Kentucky Bankruptcy Law

Counsel with Care

The One, Two Punch of Garnishment

No, this sort of garnishment is not found on a fancy Christmas dinner plate. This is a legal mechanism by which creditors can get the money you owe them without your consent. Once a creditor has obtained a judgment against you in a court of law (and there are some government creditors that do not have to go through the court process, but still have to issue notice), they can obtain a garnishment order that you will not be aware of until it hits.

Garnishments typically take two forms. The one most people are aware of is a wage garnishment. This is an order issued to the debtor’s employer to withhold up to a certain percentage of the pay. This can actually be a huge hit, but it is only the “one” punch that leaves your head spinning. The “two” knockout punch that often surprises people is a bank account garnishment. So, if your paycheck is direct deposited into an account, the creditor can scoop the rest of your income right out of the bank leaving you with no means to pay electricity, rent or a house payment.

While a wage garnishment is an ongoing order that allows for up to a certain percentage to be seized each month, the bank account is a one time hit, yet it takes all. However, the creditor can issue new bank account garnishments so as to hit the accounts repeatedly over time getting whatever happens to be in there at that moment.

The only defense once this barrage of punches starts flying is to file bankruptcy. If an individual creditor seizes more than $600.00 through these garnishments in the 90 days immediately preceding filing, then there is a chance of recovering them. So, it is important to take action and seek the counsel of a bankruptcy attorney before you are down for the count.

December 4, 2014 Posted by | Alternate Debt Relief, Bankruptcy, Chapter 13, Chapter 7, consumer bankruptcy, consumer debt, Consumer Protection, Debt collection, garnishment | , , , , , , , , , | Leave a comment

Who wants to file bankruptcy right before Christmas!?!

Well, no one does. That is a given. However, there are a few things to remain aware of if bankruptcy is something you have been contemplating here recently:

1) Any gifts you receive of substantial value at Christmas are going to have to be listed in your bankruptcy on Schedule B and exempted on Schedule C. You will need to individually identify any particular item you received that is worth hundreds of dollars.

2) Any expensive item you purchase, whether keeping it in house or giving it away to someone else, will have to be reported as well. If it is a luxury item, that is something costing more than $650.00, you will be raising red flags and risk losing the discharge of that debt.

3) Your right to receive a tax refund arises on December 31st of each year if you overpaid your income taxes. This is true whether you file a tax return right away or wait until the last minute. That tax refund is an asset of the bankruptcy estate upon filing your petition and must be listed on Schedule B and exempted on Schedule C even if you do not know the exact amount you will be receiving.

If you own a home and have a large amount of equity in that property (equity meaning value minus secured debt), you may have a very limited amount of exemption to put towards these assets mentioned above. Consulting with a bankruptcy attorney prior to Christmas may be a wise gift to yourself.

December 2, 2014 Posted by | Alternate Debt Relief, Bankruptcy, Chapter 13, Chapter 7, Consumer Protection | , , , , , , , , , , | Leave a comment

Disability Income and the Means Test

To file a Chapter 7 one must qualify under the means test. Well, that is the layman’s explanation. What is actually going on is that one must go through a formula of looking at their currently monthly income as derived from the last six months preceding the month in which the bankruptcy is filed to see if there is a presumption that filing Chapter 7 is an abuse of the bankruptcy system. Okay, let’s stick with the layman’s version.

Anyway, what matters to those of you who receive disability benefits is whether or not they have to be included in the calculation of your current monthly income in the means test. This matters because it could knock some folks out of the Chapter 7 range. Current monthly income is actually a term in statute and can be found at 11 U.S.C. Sect. 101(10A). This basically says it is all money coming in except for a couple of narrow exceptions. The exception that is most commonly found are funds one receives as a result of the Social Security Act.

The Social Security Act can be found in Title 42 of the United States Code. It covers a number of things, including Social Security retirement funds and Social Security disability. Some jurisdictions also recognize unemployment benefits as falling under this exception, while others do not.

Since Social Security Disability is excluded as “current monthly income” for purposes of the means test, one would logically assume that all disability benefits are excluded. Wrong! For example, disability income that military veterans receive from the Veteran’s Administration arise out of Title 38 of the United States Code rather than Title 42, so they are included as income for the purposes of completing the means test. It just is. Please do not ask me to explain it – just accept it.

November 25, 2014 Posted by | Bankruptcy, Chapter 7, Means test | , , , , , , , , | Leave a comment

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

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