, 11 U.S.C. 101(14A), although a domestic support obligation claim of a parent has priority over a domestic support obligation claim of a governmental unit. The chapter 13 trustee objected to confirmation of the debtors’ proposed modified chapter 13 plan because it did not pay priority claims in full. The bankruptcy judge recognized that under Section 1322(a)(4), a chapter 13 plan may provide for less than full payment of a certain assigned domestic support obligation claim owed directly to, or recoverable by, a governmental unit, as long as the plan provides that all of the debtor’s projected disposable income will be applied to make plan payments and the chapter 13 plan extends for at least sixty (60) months. The unpaid balance of the domestic support obligation is not discharged and may be collected from the debtor at the conclusion of the plan. While the case is pending, the existing income withholding order is not stayed by the automatic stay in bankruptcy.
In the Sosa case, the debtors originally filed a chapter 7 bankruptcy case, then moved the court to convert their case to a chapter 13 case. A chapter 7 case may be converted to chapter 13 case under Section 706 of the Bankruptcy Code, provided the conversion is not in bad faith, Marrama v. Citizens Bank of Mass., 549 U.S. 365, 127 S. Ct. 1105, 166 L.Ed. 2d 956 (2007). In their chapter 13 plan, the Sosa debtors proposed to pay only 26% of the priority domestic support obligation. The debtors’ budget included $500 a month in voluntary child support payments as an expense, leaving only $104 a month for plan payments. The plan provided nothing for the holders of general, nonpriority, unsecured claims. The chapter 13 trustee objected to confirmation of the plan as not being proposed in good faith, as required under 11 U.S.C. 1325(a)(3), and because the plan did not pay priority creditors in full. The bankruptcy judge recognized that certain domestic support obligation claims could be subordinated, or paid less than 100% in a chapter 13 plan. Claims owed to a parent or assigned voluntarily to a governmental unit for the purpose of collection cannot be subordinated. Again, if the subordinated domestic support obligation claim is to be paid less than 100%, the plan can still be confirmed if all the debtors’ disposable monthly income is paid into the plan for the full sixty (60) months. The judge held that the objecting party, in this case the chapter 13 trustee, has the initial burden of proving that the domestic support obligation was assigned voluntarily for the purpose of collection, and thus could not be subordinated in the plan.
In the Fourth Circuit, which includes Virginia, the standard for judging good faith is the totality of circumstances, under the case of Deans v. O’Donnell, 692 F.2d 968 (4th Cir. 1982). In Sosa, the judge was troubled by the debtors’ purpose in converting to chapter 13 when they were current on their mortgages and by the discrepancy between the $500 a month in child support they listed and the $185 claimed by the child support enforcement governmental unit. As such, the Sosa case was continued for an evidentiary hearing on the issue of good faith.
You should discuss with your Virginia bankruptcy attorney whether your child support arrearage must be paid in full in a chapter 13 plan.