Divorce-rates are higher than ever in the United States, and, while opinions vary as to the cause of this phenomenon or even whether it is actually a problem at all, it is clear that it at least poses complications of various sorts. Not least among these complications is the question of alimony and child-support. During a divorce proceeding, courts often assign a duty to maintain the living-standard of one of the divorcing spouses to the other in the form of alimony payments or a duty to maintain the living-standards and expenses of any children of the marriage to one divorcing spouse in the form of child-support payments. Or both. In some states, the amount of support or alimony is tied to the fault of one of the divorcing spouses for the divorce. Michigan, where I practice, is a “no-fault” divorce state, and these duties are more often simply based in the needs of the parties involved. Regardless, the amount of the alimony or child-support payment may have been a reasonable decision on the part of the court at the time of the divorce, but, later, these payments can pose problems when the financial circumstances of the paying spouse change for the worse.
Bankruptcy very specifically, however, does not discharge the obligation to pay alimony or child-support payments. These “debts” are required to be accounted for as “priority” Domestic Support Obligations on Schedule E of the bankruptcy petition. Domestic support obligations are not dischargeable in either a Chapter 7 or Chapter 13 bankruptcy, and, since they are a “priority” debt, they must be prioritized among the debts paid in any Chapter 13 payment plan. Further, in bankruptcy law, “domestic support obligations” include both pre-(bankruptcy) petition and post-petition obligations. This is one of the more cut-and-dry provisions in bankruptcy law. It does not include, however, debts resulting from divorce or separation that may be classified as “property settlement debts” rather than domestic support obligations. There are various factors that enter into a determination that an obligation is one or the other, including whether the required payments are to cease upon the death or re-marriage of the recieving spouse, whether they’re based on future earning abilities of that spouse, whether the payments are periodically paid rather than paid once in a lump-sum, and whether the payments are directed specifically for medical needs, a mortgage, or other such ends.
Here in Michigan, we are part of the Sixth Circuit Court of Appeals in the Federal Court system, which, along with other federal cases, handles appeals arising from Federal bankruptcy courts. The Sixth Circuit has its own test for making this determination: if the intent of the family law court that oversaw the divorce or of the parties themselves was that the payments were “support,” the court then decides whether the effect of the payments is “supporting” and whether that “support” is actually necessary for the spouse and children’s daily needs. No other Circuit handles this question quite in this manner.
Slightly less cut-and-dry is the question of what happens to the recipient of alimony or child-support payments if they need to file bankruptcy? Sadly, this is not a rare occurrence, especially for divorcees caring for children, the costs of which have increased drastically over the past eight or so years as costs-of-living for middle- and lower-class Americans have shot through the roof while wages have remained stagnant at best. The question of whether alimony or child-support payments being received may be exempted from the “bankruptcy estate” which is created when a debtor files a petition for bankruptcy differs depending on whether the petition is filed using the Federal exemptions defined under the Bankruptcy Code or the state exemptions allowed under individual states’ own laws. Each individual state (and the District of Columbia) determines whether filing debtors may choose or not between these two separate sets of exemptions. Michigan allows debtors to choose either its state exemptions or the Federal exemptions. No combining of the individual provisions of each set is allowed.
Under the Federal Bankruptcy Code, a debtor’s right to receive various future benefits is subject to the claims of creditors. To counter this, the Code allows for the exemption of several specific types of future benefits. Among them, alimony and child-support payments are specifically exempted—but only to the extent that they are actually necessary for the daily support of the debtor him or herself and any dependents. The burden of proof is on creditors to claim that any amount of this sort of payment claimed as exempt by a filing debtor is above and beyond the daily needs of the debtor, however.
Under Michigan’s law, no exemption is specifically granted for the right to receive domestic support obligations of this sort. It clearly indicates that a stock-option or other retirement plan is not exempt to the extent that it is subject to a court-order pursuing an obligation to pay alimony or child-support, but it says nothing about the right of a debtor to receive that payment. Thus, if you are a debtor considering filing for bankruptcy in Michigan and are worried about protecting alimony or child-support payments that you depend upon, the question of whether to choose between the Michigan or Federal exemptions becomes a balancing between the other differences between the two, such as the benefit of the Federal “wildcard” exemption in protecting other personal property or the specifics of the homestead exemptions in both sets of exemptions with regard to your own real property. It may be that, for reasons unrelated to domestic support payments, a Michigan debtor may still be better off choosing Michigan’s exemptions.
Or not. In short, if you are a Michigan debtor considering bankruptcy under these circumstances, you will want to speak to an experienced bankruptcy attorney about the specific application of both the Michigan and the Federal exemptions to your specific circumstances.
If you would like to discuss how either would best fit your needs, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation. Together, we can work together to protect both your property and your daily standard of living.
