Chapter 7 “straight bankruptcy” does not stop aggressive collections by your ex-spouse or by support enforcement. But Chapter 13 does.
If you are behind on your court-ordered support payments, most states’ laws give your ex-spouse and the support enforcement agencies powerful collection tools to use against you. Much more powerful ones than are available to ordinary creditors. We’re not just talking about garnishment of your checking account or paycheck. Your income tax refund can be grabbed. Your driver’s license can be suspended, including a commercial license that you rely on for your job. In fact in many states virtually any occupational and professional license can be suspended. The consequences can be catastrophic.
Chapter 7 does not help you against these collection methods. But a Chapter 13 “adjustment of debts” case can stop these punishing forms of collection, and permanently solve the problem, as the following example shows.
Gary is a 43-year old chiropractor who got divorced 6 years ago. He has visitation rights with his 10-year old son. Because he had higher income than his ex-wife when they got divorced, he was obligated to pay her $900 each month in child support, which he paid to her directly. Five years ago, after working as an employee for ten years, he decided to start his own chiropractic office. He put a great deal of effort into creating a good business plan and then worked very hard at executing it. But his timing was unfortunate—the Great Recession started a few months after he opened. Even well-established chiropractic offices were closing for lack of business. But Gary was extremely dedicated, did everything possible to keep his business alive, and now with the improving economy his business is finally looking like it is heading in the right direction.
Throughout most of these difficult five years he still found a way to pay his child support. But there were several periods of two or three months when there was absolutely no money to pay it. During these times his ex-wife was understanding, because in the meantime her income had gone up and she knew he was genuinely doing his very best. In part because of her flexibility, he did not go to court try to reduce the monthly support amount to better reflect their changed incomes. But then a year ago, after a period of four consecutive missed support payments, Gray and his ex-wife had an unrelated argument, after which she contacted the state support enforcement agency. They required him to make his regular monthly payments through the agency, which he has diligently. As for the arrearage, the few months here and there of missed payments during the previous 3-4 years added up—he’d missed a total of 11 months, so he was $9,900 behind. The agency has been after him for the last year to pay this arrearage. It recently garnished his business checking account, causing havoc there. He still owes $7,500. Now the agency is threatening to suspend both his driver’s license and chiropractic license, which would put him out of business. Given the financial struggles of his last five years, Gary has lots of other debts and absolutely no way of coming up with $7,500. He doesn’t know what to do.
So he goes to see a competent bankruptcy attorney, who, after reviewing all the possible options, recommends that he files a Chapter 13 case.
The Extraordinary Power of Chapter 13 with Support Arrearages
If Gary would do nothing, his licenses could well be suspended, and his huge investment of sweat equity in his business would be lost. He would not even be able to get chiropractic work again as an employee without his professional license.
If he filed a Chapter 7 bankruptcy case, all or most of his other debts would probably be permanently discharged (legally written off). That may enable him to eventually come up with the $7,500 support arrearage, but he may well lose his license and livelihood in the meantime.
Instead, Gary’s attorney files a Chapter 13 case for him, which immediately stops the support enforcement agency from suspending his driver’s and chiropractor licenses. It also stops any future garnishments. Gary now has to do two things: continue making his regular monthly support payments AND arrange to catch up on the $7,500 in support arrearage during the following three to five years. Gary and his attorney put together a three-year Chapter 13 plan to do this. Based on his monthly income and expenses, it obligates him to pay $400 per month (besides the $900 regular support payment) towards ALL of his debts including the support arrearage. That $400 per month will be distributed by Gary’s Chapter 13 trustee, to pay 100% of the support arrearage, and the rest to his other creditors, likely paying these others just pennies on the dollar.
Now if Gary just pays his regular support payment and the $400 monthly plan payment diligently for three years, he will be protected from the support enforcement agency’s collection efforts throughout this time. At the end of the three years he will have caught up on all the support arrearage, and he’ll be current on his ongoing support payments, so the support enforcement agency will have no more reason for any further collection actions against him. Whatever portion of his other debts that will not have been paid through his plan payments will then be discharged by the bankruptcy court and his Chapter 13 case will be closed. Gary will then be debt-free.