One of the things the Pennsylvania Bar Association makes a part of its mission is to review and, where appropriate, comment on legislation introduced for consideration by the General Assembly. These proposed laws cover a large swath of public policy territory. Earlier this year the legislature passed a bill creating a presumption of consent to divorce where a violent crime had occurred between spouses. Today there is a bill to reduce the separation period required to obtain a consent divorce from 2 years to 1. It may well pass before the end of the month. There is another bill to affect how custody proceedings may change upon a parent’s military deployment.
The Family Law Section was recently asked to comment on House Bill 1975, a bill introduced by Representative Todd Stephens of Montgomery County and 18 of his colleagues imposing interest on support arrears. While this writer sees limitations in the bill as currently drafted, the subject is one that certainly merits legislative consideration.
The nub of the problem can be described as follows: Two parents separate on January 1, 2016 and parent A has primary custody of their child. Parent A applies to the court for a child support order and on March 1, a conference is held and an interim order of $1,000 a month is issued. The Court instantly attaches the wages of Parent B and the matter is referred for a hearing to establish a final order. That hearing takes place on June 1 and a decision is rendered setting support at $2,000 a month on June 30, 2016. This means that the support account would be set at $12,000 (6x $2,000) against which there would be credits for the $4,000 for those payments collected under the interim order (Mar, Apr, May, Jun). Thus the account would show what lawyers call an arrearage of $8,000. The technical legal term is called “past due support.” When it enters a final order, courts are also supposed to address liquidation of the past due support. Typically, courts add 10% to the order to reduce the arrearage over time. An award of $2,000 would be increased to $2,200 per month with $200 being applied to eliminate the $8,000 arrearage.
Those facile at long division and the “time value of money” will see the immediate inequity. Parent B paid no support for two months and half the correct amount of support for the next four months while the final order was being decided. At $200 per month it will take 40 months to pay off the overdue support. At the legal rate of 6%, the interest that should be applied to this payout would be about $48 per month or $1,920. But under prevailing law, Parent B gets the payout interest free. So, the effective rate of the payout is not $200 a month but $152.
House Bill 1975 does not change this if Parent B unfailingly remits $2,200 per month as the June 30 order mandated. But if Parent B, fails to make the correct payment amount each and every month, the “past due support” becomes “overdue support.” And that is not just the particular missed payment but all past due support (arrearages). Under Bill 1975, if Parent B paid only $2,100 per month in September, 2016, all past due support would become overdue and subject to interest at the legal rate of 6%.*
*The proposed bill applies interest at 6% or Wall St Journal Prime +1%, whichever is greater.
The statute does not specify the date the interest would be calculated from. Should it be from the date the case was initiated; the date the order became final or the date of the default. There are meritorious arguments for all three dates.
But there is also reason not to apply these interest rates or to apply them at a rate that is today 25% above prime rate. One cannot reasonably defend an interest free loan of what the law defines as essential support for dependent minor children. On the other hand, many if not most support obligors incur unusual expenses at separation (e.g., moving, rental or home purchase deposits and related soft costs) and the economies of one family under one roof are erased. Another concern is the new trend toward spasmodic employment. In the past decade employers have increasingly relied on computer models to instantly add and/or terminate employees. Payor parents who find themselves terminated often forget to put on their “to do” list a visit to modify support based on unemployment. So the employee who neglects to make $2,200 a month payment in the month immediately following his/her termination risks falling into the “overdue support” bin that would trigger interest rates at a time when the payor is least able to make the full payment. Presumably, this might be rectified in subsequent modification proceedings but that requires recalculation of not only the support but any interest which began to accrue.
In a conference call of the state bar association’s family law section, the discussion focused upon the complex interest algorithms that would need to be written to trigger and calculate interest and to revise those numbers if, as, and when a modification is granted. In our example Parent B pays his $2,200 in July, August and September but is fired on September 30 and pays only $1,000 in October. Now his past due support is overdue support and the computer calculates and adds interest to his arrearage. In November, he applies for a reduction and in January, his support is modified to $750 a month because his income is vastly reduced. Are we still charging interest on $7,400 arrearage balance at 6% despite his reduced condition?
Lest we be accused of shilling for the payor, the plain fact is that there are times when lengthy payouts of past due support should be subject to some form of interest. Often Courts routinely apply their unwritten 10% on arrears rule despite the fact that the parties have large deposits that could easily satisfy the arrearage. At its worst, in one case, the arrearage on a $45,000 a month order was well in excess of $1,500,000. Despite the fact that the payor had reported income 5x the arrearage, the Court ordered a token payment of $5,000 a month in reduction of the past due amount. The effect was a 26 year interest free loan. The Superior Court deemed this alleged error to be harmless. See Karp v. Karp, 686 A.2d 1325 (Pa. Super. 1996)
Is there a middle ground? Encourage courts to award modest interest to incentive Payors to liquidate their obligation. Apply it to all final orders but allow it to be suspended where justice would make such accruals inappropriate in the court’s discretion. This might create the proper tension between interest free payment of past due support and debilitating interest assessments against those not really in a position to pay interest. Research provided to us by Summer Clerks Eunice Kim and Kelsey O’Neil informs us that 28 states apply interest on past due support and 40 states charge it on overdue support as H>B. 1975 suggests. When states such as Alabama, Mississippi, and Arkansas are charging 7.5-10% interest, one has to ask whether this is another example of “Carville was right” except that we might be a little less modern.
For a list of which states charge interest and how search http://www.ncsl.org/research/human-services/interest-on-child-support-arrears.aspx