"Support Creditors" Under Bankruptcy Reform Law:

Years ago, in the early days of the bankruptcy reform debate, the argument was made that somehow the bankruptcy reform legislation would injure those seeking to collect domestic support obligations from divorced spouses/parents. Given the manifest and unequivocal improvements for these creditors in the legislation, this argument was soon recognized to be unsupportable, and largely disappeared soon thereafter, except for a periodic whisper campaign that the press occasionally still picks up. The relevant provisions are well-summarized in the testimony of nationally-respected child support enforcement expert Philip Strauss before the Senate this year.

Nonetheless, despite this demonstrable improvement of position for domestic support creditors, a residual argument remains. I have seen it many places, but most recently in this new student note , but I have even seen the argument in recent updates to bankruptcy casebooks. So while I pick on this particular example because it just came across my desk, I have seen it elsewhere. The argument typically goes something like this (emphasis added):

A more important but less widely perceived consequence of the 2005 Act is that it indirectly jeopardizes support creditors by increasing competition for scarce postbankruptcy resources. Whereas support creditors once occupied a privileged position as one of the few classes of creditors with "nondischargeable" claims, the 2005 Act allows certain lenders, such as commercial creditors, to more easily pursue their claims beyond the point of bankruptcy, pitting these lenders against support creditors in an unstructured battle for the debtor's future income and assets. Because support creditors are far less adept than credit card companies at recovering debts in this unregulated environment, the 2005 Act effectively reduces support creditors' chances of receiving much-needed compensation.

While intuitively plausible, it turns out that this argument is confused on many levels and rests on a misunderstanding of the nature of debt-collection outside bankruptcy (or as in this situation, after bankruptcy). Outside bankruptcy there are two relevant types of creditors--regular creditors and these support creditors. Making debt of regular creditors nondischargeable after bankruptcy is functionally the same as the nonbankruptcy world, so it is the same analysis.

Ceteris paribus is is certainly the case that in a hypothetical "unregulated environment," institutional creditors could be more adept than support creditors in collecting debts--this is the intuitive argument. But is the non-bankrutpcy world an "unregulated environment"? Of course not. Precisely because of this potential imbalance in power, support creditors have a multitude of protections that regular creditors lack, regardless of how big and bad those creditors may be. These protections include intercept of tax refunds, suspension of drivers licenses and passports, government assistance in collection including interstate collection, and last but certainly not least, prison. So the argument is based on an incorrect premise.

But one need not even be familiar with all of the advantages for support creditors in order to recognize the fallacy of the argument. Again, the relevant benchmark here is simply nonbankruptcy debt collection. Thus, any scenario about life under the bankruptcy reform legislation is identical to life outside bankruptcy generally. As a result, the notion that credit card companies somehow can "beat" domestic support creditors would be reflected in practice outside bankruptcy today. I am not aware of a single shred of evidence that suggests that this supposed scenario actually exists under nonbankruptcy law today. None. If this nightmare scenario were true, then exactly the same competition exists under nonbankruptcy law, and the problem would exist. The reason again is obvious--nonbankruptcy law gives so many advantages to support creditors that the notion that there is some sort of "competition" between support creditors and other creditors is simply a fiction. They are essentially different in kind, not merely degree from one another. Debtors are not paying their credit card debts instead of their support debts, at least not because credit card issuers have some sort of "leverage" that others do not. They are not paying any of them, and if they are not paying their support debts there is no evidence that it has anything to do with the leverage that other creditors have, but for a myriad of other reasons. If the competition was a problem (and there is no evidence that there is), then the solution would be to provide further changes to nonbankruptcy law collection rules.

As Strauss again observes, given the many, many advantages provided to support creditors under nonbankruptcy law, the notion that there is a "competition" either outside bankruptcy or after bankruptcy simply rests on an erroneous understanding of how such debts are collected. The biggest problem support creditors faced, therefore, was debt-collection inside bankruptcy, not this supposed conflict outside bankruptcy. He summarizes the point (emphasis added):

Even when the debtor is not a wage earner, support creditors have numerous and highly significant advantages over other creditors. While this list is certainly not exhaustive, support creditors have the following remedies not possessed by other creditors, and certainly not credit card or other financial creditors: (a) support debts are already reduced to judgments and have the advantages of court process to collect judgments; (b) tax intercept collection; (c) interception of unemployment benefits/worker compensation benefits; (d) free or low cost collection services by the government; (e) license revocation for nonpayment of support; (f) free or low cost interstate collection, including interstate wage withholding and interstate real property liens; (g) criminal prosecution or contempt actions; (h) no avoidance of judicial liens securing the support debt; (i) federal collection and prosecution for support debts; (j) denial of passports; (k) collection from otherwise protected sources: ERISA plans, trusts, and federal remuneration. To say that these advantageous remedies will necessarily result in the collection of support is not possible. Many support debtors are actually quite skillful evaders of support obligations. These same people will probably be just as adept at avoiding collectors from financial institutions. The point to be made, however, is not that support debts will necessarily be collected after bankruptcy, but that the collection of support debt is in no way hampered simply because credit card debt has survived bankruptcy and financial institutions are going to attempt to collect it.

Some have argued that after bankruptcy a support debtor will be inclined to pay credit card debt to retain a credit card and not pay support. Of course, this argument assumes that after bankruptcy the debtor will find an institution willing to extend credit. Even if one did, it seems unlikely that retention of a credit card would be more important than retention of a driver's license, staying out of jail, or keeping a passport. The bottom line as I see it in analyzing S 256 with respect to its effect on the collection of support is to note that the advantages explicit in the bill far outweigh any speculative concerns that some debtors might not pay support if they are left with credit card debt after bankruptcy. What concerns support collection professionals the most in carrying out their duties is not competition with financial institutions outside bankruptcy, but competition with other general creditors, including financial institutions, during bankruptcy. S 256 readjusts the relative strength of support creditors during the bankruptcy process, giving them meaningful, even crucial, assistance. The support provisions of this bill certainly justify the approval given them by virtually all of the national public child support collection organizations in this country.

Again, my request here is simple--I would hope that commentators and scholars studying the effects of the legislation going forward would focus on what the bill actually does and the actual impact it will have, rather than speculative claims and basic factual errors about how debt collection works outside bankruptcy. I have yet to see a critic of these provisions who is either aware or acknowledges the massive protections given to support creditors and to discuss why these are insufficient or insufficient only for post-bankruptcy debts but not nonbankruptcy debts generally. This is not to say that we shouldn't also adopt the Note's policy recommendations on top of what is already done (or other proposals), but that is a separate question.

Toquam (mail):
I think this is another "give me back my Chapter 7" - the amendments gave higher priority to child support (states as well as Moms) in a Chapter 13.

Those non-banned Chapter 7's coulda shoulda woulda barred the credit card debt. Post-petition, Dad would face only the state, Mom and the whole array of child support collection - including something a lot like debtors' prison.

If you try to sum-up those denied a 7, you get above median income plus a formula showing the ability to pay some minimum on credit cards, over 5 years, from income AFTER paying child support in full.

The formulae use the IRS dunning machine - so there is relatively little wiggle room, compared for instance to most family courts assessing child support.

There was a large, principled group arguing for "a fresh start" and retaining Chapter 7 for almost any debtor who wished it.

I'd say the "DRA violated free speech" is a lot like this "limiting Chapter 7 harms children" - it all arises from the mechanism limiting Chapter 7.
11.17.2005 10:14am
rational actor (mail):
While you raise a number of interesting points demonstrating the advantages "support creditors" enjoy relative to credit card issuers, you make a large number of presumptions for which you provide no support whatsoever. First, you fail to discuss the economics of pursuing defaulted debtors, and the fact that there are significant economies of scale that are enjoyed by credit card issuers, who pursue large numbers of debtors, and support creditors who will typically pursue only one. I imagine that there are substantial costs to the individual seeking to learn how to navigate the debt collection system, that substantially raise the cost of doing so to the individual support creditor. While the legal advantages you discuss may mitigate some of this effect, I imagine that the significant scale of organized debt collectors still gives them an advantage. Keep in mind that these debt collectors are engaged in full-time jobs tracking down the debt, while the support creditor is most likely going to be a single mother, trying to raise children on her own while keeping down at least one job -- i.e., substantially disadvantaged.
Second, you chose to put in bold an assertion that retention of a credit card is less important than a drivers license or a passport. I fundamentally disagree; a simplistic refutation of this would be to compare the number of credit card transactions in the US to the number of times a passport is used, or a drivers licensee showed to someone. I can drive as much as I want without a license, and have a low probability of being pulled over. But without the credit card, it becomes more difficult to function.

I have neither the expertise nor the inclination to analyze the totality of your argument, but on a superficial basis, you seem to be ignoring some fairly significant points which lead an unbiased reader to question your conclusions..
11.17.2005 10:40am
Hans Bader (mail):
Why is everyone so solicitous of support creditors as opposed to commercial creditors?

A commercial creditor doesn't cause the events leading to the debtor's bankruptcy. It's just left holding the bag.

By contrast, many support creditors did contribute to the chain of events contributing to the debtor's bankruptcy, by initiating a no-fault divorce.

Most marriages are no-fault divorces initiated by the wife -- the typical support creditor -- over the objections of the debtor -- that is, the husband.

The National Center for Health Statistics of the Centers for Disease Control has data showing that two-thirds of all divorces are initiated by wives, not husbands. Sanford Braver, Margaret Brinig, and other researchers have documented that most of these divorces are no-fault divorces.

Such no-fault divorces drive many modest-income households into insolvency, since a working-class mother and father can make ends meet only by pooling their resources to raise their kid, and by sharing one housing unit.

Once mom kicks dad out, and total housing expenses go up from having to rent two apartments rather than one, dad doesn't have enough money to both pay his own housing expenses and also the child support and spousal support obtained by mom, which are set by the court to ensure that mom continues to enjoy her pre-divorce standard of living.

Why should a support creditor (i.e., the divorced wife), who at the very least shares with her spouse the responsibility for the life event that led to their insolvency (i.e., the divorce), get priority over commercial creditors who had no role in the calamity at all?

In recent years, there has been a terrible double standard: The divorced ex-wife avoids all responsibility for her debts just by filing for bankruptcy (most bankruptcy filers are ex-wives, not ex-husbands). Meanwhile, the divorced ex-husband is forced to take on lots of responsibility, since his alimony, child support, and attorneys fees (i.e., the money the family court typically orders him to pay to his ex-wife's attorney after a no-fault divorce) are all non-dischargeable in bankruptcy.

(This imbalance is not justified by any gender gap in living standards. The oft-cited statistic from Lenore Weitzman's The Divorce Revolution (1986) purporting to show an increase in ex-husbands' living standards after a divorce was inaccurate, as Prof. Weitzman subsequently admitted in a 1996 AP story than ran in the Manchester Union-Leader. Sanford Braver and others have documented that divorced husbands do not fare better than ex-wives after a divorce, even in states where child support collections are low, such as Arizona, and even prior to the passage of the Family Support Act, which led to increased support collections).

Too bad the bankruptcy reform legislation, in order to finally achieve passage, found it necessary to continue the unfair preferences in favor of support creditors.

The bankruptcy reform law has many valuable features, but its treatment of support debtors was not one of them.

Congress should stop pandering to divorce lawyers and their allies in the child support lobby.
11.17.2005 10:51am
Dylan Alexander (mail) (www):
Hans Bader is entirely correct about the inequities of most support debts, quite aside from the issue of collecting them. As far as the "organized" credit card collectors vs. our supposedly single crusading mom, that's simply nonsense. Texas is surely not the only state that provides considerable public resources to tracking, finding, and punishing "deadbeat dads" that owe support. Nor is there a huge problem with ignorant mom's who don't know how to interface with this machinery. Legal aid aside, it's not uncommon after many years go by for a wife to be owed $20k+. Given the quite simple procedures in place to collect this, it's well worth a lawyer's time to take a chunk in return for notifying the AG of the "deadbeat's" address and support obligations.
11.17.2005 11:10am
Gordon (mail):
Recently my wife noticed that the delinquent court-ordered child support payments she had been receiving from her ex-husband had stopped. She called the Court and found out that he had declared bankruptcy right before the law change. So we will find out first-hand what happens under the OLD bankruptcy code.

As for Hans Bader's arguments, a father has a legal, monetary, moral, and ethical responsibility to assist in the continued well-being of his own children. Even if the ex-wife initiates the divorce (my ex-wife initiated her divorce after being the primary breadwinner for her erratically employed husband for 14 years, in addition to all the personal issues which I won't go into), the children would be innocent victims of Hans Bader's combination of ruthless utilitarianism and hectorimg morality.
11.17.2005 11:42am
Andy Freeman (mail):
> Again, my request here is simple--I would hope that commentators and scholars studying the effects of the legislation going forward would focus on what the bill actually does and the actual impact it will have, rather than speculative claims and basic factual errors about how debt collection works outside bankruptcy.

(1) That's not how the game is played.
(2) What fun would that be?
11.17.2005 11:55am
none (mail):
Dylan, I think many states may limit an attorney's ability to take a child support recovery case on a contingency-fee basis. I believe NC does.
11.17.2005 12:07pm
David Berke:
You have to love Hans Bader's argument: Damn those women, if only they'd stay in their miserable marriages, none of this would have happened.

The argument that men don't do better even when they aren't forced to pay child support or alimony is ludicrous on its face. Whether they do when forced to pay such is not a discussion I have enough information to comment upon.

Why favor the support creditor over the commercial creditor? The commercial creditor can spread the risk around, and such occurrences are part of its cost of business. It also accounts for these possibilities in setting interest rates. The support creditor, on the other hand, has nowhere to spread the risk. A child has even less of an ability to deal with the monetary shortfall. Welfare and/or other state involvement may be required to make up for the shortfall, and if necessary, will probably be inadequate. Why get the state involved?

I am not arguing for the maintenance of the current system with respect to child support and alimony in all respects, so please don't tell me about wealthy mothers receiving 75,000 a year in child support / alimony or other injustices within the system itself, as they are not relevant to this argument.
11.17.2005 12:59pm
Richard Riley (mail):
Gordon, your own situation raises some of the child support inequity issues that commenters here are concerned about. If your wife was the primary breadwinner in her family for 14 years, why couldn't she support the children on her own after the divorce she initiated, and why is she going after the ex-husband now? Why continue the frustrating money chase and attendant misery? You mention "legal ... moral and ethical responsibilities." I had those in spades in my divorce. Litigation and enforcement actions are mighty blunt instruments for vindicating such things.
11.17.2005 1:01pm
Houston Lawyer:
I'm going to have to side with Hans Bader on this one. While I agree that divorced fathers have a moral obligation to support their children taken from them by their ex-wives and the state, I believe that most states enforce divorce laws in such a manner that they should be deemed to obliterate any legal obligation to do so. That being said, I can hardly feign sympathy for credit card companies who will open up an account in a husband's name based upon a wife's signature. I suggest that we combine divorce and bankruptcy into one court filing, it would save a lot of effort.
11.17.2005 1:04pm
TZ: good post. Didn't read all the lengthy comments above. But merely highlighting this ignored fact re: non-bankruptcy law does this field a service. I suspect that alot of the heat that the BCPA takes for being manifestly injust is from folks who study social justice alot more than debtor/creditor law. Simply put, raising the cost of not paying to runaway fathers lowers the benefit to them of so fleeing. Well done.
11.17.2005 2:28pm
Dick King:
Can anyone explain to me why it's even remotely constitutional for a person to spend months in jail without ever having faced a jury of his peers?

11.17.2005 2:31pm
Dick King:
Is anyone besides me appalled by the menialness of the jobs held by the people on lists like these and the amount of money that's expected of them?

11.17.2005 2:51pm
Typo above: Raising the cost lowers outweighs the attendant benefit in so fleeing
11.17.2005 4:13pm
Per Son:
Houston Lawyer: what do you mean by Ex-wives and the state take the father's children away. Unless the parties agree, there is a custody hearing where the parents get to duke it out. I am still not understanding why divorce law as it is practiced should eliminate one parent's duty to support their children.
11.17.2005 4:32pm
Houston Lawyer:
I don't know the exact statistics, but I believe that in custody fights, the children go to the ex-wife about 90% of the time. Last time I sought a quote, a good divorce attorney sought a retainer of $25,000 per child for a custody fight. So I guess you could call it consensual if a man decides not to spend that kind of money against those kinds of odds. There are other words for that though.
11.17.2005 5:03pm
Paul Gowder (mail) (www):
Todd: your argument doesn't work. Sure, support creditors have a lot of advantages outside of bankruptcy. But that's not the point. In a pre-bankruptcy-act world, they might be the only debt left over. In a post-bankruptcy-act world, they're less likely to do so. So unless you think support creditor's advantages give them complete dominance in out-of-bankruptcy collection (which isn't true, because tax return interception etc. only go so far), then the fact that other creditors will be competing with them after bankruptcy must still impair support creditors' powers to some extent. Even if that extent is smaller than the student note author's argument suggests.
11.17.2005 5:03pm
Per Son:
Houston Lawyer:

Do you really think most people going through divorces have ($25,000) to spend on an attorney?

The fact is simple - the people most likely to be hurt from lack of alimony and/or child support are likely to be the most likely to not afford a high-price divorce attorney.

Lastly, mothers do not get custody 90% of the time. The split is usaually fathers around 10, mothers around 45 and both around 45.
11.17.2005 6:05pm
Houston Lawyer:
No, I don't think people normally have $25,000 to spend on a divorce, hence the larger number of women who end up with custody of their children, the default position. Your statistics don't add up for me. The fact remains that women are far more likely to initiate divorce and the state basically encourages them to do so by stacking the odds of keeping custody of the children in their favor. If men reasonably believed that they had an even chance of keeping custody of their children, they would fight for it much more often.

I have no respect for deadbeat parents of either sex, but 2/3rds of the time it is the woman who sues for the divorce. It is the divorce that consequently leads to the bankruptcy. If the custody laws were changed, there would be fewer divorces requiring the payment of child support, and consequently fewer bankruptcies.
11.17.2005 6:48pm
Per Son:
10 plus 45 plus 45 = 100. How does that not add up?

Without looking at why women seek divorce, how can the rate alone tell us anything? Additionally, I have no proof, but I would not doubt that men are less likely interested in full custody in the first place.

Additionally, why do custody laws have an effect on divorce? Do you have any evidence of this? Did you consider that because men are more prone to violence, drug use, and infidelity, women would be more prone to leave such men?
11.17.2005 7:13pm
Hans Bader (mail):
Re: Overstating dad's chances in divorce court:

Per Son's suggestion that joint custody occurs in 45 percent of all cases probably refers to joint LEGAL custody, not joint PHYSICAL custody.

Often, the divorced dad is given joint LEGAL custody, but that does not change the fact that it is the divorced mom who gets primary PHYSICAL custody. PHYSICAL custody is what really matters, and that's what divorced dad doesn;t get. (To use an imperfect analogy: Queen Elizabeth is the LEGAL ruler of England, but Tony Blair is England's actual ruler.)

Joint legal custody doesn't necessarily mean you get the kid half the time; it just means that you get input into significant decisions affecting the child, and relatively generous visitation (thus, a father with joint legal custody might get the kid one-third of the time, versus roughly a sixth of the time for a father with no legal custody at all).

In any event, I question whether fathers really do get joint legal custody 45 percent of the time. In my home state of Virginia, the figure is far lower.

By the way, contrary to Per Son's contention, the infidelity rates for husbands and wives aren't much different. Indeed, a Ball State study suggests that among the youngest couples, infidelity rates are marginally higher among women.

That may be a function of the fact that infidelity can lead to a divorce, and the economic costs of divorce, which were once higher for women than for men, are now higher for men than for women (coupled with the likelihood that a father probably will not receive PHYSICAL custody of his children).

(The greater economic cost reflects increasing support awards and collections benefiting ex-wives since the 1980's and the advent of equitable distribution in the 1970's; note that even men who are very poor or worked to put their wives through college seldom receive alimony, unlike ex-wives, who often receive alimony despite having fairly similar incomes to their ex-husbands).
11.18.2005 11:26am
D Lacey (mail):

It is not likely to be true that no commercial creditors cause the events leading to bankruptcy. Some probably do, at least are implicated in the causal chain. Through dishonest lending practices in some cases, and honest attempts to help in others, or simply granting more credit than the person could legitimately have been expected to take on.
11.18.2005 4:03pm