|The Unfinished Business of Bankruptcy Reform: A Proposal To Improve the Treatment of Support Creditors|
|Bryan W. Leach, Sunday, 16 October 2005 [View as PDF]|
115 Yale L.J. 247 (2005)
Amid the controversy surrounding the recently enacted Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (2005 Act), few commentators have focused on the Act's provisions designed to enhance the protection of "support creditors"--a class of creditors consisting mostly of divorcées and single mothers who are owed child support, alimony, or other maintenance but whose former partners have declared bankruptcy. 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. 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. As one commentator quipped, the bankruptcy reform puts support creditors "first in line to receive nothing."
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.
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, 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.