Law Tips: Is Unpaid Child Support an Asset in the Child’s Subsequent Bankruptcy? Maybe.

There are possibly enormous repercussions for bankruptcy clients from the ruling in Perkinson v. Perkinson, 989 N.E.2d 758 (Ind. 2013) per Tom Yoder, Barrett & McNagny, Fort Wayne. Tom recently raised a red flag concerning this domestic relations case during the 2014 Indiana Law Update. He is generously providing our Law Tips readers with his insights on the issues he sees developing.

In a case of some significance to family law practitioners, the Indiana Supreme Court, in the strongest language possible, declared void as a matter of public policy any agreement between divorced parents excusing the payment of child support in exchange for giving up child visitation time. As Justice David wrote, “It is incomprehensible to this Court to imagine that either parent would ever stipulate to give up parenting time in lieu of not paying child support.” Yet, that is precisely what happened in this case and, in striking down such agreements, Justice David made clear no court should ever allow it to happen again.

All well and good, but of what bankruptcy relevance is this decision? In the course of its opinion, the Court made the following comments: “Even if it is not in a child’s best interest to visit with a parent, it is still in that child’s best interest to be financially supported by that parent. It is well established that the right to child support lies exclusively with the child and that a custodial parent holds the support payments in trust for the benefit of the child.” Sickels v. State, 982 N.E.2d 1010, 1013 (Ind. 2013) citing In re Hambright, 762 N.E.2d 98, 10l(Ind.2002); Hicks v. Smith, 919 N.E.2d 1169, 1171 (Ind. Ct. App. 2010), trans. denied. Custodial parents who receive child support funds act as a trustee, and, “as a constructive trustee, [the custodial parent] may not contract away the benefits of the trust.” Nill v. Martin, 686 N.E.2d 116, 118 (Ind. 1997). To do so would violate the fiduciary duty the custodial parent owes the child in relation to any child support funds.”

In other words, the right to child support, and presumably the right to enforce child support obligations, ultimately belongs to the child, not the custodial parent who acts merely as a “constructive trustee.” Accordingly, neither parent has the right to bargain away the child’s support rights or, in bankruptcy parlance, take the child’s “property.”

Therefore, subject to the applicable statute of limitations, do individuals filing for bankruptcy relief in Indiana now have a duty to list all unpaid child support, even from years past, as assets on their bankruptcy Schedules and in their Statement of Financial Affairs? Do debtors’ counsel now have an affirmative duty to inquire of potential clients whether their parents ever divorced and, if so, were all child support obligations paid? More significantly, may bankruptcy trustees in such cases now bring Adversary Proceedings for turnover against nonpaying parents to recover unpaid child support on behalf of the child’s (now presumably an adult) creditors?

To date, there do not appear to be any reported Indiana bankruptcy decisions on the issue. However, in time, aggressive trustees searching for non-exempt assets from which to pay administrative expenses and unsecured claims are sure to make the effort. Considering the amount of unpaid child support existing at any point in time in Indiana, the amounts in controversy could well be enormous.

Author’s further comment: This is a clear case of Yoder’s Law of Unintended Consequences. I very much doubt Justice David had any idea he might be opening Pandora’s bankruptcy box when he ended the practice of divorced parents entering into child support/visitation exchange agreements. By trying to help children of divorce, he ironically may have inadvertently opened another potential avenue of post-dissolution family discord.   The unanswered question is how far Bankruptcy Courts will be willing to extend this decision to debtor/creditor relations.

We appreciate Tom Yoder’s contributions to ICLEF, both as an ongoing faculty member and a participant in Law Tips. Tom’s comprehensive bankruptcy law presentation is a portion of the 2014 Indiana Law UpdateTM as On Demand Seminars. Are you aware that under the MCLE rule you may take up to 6-hours of your 36-hour requirement by viewing an ICLEF On Demand/Online Seminar?

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About our Law Tips faculty participants:
Thomas P. Yoder is a partner with law firm of Barrett & McNagny LLP in Fort Wayne, Indiana, and concentrates his practice in the areas of business bankruptcy, creditors’ rights and general insolvency matters. He is a Fellow of the American College of Bankruptcy. He has also written and lectured extensively on bankruptcy and  insolvency-related topics and is a co-author of Bankruptcy- A Survival Guide for Lenders (First ed. 1997; Second ed. 2008), published by the American Bankruptcy Institute and winner of the ABI’ s Outstanding Publications Award (1997).

Anne E. Simerman was a co-author of the Indiana Law Update materials used in this article.  She  is a partner with the law firm of Barrett & McNagny LLP, and concentrates her practice in the areas of Commercial and Consumer Finance, Commercial Law and Bankruptcy, as well as general corporate and business law. She is a contributing author to Bankruptcy: A Survival Guide for Lenders, American Bankruptcy Institute, Deborah L. Fletcher and Thomas P. Yoder 1st Ed. (1997). She has contributed to ICLEF’s Annual Update on Bankruptcy and Commercial Law (2003-2013) and numerous other related CLE programs.

About our Law Tips blogger:
Nancy Hurley has long-standing connections with Indiana lawyers. She was formerly a member of the ISBA and IBF staffs for over 30 years. Nancy’s latest lifestyle venture is with ICLEF. We are utilizing her exceptional writing and interviewing skills while exploring how her Indiana-lawyer background fits with ICLEF’s needs. When she isn’t ferreting out new topics for Law Tips, her work can be found in our Speaker Spotlight blogs, postings on the ICLEF Facebook and Twitter pages, and other places her legal experience lends itself.

Thank you for reading Law Tips. You may subscribe to this weekly blog through the RSS link at the top of this page.  Also, you are encouraged to comment below or email Nancy. She welcomes your input as she continues to sift through the treasure trove of knowledge of our CLE faculty to share with you.

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