Domestic Support Obligations (DSO)
Many people who file for bankruptcy owe alimony and child support. Such domestic support obligations are classified as a priority payment that is not dischargeable under any circumstances.
Domestic support obligations (DSO) include alimony, maintenance, and child support. To be classified as a DSO, the debt must be for actual support or maintenance; debts from a division of assets from a property settlement agreement are not included. There are many cases where the determination of the debt as a DSO is not clear; hence, a great deal of case law has developed to distinguish DSO claims from other debts arising from divorce, separation, and child support or from claims that are not actually for support or maintenance, even if the claim is classified as a DSO claim by the claimant.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) has elevated DSO claims from 7th to 1st priority. Their high priority is reflected in how they are treated under bankruptcy law:
- The automatic stay does not stop the collection of DSO claims.
- DSO claims cannot be discharged.
- DSO claims cannot be recovered as preferences. Preferences are extra payments made to preferred creditors, such as a relative or one with which the debtor has a continuing relationship, such as the family doctor. The trustee can generally avoid preferences by forcing the creditor to repay the extra amount to the bankruptcy estate. However, payments for domestic support obligations cannot be retrieved as a preference.
- DSO claims can be enforced against exempt property. Debtors can usually keep exempt property even if they have no other assets or money to pay creditors. Exempt property is generally considered essential for a minimum standard of living. However, even exempt property can be sold to satisfy domestic support obligations.
- Judicial liens for DSO claims cannot be avoided, even if they impair an exemption. Generally, a judicial lien can be reduced by the amount of the exemption, except for a judicial lien for a DSO claim.
- Under Chapter 11, the debtor must pay all current DSO obligations, but not necessarily arrearages, after filing for Chapter 11 before the debtor's payment plan can be confirmed §1129(a)(14); otherwise the case can be dismissed under §1112. Arrearages can be paid in installments according to the confirmed plan.
The top priority for DSO claims actually has 2 sub-priorities. Unlike the other priorities, where every claim within that priority is considered equal, there are 2 sublevels of priorities for DSO claims. Under §507(a)(1)(A), the 1st sub-priority is for the support that is paid directly to a spouse, former spouse, or child of the debtor, or to the child's parent, legal guardian, or other person responsible for the child.
Under subsection (B), a governmental unit that has received an assignment by the spouse or child has 2nd sub-priority.
Although DSO claims have a nominal 1st priority, they share this priority for the administrative expenses of administering the DSO claims by the trustee. Congress enacted §507(a)(1)(C) so that the trustee will be paid to handle the claim. The trustee receives a percentage of the payment that decreases as the amount of the payment increases. For instance, currently, the trustee receives 25% of the 1st $5,000 in payments and 10% of amounts over $5,000 but less than $50,000. Since DSO payments are paid before other unsecured creditors, the trustee's percentage will be the higher percentages that apply to the initial payments.
There may also be a problem for individual debtors with DSO obligations that are operating businesses. A corporation or partnership obviously does not have DSO obligations, but an individual debtor in a Chapter 11, 12, or 13 filing may have, and this may make it difficult for the business to borrow money while the debtor is in bankruptcy. Generally, new credit has a super priority, but only over 2nd priority administrative expenses. Hence, creditors will be reluctant to extend credit to the debtor that has superior DSO obligations.
There are 2 possible solutions that will allow a debtor to obtain credit:
- The trustee can obtain new credit and give it a priority above DSO claims where the credit is necessary for "the actual, necessary costs and expenses of preserving the estate". §503(b)(1)(A) This makes sense since if the business suffers, there may be less money available to pay any claims, including DSO claims.
- The trustee can also give a creditor extending a new loan a lien on unsecured or undersecured property if the trustee cannot obtain credit any other way. This gives the creditor a security interest in the debtor's property. Creditors with security interests in the debtor's property are paid before all unsecured creditors, including those with DSO claims.