Many people who file bankruptcy rely upon the support of regular child support or alimony payments to meet their basic needs, and many are owed large amounts of past due child support or alimony from the other parent. Bankruptcy law generally protects a debtor’s right to receive these domestic support benefits but this right is not absolute. When a debtor in Minnesota files bankruptcy, they may choose to use either “Federal exemptions” (those provided in the Federal Bankruptcy Code) or “State exemptions” (those provided for under the Minnesota Statutes and other applicable Federal law) to “exempt,” or legally protect their property from being taken to pay creditors. This is important because debtors in a chapter 7 bankruptcy case may have to surrender money or property that is not exempt to the trustee to pay their creditors. It is also important in a chapter 13 case, as the more property that is not exempt, the higher their monthly payment, because they are required to pay to their unsecured creditors, at minimum, the value of the nonexempt property.
It is a very good idea for a person considering filing for bankruptcy to speak with an experienced bankruptcy attorney before filing their case to help them determine whether using State or Federal exemptions will better protect their property. Which type of exemptions the debtor chooses will specifically impact how the debtor’s right to receive child support or alimony will be treated in their bankruptcy case.
Under State exemptions, the Minnesota Statutes treat alimony like income earnings. Accordingly, just like with wages earned from an employer, alimony payments are exempt, and protected, up to 75%. This includes any unpaid alimony still owed to the debtor and even includes alimony already paid to the debtor for up to 20 days. This means that 75% of already-received alimony payments are exempt, even if placed in the debtor’s bank account, so long as the exempt property is traceable to an alimony payment. This ability to trace the money in the debtor’s bank account can be difficult, particularly if the debtor frequently deposits funds from other sources (i.e. wages) into the bank account. Under the Federal exemptions, a debtor’s right to receive alimony is exempt “in an amount reasonably necessary for the support of the debtor.” Sometimes, the ex-spouse may owe the debtor huge amounts of unpaid alimony. In these kinds of cases, when the debtor chooses Federal exemptions, the large majority of the unpaid alimony will likely be considered exempt and protected. However, if the unpaid amount of alimony owing to the debtor exceeds the basic needs and support of the debtor, the portion in excess of such needed support may be considered not exempt. It is also notable that it is only the debtor’s right to receive future alimony payments that are exempt under Federal exemptions and any such alimony becomes nonexempt upon being actually received by the debtor.
State exemptions fully protect both a debtor’s right to receive child support as well as child support that the debtor has already received. Again, as is the case with already-received alimony, the debtor must be able to trace any funds they have to the child support they have already received in order to claim those funds exempt. If the debtor chooses Federal exemptions, the right to receive unpaid child support is also exempt in an amount reasonably necessary for the support of the debtor. Just like with alimony, if the debtor is owed an excessive amount of unpaid child support, the amount above what the debtor needs for their basic support could be considered as not exempt. Also, like with alimony, the Federal exemptions only protects the debtor’s right to receive child support but does not protect already-paid child support once received by the debtor.
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This is a general overview of how bankruptcy law treats child support and alimony in a bankruptcy. One should consult with an experienced bankruptcy attorney for more specific information and advice on how their right to receive domestic support will be handled in their specific bankruptcy case. See us at LifeBackLaw.com!
