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.