Collecting Support and Arrearages
Published in Chicago Lawyer Magazine, September 2009
By Daniel Stefani
With today’s tough economic climate, the challenge of collecting child support and maintenance arrearages is becoming increasingly difficult. Many delinquent payors are out of work and have little to no cash, liquid assets or equity in their home. Oftentimes, the only asset in the delinquent payor’s control is their 401(k) or individual retirement account.
Under section 5/12-1006 of the Illinois Code of Civil Procedure, a judgment debtor’s interest in or right to the assets in their pension plan, retirement plan and/or IRA are exempt from a judgment creditor.
However, section 15(d) of the Income Withholding for Support Act (750 ILCS 28/15(d)) provides an exception to the protections under section 5/12-1006 for the collection of child support arrearages. Section 15(d) states that income includes any payment from annuity, pension, and retirement benefits and that “any other state or local laws which limit or exempt income or the amount or percentage of income that can be withheld shall not apply.” See also Jakubik v. Jakubik , 208 Ill.App.3d 119, 152 Ill.Dec. 931, 566 N.E.2d 808 (1991) (stating that the exemption of an IRA from judgment is subject to the statutory exceptions for child support and maintenance obligations because public policy favors the payments of these obligations from exempt property to promote the support of the family).
There are two recent cases that have given Illinois courts a better ability to reach a retirement benefit to satisfy these past-due family support obligations. In Re: the Marriage of Thomas , 339 Ill.App.3d 214, 789 N.E.2d 821, 273 Ill.Dec. 647 (Ill.App. 2 Dist. 2003), held that the Employee Retirement Income Security Act of 1974 (ERISA) permits the entry of a Qualified Domestic Relations Order (QDRO) as a vehicle to effectuate the transfer of retirement assets from a delinquent child support payor to the payee ex-spouse to satisfy either a maintenance and/or child support arrearage. The court extended the exception to satisfy a judgment for attorney fees and costs incurred in the collection of the arrearage. It noted the exception to the protections of section 5/12-1006, however, the court limited the amount of retirement benefits that could satisfy the judgment to the value of the retirement account benefits in the ex-spouse debtor’s name held at the dissolution of the marriage between the debtor and payee ex-spouse.
The 3rd District Appellate Court extended in 2008 the payee ex-spouse’s ability to satisfy a child support arrearage to the debtor’s new spouse’s retirement account. In Re the Marriage of Takata , 383 Ill.App.3d 782, 890 N.E.2d 688, 321 Ill.Dec. 966 (Ill.App. 2 Dist. 2008).
In Takata , the debtor ex-spouse remarried and his new wife disclosed that she owned an interest in an IRA that was acquired during her marriage to the debtor ex-spouse. The payee ex-spouse sought to satisfy the child support arrearage with the new wife’s IRA by a turnover order pursuant to section 5/2-1402(c)(3) of the Illinois Code of Civil Procedure against the new wife as a third-party defendant. The payee ex-spouse argued that because the debtor ex-spouse had a marital interest in his new wife’s IRA, the funds could be used to satisfy the judgment.
The trial court denied the turnover because it found that the debtor ex-spouse had a “vague, contingent, highly speculative interest” in the IRA. The appellate court reversed and remanded finding that the debtor had an actual interest in said IRA because it was marital property of the debtor and his new wife, and the IRA was subject to a turnover order.
There was no discussion of the fact that the debtor and third-party defendant were not going through a divorce, which triggers the species of common ownership and the debtor’s interest in the IRA as marital property was not yet realized. This is a defense that could be asserted by any future third-party defendant spouse of a debtor. The debtor and third-party defendant spouse failed to seek an exemption hearing that might have resulted in the turnover not applying to said IRA.
Ultimately, there are potential tax ramifications to these court-ordered transfers that need to be addressed. There are no cases or statutes that deal with these tax issues.
Not all of the arrearage amounts benefit the family. Conversely, when child support is paid, the payee spouse does not pay income tax on the amount received so 100 percent of those dollars benefit the child. The use of a QDRO to satisfy child support arrearages may require the court to consider “grossing-up” the amount to be transferred to allow for the taxation of the gross amount received by the payee ex-spouse. This way the child realizes the full benefit of the support. If the arrearage is maintenance (or spousal support), there is no issue since those payments typically are taxable to the recipient so the payee ex-spouse is in no worse financial condition.
If there is a turnover order entered, as in Takata , the question of who pays the income tax on the money remains. Does the third-party defendant spouse get taxed on the withdrawal? That would create an unfair result. The court should proceed cautiously when crafting these remedies in order to achieve the most equitable result to both the debtor ex-spouse (or their current spouse as third-party defendant) as well as the payee ex-spouse.