Defending Against Preference Actions: The Domestic Support Obligation Exception

The Domestic Support Obligation Exception

Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.
Creditworthy News

While the topics of alimony and support are not usually found on credit pages, it is necessary to give one the full view of Preference defenses. Under the Bankruptcy Reform Act of 1994, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, payments in the nature of domestic support obligations (as defined in Section 101(14A) of the Bankruptcy Code), such as alimony, maintenance, support, or divisions of property are excepted from a bankruptcy trustee’s avoidance action. Specifically, Bankruptcy Code Section 547(c)(7) provides:

(c) to the extent such transfer was a bona fide payment of a debt for a domestic support obligation–

See 11 U.S.C. Section 547(c)(7).

This provision was enacted by Congress as part of a series of Code amendments intended to preclude debtors from using the protection of a bankruptcy case in order to avoid legitimate marital and child support obligations.

It is important to note that in order for this defense to apply to a trustee’s preference action, the creditor must prove that the transfer was a bona fide payment for alimony, maintenance, support, or from a property division. Generally, this is accomplished by showing that the payment arises out of or directly as a result of a separation agreement, divorce decree, property settlement agreement or other order of court within the United States or its territories.

Interestingly, an alimony, maintenance or support debt payment is not protected by Section 547(c)(7) if it is assigned to another entity, by operation of law or otherwise. For example, an alimony support payment cannot be assigned by a spouse to one of his creditors who then receives the alimony payment. In such an instance, the payment is subject to the trustee’s avoidance action.

From a practical standpoint, unless a trustee suspects that alimony, maintenance or support payments are not of a legitimate nature, the trustee will rarely bring an action to avoid such payments as a preference. However, creditors receiving such payments should take all precautions to confirm in writing at or about the time of the payments that the payments were for alimony, maintenance or support.

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