The unfinished business of bankruptcy reform: a proposal to improve the treatment of support creditors.

• Author: Leach, Bryan W.

Amid the controversy surrounding the recently enacted Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (2005 Act), (1) few commentators have focused on the Act's provisions designed to enhance the protection of "support creditors"--a class of creditors consisting mostly of divorcees and single mothers who are owed child support, alimony, or other maintenance but whose former partners have declared bankruptcy. (2) This Comment critiques the recent revisions to the Bankruptcy Code concerning support creditors and concludes that Congress must do more if it wishes to provide meaningful assistance to this vulnerable group.

Proponents of the 2005 Act point to its assignment of higher priority status for matured support claims as evidence of the Act's progressive character. (3) Yet this measure--which bumps support creditors higher up in the queue among other unsecured claimants during liquidation--has little practical value in the vast majority of cases, in which secured creditors' claims exceed the total value of the debtor's assets, leaving nothing for "priority" creditors of any kind. (4) As one commentator quipped, the bankruptcy reform puts support creditors "first in line to receive nothing." (5)

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, (6) 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.

To remedy this problem, I suggest that Congress modify the Bankruptcy Code in three ways. First, Congress should create a statutory hierarchy among nondischargeable claims, with the claims of support creditors taking precedence over those of other unsecured creditors. By establishing a priority system for nondischargeable claims akin to that which currently operates when dividing up the bankruptcy estate, (7) Congress would allay well-founded fears that credit card companies will crowd out vulnerable child support and alimony recipients in the race to recover against the debtor's postbankruptcy assets.

Second, Congress should amend the Bankruptcy Code to include a "springing lien"--a device that automatically grants support creditors the right of first access to a debtor's future income. Such an innovation would prevent commercial lenders from leapfrogging ahead of support creditors by obtaining wage garnishments, a form of secured claim.

Third, Congress should prevent all creditors with nondischargeable claims from claiming against the debtor's future income until any ongoing support-related obligations have been satisfied. This reform would ensure that before paying any outstanding debts--including support-related arrears--debtors would make allowance for their children's and former partners' current expenses.

1. REFORMS BENEFITING SUPPORT CREDITORS IN THE 2005 ACT

   Policymakers have long considered support creditors a particularly vulnerable group. Such creditors often cannot provide for themselves and their children when support payments cease and, unlike commercial creditors, they cannot effectively pool or manage risk. Accordingly, pre-2005 bankruptcy law gave special solicitude to support creditors by designating support-related debts as nondischargeable, (8) allowing support creditors to access otherwise exempt assets, (9) granting support creditors priority status in estate distributions, (10) relaxing the automatic stay for support-collection purposes, (11) and making exceptions to preferential transfer rules for support payments. (12)

   The 2005 Act bolsters these protections in several ways. First, it eliminates the controversial distinction between support claims and marital property settlements. In place of the old balancing test, which required a tribunal to determine whether property settlements would be nondischargeable, the Act creates a brightline rule that all such obligations are nondischargeable. (13) This change will prevent debtors from unfairly mischaracterizing their support debts as property settlements and thereby escaping those obligations.

   Second, the 2005 Act broadens the support-related exceptions to the automatic stay. The most important consequence of this reform is that wage garnishments may persist while bankruptcy proceedings are still pending. (14) Related provisions allow for the interception of tax refunds to satisfy support obligations, withholding of licenses from debtors who default on support payments, reporting of overdue support payments to credit agencies, and enforcement of medical-support obligations. (15)

   Third, in a much ballyhooed provision, the 2005 Act elevates support claims from seventh to first priority status. (16) Within the new first priority category, the Act creates three...