Circuit Court: Disallowed Portion of State’s DSO Claim Not Subject to the Discharge Injunction

Circuit Court: Disallowed Portion of State’s DSO Claim Not Subject to the Discharge Injunction

Debtors filed for Chapter 13 bankruptcy protection. The Department of Social Services (“DSS”) filed a proof of claim in the amount of $36,026.27 for an unsecured domestic support obligation (“DSO”) to pay spousal and child support arrears to husband’s prior spouse. See 11 U.S.C. § 501. DSS then determined it had improperly calculated husband’s support obligations under the state court’s divorce decree after the children’s emancipation. DSS filed an amended proof of claim for $88,026.27 three months after filing its initial proof of claim.

The Debtors objected to the amended proof of claim on multiple grounds, see § 502(b), including their contention that the greater support payments now claimed by MDSS had been “waived by acquiescence” under state law. MDSS responded to the objection, arguing that husband should have known he was obliged to pay the greater amount based on two mailings stating the correct obligation. After a hearing, the bankruptcy judge sustained the debtors’ objection, disallowing the amended proof of claim. See § 502(b)(1). DSS did not appeal that order.

Subsequently, the bankruptcy court confirmed the Debtors’ Chapter 13 plan, which required $600 per month payments to DSS on its $36,026.27 allowed claim. The Division did not object to the plan. After the Debtors completed payments under the plan, they applied for and received a bankruptcy discharge. See § 1328(a). Six weeks later, DSS issued an Income Withholding Order, garnishing husband’s wages to collect $52,000 for the past-due, disallowed DSO debt plus additional interest. Instead of contesting the garnishment under state law, the Debtors’ attorney filed a motion for sanctions, arguing DSS’s collection action willfully violated the discharge injunction. See § 524(a) (effect of discharge). After a hearing, the bankruptcy judge agreed and ordered DSS to cease attempting to collect the debt in violation of the discharge injunction and, as a contempt sanction, to pay the Debtors’ attorney’s fees in the amount of $1,335. DSS appealed that ruling to the Bankruptcy Appellate Panel.

The BAP reversed the contempt order sanctions, concluding the bankruptcy court abused its discretion because a discharge injunction “does not apply to a nondischargeable domestic support obligation, even the disallowed portion,” and therefore DSS’s attempt to collect a prepetition DSO did not willfully violate the discharge injunction. The Debtors appeal the BAP’s decision to reverse the contempt order sanctions.

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