In the bankruptcy case of Larsen, David M.; In re, the bankruptcy court refused to redirect the debtor's funds held by a state court for the support of the debtor's minor children to other creditors.
The details of the bankruptcy case:
The debtor's former wife filed for divorce in 1999. During those proceedings, the debtor transferred marital assets into the Magnum Opus trust of which he was the settlor and beneficiary. The divorce was granted on Jan. 31, 2001. Three years later, the debtor kidnapped and assaulted his former wife. As a result, he was sentenced to 37 years in prison, and she was awarded a civil judgment of $3.4 million. During those legal proceedings, the state family court froze the debtor's assets and ordered that child support for the couple's two minor daughters be paid from the debtor's Fidelity IRA and then from his Federal Thrift Savings Plan. Contrary to the court order that he not deplete or transfer his assets, the debtor directed his father to withdraw the entire balances from the IRA and TSP accounts. The court responded by appointing a receiver to take possession of the assets. Later, the receiver was authorized to sell real estate owned by the debtor in the name of the Magnum Opus trust. Four years later, the state court granted the judgment creditor's motion for an order that the funds in the Magnum Opus trust receivership be used to pay the civil judgment on the grounds that the debtor was the settlor as well as the beneficiary of the trust. On March 31, 2009, the funds were transferred to the attorney's trust account and the debtor filed for bankruptcy, claiming the funds as exempt. The bankruptcy court found that the retirement funds, which were withdrawn and not reinvested by the debtor's father, were not exempt. Although the court found that the debtor retained sufficient interest in the money for it to be included in the bankruptcy estate, the court abstained from asserting authority over the money.
The bankruptcy court also noted that there was no public policy that would allow a debtor to file bankruptcy just to avoid paying child support and/or to redirect payment from his children to other creditors. The bankruptcy trustee acknowledged that the interests of the children superseded any of the interests of other creditors in the bankruptcy case.
When debtors file for bankruptcy it is important that they do so in good faith. When a debtor files bankruptcy with the sole purpose of avoiding payment to certain creditors (including former spouses and children) while favoring payment of others that is a bad faith act and will most likely end in the dismissal of the bankruptcy case.