§ 136.21     Domestic Support Obligations after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 136.21, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

BAPCPA expanded and repositioned the priority for alimony, maintenance and support. As enacted by BAPCPA, § 101(14A) defines a new term of art, “domestic support obligation” (DSO) as follows:

(14A) The term “domestic support obligation” means a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is—
(A) 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;
(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;

 
(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of—
 

 

(i) a separation agreement, divorce decree, or property settlement agreement;
(ii) an order of a court of record; or
(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and

 
(D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.1
 

 

[2]

BAPCPA then shuffled the priorities in § 507(a) to define a new first priority as follows:

(a) The following expenses and claims have priority in the following order:
(1) First:
(A) Allowed unsecured claims for domestic support obligations that, as of the date of the filing of the petition in a case under this title, are owed to or recoverable by a spouse, former spouse, or child of the debtor, or such child’s parent, legal guardian, or responsible relative, without regard to whether the claim is filed by such person or is filed by a governmental unit on behalf of such person, on the condition that funds received under this paragraph by a governmental unit under this title after the date of the filing of the petition shall be applied and distributed in accordance with applicable nonbankruptcy law.
(B) Subject to claims under subparagraph (A), allowed unsecured claims for domestic support obligations that, as of the date of the filing of the petition, are assigned by a spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative to a governmental unit (unless such obligation is assigned voluntarily by the spouse, former spouse, child, parent, legal guardian, or responsible relative of the child for the purpose of collecting the debt) or are owed directly to or recoverable by a governmental unit under applicable nonbankruptcy law, on the condition that funds received under this paragraph by a governmental unit under this title after the date of the filing of the petition be applied and distributed in accordance with applicable nonbankruptcy law.
(C) If a trustee is appointed or elected under section 701, 702, 703, 1104, 1202, or 1302, the administrative expenses of the trustee allowed under paragraphs (1)(A), (2), and (6) of section 503(b) shall be paid before payment of claims under subparagraphs (A) and (B), to the extent that the trustee administers assets that are otherwise available for the payment of such claims.2
[3]

The new first priority for DSOs is somewhat broader than the pre-BAPCPA seventh priority for alimony, maintenance or support.3 The first priority for DSOs extends to debts that accrue after the petition in a Chapter 13 case, including “interest that accrues on that debt as provided under nonbankruptcy law.” By statute, postpetition interest is now part of a first priority DSO claim.

[4]

Under pre-BAPCPA law, most debts for alimony, maintenance and support were nondischargeable in Chapter 13 cases and entitled to priority and full payment through the Chapter 13 plan but without interest under § 1322(a)(2).4 This was a problem for Chapter 13 debtors who wanted to pay accruing, nondischargeable, postpetition interest to avoid a large surviving claim, but couldn’t do so through the plan. That BAPCPA now defines postpetition interest to be part of a DSO claim perhaps solves this problem. Chapter 13 debtors can provide for full payment of a DSO, and payment of postpetition interest will be included—consistent with nonbankruptcy entitlements.

[5]

Under pre-BAPCPA law, the seventh priority for alimony, maintenance or support was defined as debts “to a spouse, former spouse or child of the debtor.” New § 101(14A) more broadly defines a DSO as a debt “owed to or recoverable by” a spouse, former spouse or child of the debtor with the addition of “such child’s parent, legal guardian or responsible relative” or a “governmental unit.”

[6]

BAPCPA enlarged the sources of an obligation entitled to first priority as a DSO to include debts that are not expressly designated to be in the nature of alimony, maintenance or support and debts that are “subject to establishment” by agreement, decree, court order and the like.5 This expanded definition will reach DSOs established by agreements and court orders after the Chapter 13 petition and will afford first priority status to any postpetition DSO debt.

[7]

The expanded definition of DSO could have interesting and difficult effects when a significant DSO is established during the Chapter 13 case. To accomplish confirmation, the plan must provide for full payment of any DSO unless the claim holder consents to different treatment. The funding of the plan, of course, will be based on many factors—including DSO debts known at the time of confirmation. A new or increased support obligation established after confirmation would be a first priority DSO under the new definition in § 101(14A) that must be paid in full under § 1322(a)(2). But funding for the plan may be rendered inadequate by the establishment of a DSO after confirmation.

[8]

This is not a far-fetched possibility and will call for imagination on the part of debtors, trustees and DSO claim holders. If a confirmed plan ceases to be “feasible” because of the establishment of a postconfirmation DSO, perhaps the trustee or the claim holder will move to dismiss the Chapter 13 case for “cause.” It is likely to be in the debtor’s best interest to seek to modify the plan to manage the new or larger DSO through increased payments.

[9]

DSO under new § 101(14A) does not include a debt in the nature of alimony, maintenance or support that is assigned to a nongovernmental entity unless the assignment was voluntary and for the purpose of collecting the debt.6 A debt for alimony, maintenance or support assigned to a governmental entity remains a DSO without regard to why or how the obligation was assigned. But a DSO assigned to a governmental unit or owed directly to or recoverable by a governmental unit is reduced in priority within the first priority in § 507(a)(1) unless the DSO was assigned voluntarily for the purpose of collecting the debt.7 This reduced first priority—one and a half priority?—has limited consequence in a Chapter 13 case because all claims entitled to priority without regard to order are entitled to full payment in a Chapter 13 case under § 1322(a)(2).

[10]

The new definition of DSO in § 101(14A) and the first priority in § 507(a)(1) are not coextensive. DSO includes secured debts in the nature of alimony, maintenance or support. The first priority in § 507(a)(1) is limited to allowed “unsecured claims for domestic support obligations.” There will be debts to former spouses that fit the definition of DSO in § 101(14A), but because of liens to secure those debts, the claim must be treated as a secured claim, not as a priority claim through the Chapter 13 plan. An obvious example would be a hold-harmless provision of a divorce decree that grants a former spouse a lien on the marital residence to secure future obligations of the debtor. The possibility under pre-BAPCPA law that a debt for alimony, maintenance or support could be both a secured claim and a priority claim has been eliminated by BAPCPA.8

[11]

Section 507(a)(1)(C) addresses the payment of administrative expenses of a trustee when there is a first priority DSO claim.9 When BAPCPA shuffled the priorities in § 507(a) to make DSO debts first priority, the effect was to reduce administrative expenses allowed under § 503(b) to second priority under § 507(a)(2). Especially in Chapter 7 cases, when the assets available for distribution to creditors are insufficient to pay DSOs in full, there will be no funds left for payment of administrative expenses. Section 507(a)(1)(C) provides that administrative expenses of a trustee allowed under § 503(b) shall be paid “before” payment of DSO claims “to the extent that the trustee administers assets that are otherwise available for the payment of such claims.”10

[12]

There is a reference to a trustee appointed under § 1302 in new § 507(a)(1)(C) which may be interpreted to allow a Chapter 13 trustee—whether a standing trustee or a trustee in an individual case—to be paid administrative expenses in advance of distributions to a first priority DSO claim holder.11 Ambiguity whether the compensation and expenses of a standing Chapter 13 trustee are administrative expenses12 could complicate this issue.

[13]

The difference between the definition of DSO in § 101(14A) and the first priority in § 507(a)(1) could have significance at discharge in Chapter 13 cases. All DSOs are nondischargeable in a Chapter 13 case.13 Not all DSOs are entitled to priority under § 507(a)(1). In addition to DSOs secured by a lien, there is a condition in § 507(a)(1)(A) and (B) that an unsecured claim for a DSO filed by a governmental unit, assigned to a governmental unit or owed directly to a governmental unit is entitled to first priority only if funds received after the petition “shall be applied and distributed in accordance with applicable nonbankruptcy law.” It is not immediately obvious to what nonbankruptcy law this section refers. It is even less clear under what circumstances a governmental unit would apply funds received on account of a priority DSO other than in accordance with applicable nonbankruptcy law. Nonetheless, the condition is there and it raises the possibility that there will be debts defined as DSOs that will not be entitled to first priority under § 507(a)(1). Such a debt would be nondischargeable under § 1328 but not entitled to full payment as a priority debt under § 1322(a)(2).

[14]

The condition in § 507(a)(1)(A) and (B) could relate to the possibility that a governmental unit would seek collection of both its portion of a support obligation and the portion payable directly to an ex-spouse or child. In that circumstance, the governmental unit would be required by nonbankruptcy law to ensure that the funds collected were properly “applied and distributed.” That condition, of course, would apply under nonbankruptcy law without regard to § 507(a)(1)(A) and (B). It is hard to conceive how a DSO would forfeit its priority after the fact if a governmental unit failed to respect the condition.

[15]

There could be an interest rate issue at confirmation with respect to a DSO secured by a lien. The definition of DSO in § 101(14A) includes interest that accrues before or after the petition as provided under applicable nonbankruptcy law. A secured DSO would accrue postpetition interest at whatever rate is provided by nonbankruptcy law.

[16]

At confirmation, a secured DSO would not be a priority debt under § 507(a)(1) but would instead be treated as a secured claim under § 1325(a)(5). The present value (discount) rate applicable at confirmation under § 1325(a)(5) is not likely to be the same as the interest rate on the DSO under applicable nonbankruptcy law. The phrase “notwithstanding any other provision of this title” in § 101(14A) suggests that bankruptcy courts will resolve this conflict in favor of the interest rate under applicable nonbankruptcy law.

[17]

The exception to priority under pre-BAPCPA law for any debt for alimony, maintenance or support that was “assigned to another entity, voluntarily, by operation of law, or otherwise” has been eliminated by BAPCPA. An unsecured debt that falls within the new definition of DSO in § 101(14A) is entitled to the first priority described in new § 507(a)(1) notwithstanding assignment. The definition of DSO itself excludes debts assigned to a nongovernmental entity unless assigned voluntarily for the purpose of collecting the debt. And § 507(a)(1) divides the first priority to reduce DSOs assigned to a governmental unit or owed directly to or recoverable by a governmental unit to the one-and-a-half priority mentioned above. The combined effect of these changes is to raise the priority of debts for alimony, maintenance or support assigned to a governmental entity or assigned to a nongovernmental entity voluntarily for the purpose of collecting debt—these classes of assigned DSOs are entitled to first priority after BAPCPA but were not entitled to seventh priority under pre-BAPCPA law.

[18]

The new definition of DSO in § 101(14A) may overlap postpetition claims in Chapter 13 cases. Under § 1305(a)(2), a proof of claim may be filed in a Chapter 13 case for a consumer debt “that arises after the date of the order for relief . . . and that is for property or services necessary for the debtor’s performance under the plan.”14 BAPCPA defined DSO in § 101(14A) to include debts for alimony, maintenance or support that accrue after the petition in a Chapter 13 case and that are “subject to establishment” after the petition.

[19]

An intersection is likely between § 1305 and § 101(14A) when a debtor is ordered after the Chapter 13 petition to pay a DSO that is also necessary for the debtor’s performance under the plan. An example would be medical care for a dependent of the debtor that arises after the petition. That debt could be a postpetition claim under § 1305(a)(2), and when a domestic relations court orders the debtor to reimburse an ex-spouse for the cost of that medical care, § 101(14A) is in play.

[20]

The dual nature of this DSO could be a management problem because the procedures for allowance and payment of postpetition claims under § 1305 are completely different from those for allowance and payment of priority claims under § 507 and § 1322(a)(1).15 Perhaps the conflict evaporates under § 101(14A). As mentioned above, the first sentence of new § 101(14A) contains the phrase “notwithstanding any other provision of this title.”16 Although not beyond doubt, the first sentence of § 101(14A) could be interpreted to trump any inconsistent provision of § 1305.


 

1  11 U.S.C. § 101(14A).

 

2  11 U.S.C. § 507(a)(1), discussed in § 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA.

 

3  See § 301.1 [ Alimony, Maintenance and Support in Cases Filed after October 22, 1994 ] § 136.20  Alimony, Maintenance and Support in Cases Filed after October 22, 1994 for discussion of 11 U.S.C. § 507(a)(7) prior to amendment by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

 

4  See §§ 299.1 [ Postpetition Interest on Priority Claims ] § 136.16  Postpetition Interest on Priority Claims before BAPCPA and 301.1 [ Alimony, Maintenance and Support in Cases Filed after October 22, 1994 ] § 136.20  Alimony, Maintenance and Support in Cases Filed after October 22, 1994.

 

5  11 U.S.C. § 101(14A)(B), (C).

 

6  11 U.S.C. § 101(14A)(D).

 

7  11 U.S.C. § 507(a)(1)(B).

 

8  See §§ 300.1 [ Secured Priority Claims? ] § 136.18  Secured Priority Claims before BAPCPA and 301.1 [ Alimony, Maintenance and Support in Cases Filed after October 22, 1994 ] § 136.20  Alimony, Maintenance and Support in Cases Filed after October 22, 1994.

 

9  See § 514.1 [ Trustees’ Fees and Expenses ] § 136.5  Trustees’ Fees and Expenses after BAPCPA.

 

10  11 U.S.C. § 507(a)(1)(C).

 

11  See § 514.1 [ Trustees’ Fees and Expenses ] § 136.5  Trustees’ Fees and Expenses after BAPCPA for further discussion of this issue.

 

12  See § 514.1 [ Trustees’ Fees and Expenses ] § 136.5  Trustees’ Fees and Expenses after BAPCPA.

 

13  See 11 U.S.C. § 1328(a)(2) and (c), discussed in § 552.1 [ Domestic Support Obligations: § 523(a)(5) ] § 159.5  Domestic Support Obligations: § 523(a)(5).

 

14  11 U.S.C. § 1305(a)(2), discussed in § 302.1 [ Postpetition Claims ] § 137.1  Postpetition Claims before BAPCPA.

 

15  See §§ 279.1 [ Priority Claims, Including Requests for Payment of Administrative Expenses ] § 132.6  Priority Claims, Including Requests for Payment of Administrative Expenses and 281.1 [ Postpetition Claims ] § 132.9  Postpetition Claims.

 

16  See 11 U.S.C. § 101(14A), quoted above in this section.