During distribution of the proceeds of a debtor’s estate, creditor claims and expenses are paid in a specific order of priority pursuant to title 11 of the United States Code (the “Bankruptcy Code”). Domestic support obligations, which include monies owed to or recoverable by a spouse, former spouse, child of the debtor, or such child’s parents, are entitled to be paid first. Typically, these types of claims are first priority regardless of whether they are filed by the persons to whom they are owed or by a governmental unit on behalf of such persons. However, this top tier priority is not always guaranteed as it can be affected by things such as an untimely filing of a proof of claim or even state-specific laws that are triggered during bankruptcy.
Generally, a creditor may file a proof of claim during a bankruptcy case, effectively saving their spot in the line to be paid. Section 101(10) of the Bankruptcy Code generally defines a creditor as an “entity that has a claim against the debtor.” Courts can and have expanded the statutory definition of a creditor. By doing so, courts confer in the person or entity not only title of creditor, but also the statutory rights and privileges that go with it. For example, some states offer collection agencies for creditors to enroll in as an effort to help collect debts quicker and more effectively. However, state services of this type come with the “catch” of signing over particular rights to the agency. In some cases, this division of rights can be the deciding factor in who is the creditor in a bankruptcy proceeding, especially when it involves a domestic support obligation.
This memorandum examines when a domestic support obligation is afforded first priority distribution during a bankruptcy case and certain events that could possibly alter this determination. Section I explains how the Bankruptcy Code defines a “creditor” and the courts’ analysis of that definition. Section II specifically examines domestic support obligations and where they fall on the priority spectrum after taking state law into consideration. Additionally, this Section will explore proofs of claim under section 726 of the Bankruptcy Code and discuss who can file them, their statutorily imposed time restrictions, and how these restrictions could potentially affect domestic support obligations. Section II will further discuss how the courts’ narrow definition of a creditor and statutory time restrictions interact to potentially result in a lower priority for persons owed domestic support obligations.