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Bankrupt Man Must Allow Seizure of Tax Refunds to Pay Child Support Arrears - New Hampshire v. McGrahan

January 25, 2012

Vincent Howard and our team of Rubidoux personal bankruptcy lawyers frequently counsel clients about the fact that child support payments are not dischargeable in bankruptcy. This is built into bankruptcy law and is very difficult to overcome, but we're often able to make enough room in the client's budget to make payments workable -- and bankruptcy allows some debtors a much-needed chance to catch up on arrearages. In State of New Hampshire v. McGrahan, debtor Robert McGrahan planned to pay off his past-due child support through his bankruptcy, but had to modify his plan because the state Department of Health and Human Services seized his income tax refund to reduce the arrearage. The bankruptcy court ultimately decided to disallow any further seizure, but the Bankruptcy Appellate Panel of the First U.S. Circuit Court of Appeals reversed.

McGrahan filed for Chapter 13 bankruptcy in September of 2009, listing the New Hampshire DHHS as a creditor for $13,000 in child support. His first amended plan noted that the DHHS would seize his income tax refunds annually and the proof of claim amount would be lowered. After the plan was confirmed, the DHHS seized $4,257 in tax refunds, but did not amend its proof of claim; McGrahan's trustee continued paying off the full amount. More than a year into the bankruptcy, McGrahan filed an amended proof of claim for the full amount owed to DHHS minus the seizure, and asked to remove the income tax seizure language as overly burdensome. DHHS moved in response for a ruling allowing it to continue seizing tax refunds. The bankruptcy court denied this, finding no interception is allowed if the bankruptcy plan will pay off the full amount owed. DHHS appealed.

In its analysis, the First Circuit BAP said the issue was whether the effect of the plan's modification was to prevent further tax refund seizures. Though confirmed plans are generally considered final, the panel said, this is only true when the issues were actually litigated by the parties; it found that the tax refund seizures were not. It said the silence in McGrahan's second modified plan on the issue of refund seizures cannot be taken as prohibiting the interceptions. Furthermore, the bankruptcy court itself had ruled earlier in the case that nothing in the first amended plan prohibited DHHS from exercising its right to collect, the panel said -- and that ruling is now the law of the case. Thus, the First found that the bankruptcy court erred in ruling that the tax refund interception is not permitted, and reversed that decision.

At Howard Law, P.C., our Newport Beach consumer bankruptcy attorneys often help clients wrestle with the issue of how to handle child support payments. Clients sometimes come to us after they've fallen far behind in their payments due to financial difficulties, and the state in which they owe support has taken a drastic measure like seizing their tax refunds or garnishing their wages. Vincent Howard and our team of Carson individual bankruptcy lawyers can help clients undo this damage and work out a way to repay what they owe through bankruptcy, often by limiting what they owe on debts that are dischargeable. However, we agree with McGrahan that filing an amended plan each year is burdensome, particularly if the state is not going to amend its proof of claim to reflect the lowered amount the debtor owes.

Howard Law, P.C., is led by experienced bankruptcy attorney Vincent Howard and represents Californians of all backgrounds and walks of life who are considering bankruptcy as a way to handle serious debt. To learn more or set up a consultation, send us a message through our website or call 1-800-872-5925.

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