Kentucky Bankruptcy Law

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Overcoming a “Presumption of Abuse” in Chapter 7 Bankruptcy

Overcoming the “presumption of abuse” in Chapter 7 bankruptcy is not always as daunting as it may sound. In order to qualify for an individual Chapter 7 one either must have predominantly business debts or qualify for it under a “means test”. The means test essentially looks at your household income for the six month preceding the month in which the bankruptcy is filed. Certain things can be deducted out of that income as well as certain standardized costs of living. Once the information has been run through the formula, a potential debtor either falls under the median income for their household size and state of residence, thus qualifying for a Chapter 7, or it does not.

One might be tempted to think that failing to fall under the median income is the end of the story and they cannot file a Chapter 7 (they almost always can still do a Chapter 13). This is true for the majority of persons where the presumption arises. However, it is not automatically the end of the analysis that your bankruptcy attorney should engage in. They need to also explore any changes in circumstances that would justify going into the Chapter 7 anyway.

So, having an income above the median only creates a “presumption” that doing a Chapter 7 would be abusive of the bankruptcy process. This presumption can be overcome by a showing of a change of circumstances. For example, a sudden change in one’s health could decrease the current income or increase health costs that can be deducted from that income. Such a sudden event may not show up in the means test results for months since one is looking at a six month snapshot but, one may not be able to wait that long to file.

The way to overcome that presumption of abuse requires your attorney to prepare two extra documents. First, they should prepare a sworn statement for you to sign (an affidavit) that explains the change in circumstance that justifies overcoming the presumption. Second, they should prepare a mock means test showing what that change in circumstances would look like over time. These can be filed  concurrently with the petition.

The United States Trustee would look at these extra documents and make their own determination whether to pursue dismissal of the Chapter 7 or decline to pursue it. Even if the US Trustee declines to pursue the presumption of abuse dismissal, individual creditors could still pursue it, though they are unlikely to do so.

November 19, 2014 Posted by | Bankruptcy, Chapter 13, Chapter 7 | , , , , , , , , , , , , , | Leave a comment

Friends, Family, and the Debt Dilemma

When faced with bankruptcy, people hate to turn away from family that have helped them. The natural and common thing to do is try to repay those family members instead of other debts or to protect family assets by giving them away. This very human reaction may be understandable, but under the law it is not forgivable. Such transfers can create real problems for yourself and for the family you were trying to help.

The bankruptcy code provides for a trustee over a Chapter 7 estate to go after assets transferred prior to the filing of a Chapter 7. These transfers can take the form of favorable repayment of one (or some) debts over others or in the form of a gift. A favorable repayment may constitute a “preference” and a gift may qualify as a “fraudulent conveyance (or transfer)”. When the person receiving the preferential payment or the gift is a family member, the bankruptcy code is especially tough. The trustee can go after preferences made up to a year prior to the filing of the bankruptcy if made to an “insider”. Family members are insiders by definition.

Trustees can go after fraudulent transfers (gifts) to insiders made two years prior to filing under the bankruptcy code. However, one cannot rely on that two-year period because the bankruptcy code also has a “strong arm” provision that allows trustees to use state law to go after preferences and fraudulent transfers. In Kentucky preferences are treated the same, but the reach back period for fraudulent conveyances to insiders is five (5) years prior to the filing date.

Two situations recently came to me that point out the need for caution. In the first situation, a person borrowed from a close relative to put into a business. They intended to pay this relative back in a lump sum from a retirement account, but then it began looking like a Chapter 7 might be imminent. This would have created a double impact: first, exempt fundsthat would have ridden through the bankruptcy would have been converted to non-exempt funds and second, the trustee would have pulled that large lump sum payment back into the estate from the relative. From those reclaimed funds, the trustee would pay himself a percentage and the rest would have gone to unsecured creditors. This is a good example of a preferential payment within a year of bankruptcy to an insider. The retirement would be gone and the relative would remain largely unpaid (they would be treated the same as any other unsecured creditor and recieve cents on the dollar).

The second situation involved a person who had racked up considerable unsecured debt and had their personal residence secured to the hilt, but they owned several acres in another state free and clear of any lien. It was important to this person to retain the out-of-state land because it contained a family cemetery. They wanted to give the land to someone else to keep it in the family. Unfortunately, this would have been a fraudulent conveyance and the land would be taken and sold by the trustee with proceeds going to unsecured creditors. The cemetery itself would likely be protected and the family could still access it, but ownership of it and all the surrounding acreage would leave the family.

With a five (5) year reach back in Kentucky anyone would be hard pressed to plan for hard financial times well enough to preserve such an asset, but this example highlights the importance of sitting down with a bankruptcy practitioner who will help devise a comprehensive plan. In this scenario and with other factors beyond the limits of this posting (such as the age and health of the debtor), delaying bankruptcy by using this land as collateral to obtain enough funds to live on would be a wise alternative.

October 17, 2014 Posted by | Bankruptcy, Chapter 7, Discharge | , , , , | 1 Comment

Hidden Debt Collection Mechanism

Despite the fact that notices of judgment liens are sent to the Debtor, such notices are often ignored, misunderstood, or forgotten by the time the Debtor files bankruptcy. So, it is important for the Debtor to go down to the County Clerk and get a copy of ALL active liens against real estate. Since nothing bad immediate happens with a judgment lien against property, people tend to overlook them, so they are a hidden debt collection method that could survive bankruptcy.

In a Chapter 7 or a Chapter 13, one can avoid a judicial lien on property that impairs an exemption pursuant to 11 USC Sect. 522(f).  The most common way this plays out is that a creditor has filed suit, obtained a judgment, and then filed a lien on that judgment against your real property. This lien can sit dormant against your home for fifteen years, but it must be satisfied if the property is ever sold. Or, the creditor may pursue foreclosure but they rarely do that unless they believe there is enough equity in the property.

In order to strip off the judgment lien, your bankruptcy attorney must file a motion within the bankruptcy as a contested matter. In other words, if your attorney does nothing else, then the lien will survive the discharge. Previously, this was done within the plan of a Chapter 13, but the local rules have changed so that it must be done by motion in both Chapter 7 and Chapter 13 bankruptcies.

If your attorney was unaware or the judgment lien or otherwise failed to file that motion to strip the lien, not all is lost. A decision in the Eastern District of Kentucky Bankruptcy CourtIn re Cross, Case No. 93-50547, the Debtors failed to strip the lien off their real property while the bankruptcy remained open. Twenty months after the case closed, the Cross’ reopened the bankruptcy and moved to have the lien stripped. Despite the passage of time and the creditor arguing that the Debtors waived the right to strip the lien based on so much time passing, the court still granted their motion.

October 15, 2014 Posted by | Assets, Bankruptcy, Chapter 7, Discharge, Exemptions, Property (exempt, Security interests | , , , , , , , | 1 Comment

Second Home Loans: Disappearing debt

Well, I cannot actually make a second mortgage disappear, but I might be able to strip it off of your house and make it an unsecured debt instead of a secured debt.

In a Chapter 13, one can “value” the amount of a secured debt under 11 USC Sect. 506. Essentially, when one files a Chapter 13 a secured debt is only secured up to the value of the property it is secured against. There are some exceptions which I will not go into. If you own a home and have a second mortgage, then that second mortgage might be completely underwater. That is, there is no equity left to which the secured debt can attach. If that is the case, it can be “stripped” off of the property and treated as an unsecured debt.

However, if the lender can prove that there is even $1.00 worth of equity, the courts in the Sixth Circuit (including Kentucky) will not strip the loan off; it has to be paid in full to keep the house just like the primary loan. The rationale is that as one pays down the principal on the primary loan, more and more equity is realized to which that second loan can attach.

September 26, 2014 Posted by | Assets, Bankruptcy, Chapter 13, Exemptions, Foreclosure, Plan payments, Pre-filing planning, Property (exempt | , , , , , | 1 Comment

Dormant Debt Device

You can avoid a judicial lien on property that impairs an exemption pursuant to 11 USC Sect. 522(f).  The most common way this plays out is that a creditor has filed suit, obtained a judgment, and then filed a lien on from that judgment against your real property. This lien can sit dormant against your home for fifteen years, but it must be satisfied if the property is ever sold. The creditor may pursue foreclosure but they rarely do that unless they believe there is enough equity in the property.

In order to strip off the judgment lien, your bankruptcy attorney must file a motion within the bankruptcy as a contested matter. In other words, if your attorney does nothing else, then the lien will survive the discharge. Previously, this was done within the plan of a Chapter 13, but the local rules have changed so that it must be done by motion in both Chapter 7 and Chapter 13 bankruptcies.

If your attorney was unaware or the judgment lien or otherwise failed to file that motion to strip the lien, not all is lost. A decision in the Eastern District of Kentucky Bankruptcy Court, In re Cross, Case No. 93-50547, the Debtors failed to strip the lien off their real property while the bankruptcy remained open. Twenty months after the case closed, the Cross’ reopened the bankruptcy and moved to have the lien stripped. Despite the passage of time and the creditor arguing that the Debtors waived the right to strip the lien based on so much time passing, but the court rejected that argument.

For a judgment to qualify to be voided (stripped off) it must impair the exemption amount that the debtor claims in the property. Many debtors do not even know they have a judgment lien in their property so, it is important to go to the country clerk and obtain a copy of any active liens for your lawyer to evaluate.

September 24, 2014 Posted by | Assets, Bankruptcy, Chapter 13, Chapter 7, Exemptions, Planning, Pre-filing planning | , , | Leave a comment

Chapter 13 Flexibility: A parting of ways

Many of my posts espouse the flexibility of a Chapter 13 bankruptcy. Two of the ways that a Chapter 13 shows its flexibility are the absolute right to dismiss the bankruptcy under 11 U.S.C. Sect. 1307(b) and the somewhat limited right to convert the 13 to a Chapter 7 under 11 U.S.C. Sect. 1307(a). These two diverse directions of flex can actually happen concurrently in a Chapter 13.

Let us presume that a married couple files a joint Chapter 13. If one of the spouses comes into to funds that would be non-marital under State law and that are sufficient to resolve the debt issues leading to bankruptcy in the first place, then that spouse can voluntarily dismiss their Chapter 13. They essentially step out of the bankruptcy and it becomes an individual Chapter 13 even though the parties remain married.

Then, the lawyer needs to engage in a second level analysis as to whether the remaining spouse continue the Chapter 13 or convert based on various factors, including: that spouses assets and whether any are not exempted, if they have arrears for secured debts they still need to cure, and if they have any income tax debt they need to cure through the Chapter 13.

September 22, 2014 Posted by | Bankruptcy, Chapter 13, Chapter 7 | , , , , , , | Leave a comment

The danger of short term loans on your house

You home is an incredible source of collateral for loans when there is equity (value minus debt secured against it), but there is also danger in using your home this way. There are still lenders who will do rather large, short-term loans secured against a private residence. These loans can be tempting because they often will provide for relatively low-interest loans. However, they can be dangerous. especially when they are balloon loans. Such loans are seductive because they have low monthly payments with a final huge payment due at the end.

I have seen these often used by people trying to get a business venture off the ground. However, people sign up for them for many reasons. The business folks are essentially betting on having a solid and very profitable business going in three to five years. I admire their confidence, but most businesses that survive take three years just to start making a modest return. And so, many find their balloon payment looming without adequate resources to cover the debt. Sometimes banks will roll it into a new loan, but there is no guarantee of this. Therefore, it is wise to talk to a lawyer who knows about bankruptcy prior to that maturity date.

Banks like loans against your personal residence because the revisions to the bankruptcy code back in 2005 gave special treatment to loans secured solely against one’s residence. Basically, 11 USC Section 1322(b)(2) prevents such loans from being modified in a Chapter 13 bankruptcy. Therefore, the only thing one can do is cure the arrears through the bankruptcy, but the underlying agreement remains intact. There is a nice little exception, though, found in 11 USC Section 1322(c)(2) for loans that come due DURING the Chapter 13. So, if one times things right and files a Chapter 13 BEFORE the last payment on your short-term loan is due, a Debtor CAN modify that loan to some extent.

The most likely use for this exception is to move the maturity date of the loan out for the duration of the Chapter 13 plan and thus provide for the cure of arrears on that loan. The Debtor still has to show that the lender is adequately protected, but that hurdle is usually overcome easily with real estate that is either holding its value or increasing in value. This is NOT a complete remedy, but it can buy more time for a Debtor to either find alternative financing that has no balloon payment or make those profits they hoped for that would cover the debt.

September 9, 2014 Posted by | Additional Debt, Adequate protection, Bankruptcy, Chapter 13, Financing, Foreclosure, Home Loan Modification, Home loan modifications, Plan, Plan payments, Planning, Pre-filing planning, Secured loan arrears, Security interests | , , , , , , , , , , , , , , , | Leave a comment

Student Debt v Student Loan – viva la difference!

A recent decision out of the Norther District of California Bankruptcy Court bolsters a position I have already been espousing. In re Christoff, 510 BR 876 (N.C. Cal. 2014) looked at 11 USC Sect. 523(a)(8) which makes three types of loans non-discharged unless certain things are proven in an adversary proceeding (a lawsuit within the bankrutpcy). The three types of loans are, in essence: government subsidized loans, IRS qualified education loans, and “an obligation to repay funds received as an educational benefit, scholarship or stipend[.]” 11 USC Sect (a)(8)(A)(ii).

This case involved Meridian University directly funding the debtor’s studies in their Psychology program and whether that constituted the third type of debt above.  The court ruled against Meridian because that statutes says “repay funds” thus requiring that actual funds are distributed. Instead, Meridian simply kept a “tab” of sorts of what the debtor owed them for tuition and fees. There was no third-party lender involved that distributed funds to Meridian or to the debtor.

I expect this would be the same outcome if such a debt discharge were challenged here in the Eastern District of Kentucky. This impacts many technical schools that simply charge the student debtor directly for tuition rather than involving an independent third-party lender. It is very good news for student debtors who went to such schools and then discover their training is not quite as marketable as the school led them to believe. So, the student debtor in the case above had student debt, but not a student loan.

August 11, 2014 Posted by | Bankruptcy, Chapter 13, Chapter 7, Discharge, Student loans | , , , , , , , , , , | Leave a comment

Answering a lawsuit on your own

Having a sheriff or constable hand you a summons and complaint (a lawsuit) is an awful feeling. If you have been served with a lawsuit, then you really should consult a lawyer about the particulars of the complaint. This post should not be a substitute for obtaining individualized legal advise. However, I also know that not everyone has access to legal representation. If you are being sued for non-payment of a debt, then you likely have a hard time finding the funds to retain counsel. So, I am offering a few pointers in filing an answer to a complaint in order to protect your interests.

First, though, I want to suggest you reach out to a modest means or pro bono legal clinic if you cannot obtain private counsel. In the Bluegrass area and Eastern Kentucky you can contact: Legal Aid of the Bluegrass, The Fayette County Bar Association, and AppalReD.

Again, this is not a substitute for legal advice:

In Kentucky, a state court lawsuit must be answered within twenty (20) days of being served with the complaint. If the 20th day falls on a weekend or holiday, you have until the next weekday to file your answer, though I always err on the side of filing it a day or two early. If your goal is to delay the lawsuit as long as possible while you pull things together for bankruptcy, then you will wait until the last day of your time before filing your answer (again, I shave a day off just for an abundance of caution). Filing an answer consists of delivering your original, signed answer to the clerk and mailing a copy to each lawyer (or unrepresented party) listed on the complaint you received by first class mail. You do not need to send it certified mail.

The answer consists of three parts. The first part is the “style” of the case. It is all the stuff on the heading of the complaint, except you do not have to list the addresses of the parties – just their names – and you call it an “Answer” rather than “Complaint”. The case number is the most important part because you want the clerk to file your answer in the right case.

The second part is where you either admit or deny the allegations in the complaint. This is where a bit of lawyer speak comes in: if do not know something for certain, but suspect it may be true, you can still deny it by saying “I cannot confirm or deny such and such allegation of the complaint, therefore I deny the same.” You must do this because anything you admit in your answer is not longer a controversy. So, if the lawsuit is filed by the original creditor that you borrowed money from, then you can admit that you owe them a debt, but still deny the exact amount they are claiming is owed. However, if the lawsuit is brought by a collection agency or a party claiming that the debt was assigned to them, you may suspect that to be true, but you really do not know for sure that it was assigned to them correctly. So, you can deny owing that party a debt altogether as well as the amount they claim is owed. You must sign this part of the answer, but do NOT sign for anyone else. If you and your spouse are being sued for the same debt, you each must sign the answer or risk being found to be practicing law without a license.

The third part must also be signed (so you will sign your answer twice). This part simply is a statement saying that you put a copy of your answer into the mail, US Post, first class postage, and then list each party or their lawyer and the address you mailed it to. Again, sign after this statement and make sure you actually do send a copy to that party or lawyer.

Filing the answer can either be hand delivery to the clerk or by mailing your answer in to the clerk. Either way, you also want to submit a cop of your answer along with the original so that the clerk can stamp it and hand the copy back to you. This is your proof of filing the answer just in case the clerks misplace the answer (they do have lots of cases to manage by the way). If you mail your answer in, send a self-addressed, stamped envelope along with the original and copy so the clerk can mail it back to you.

Filing an answer in a lawsuit simply prevents the plaintiff from a quick and easy default judgment against you. It forces them to produce proof to the court. They may do this by way of a Summary Judgment or it may end up being a hearing (especially if it is small claims court). Either way, it typically gains you extra time to either file bankruptcy or prepare a defense.

August 8, 2014 Posted by | Alternate Debt Relief, attorney fees, Bankruptcy, Chapter 13, Chapter 7, Planning, Pre-filing planning | , , , , , , , , , , , | Leave a comment

When should I file bankruptcy?

First of all, I want to clearly state that bankruptcy is not something to aspire to achieve. Almost no one wants to file a Chapter 7 or a Chapter 13 and get a discharge of debts. Nearly everyone I talk to would rather have the means with which to pay their creditors. So, if you are reading this post, you have likely already tried everything you can think of to make things work and you are considering bankruptcy as a last resort. I can appreciate that. And I know that also means many of you have already gone past the point where wisdom would have you go. And that is why I hope to lay out some general principles as to when one should file bankruptcy. Everyone’s situation has its own unique twists and turns, so you should find a lawyer who will provide a free consultation to see if it is time for you to file.

If a creditor has filed a lawsuit against you to collect a debt because you have not had the means to pay it, then you likely should file.

If the only way you can pay all your bills next month is to take a loan out from your retirement account, you likely should file.

If your house has been sold at a foreclosure auction, you likely should file.

If your car has been repossessed and sold at auction for less than you owed on it, you likely should file.

If you are seriously considering utilizing a payday loan provider in order to stay afloat, you likely should file.

If you feel crushed by debt and you do not see an end in sight unless you win the lottery, you likely should file.

If your employer notified you that they just received a wage garnishment order, you likely should file.

The main thing is to not wait until you are right up against the wall. It takes time to properly assess a persons financial situation and make sure that a petition and schedules are accurately completed. This means that you have to pull together a lot of documents in a very short period of time. It is far better to seek counsel when the crisis is still off in the future a bit.

August 7, 2014 Posted by | Bankruptcy, Chapter 13, Chapter 7, Credit Counseling & Debtor Education, Planning, Pre-filing planning | , , , , , , , , | Leave a comment

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