Every year I offer just a bit of information about Christmas shopping. We all feel the push to buy nice presents for those whom we love. But, if your budget is tight and you have begun to wonder about whether you might have to file bankruptcy in the coming months, then take care. This is because debt for “luxury items” may not be part of a discharge of debt. Luxury items are defined in statute as being over a certain dollar amount. Also, debt incurred in anticipation of bankruptcy may also fail to be discharged in a bankruptcy. So, enjoy the season. Know that the best present is to be present for your loved ones. And manage debt wisely.
Mr. Rodgers offers some great insights. Many potential clients call mainly to find out the cost and pick the least expensive provider. I would add to what John says that a person shopping for a bankruptcy attorney should also look for the degree of personal, one on one time the attorney provides in answering your questions and concerns.
It’s not always the most expensive bankruptcy lawyers that are the best or the cheapest that are the worst. In most areas, the prices for filing bankruptcy are determined by the market. The filing fees and credit counseling fees are set fees. The attorney fee, in most cases can vary. (The exception is Chapter 13 where, in most jurisdictions, the price is set by the court)
One of the most important things to look for, other than price, is the experience of the lawyer. How many bankruptcy cases do they usually handle per month? How many cases have they filed in the last year ?
Is the lawyer a member of any bankruptcy attorney professional associations ? The National Association of Consumer Bankruptcy Attorneys is the largest professional association of consumer bankruptcy attorneys representing folks filing bankruptcy. If a lawyer is a member, chances are good that they stay current…
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Entrepreneurs who launch their own small business are brave souls. I applaud them and share in their story. Launching into the practice of law with nothing rather than working for a salary or wages was risky. The common observation is that a substantial percentage of small businesses do not survive past the three year mark. Of those that do go beyond that milestone, some thrive and some limp along. The debt that usually accompanies a business start-up and the extent to which creditors will work with these business owners can determines these outcomes. In a sense, when a small business goes into debt, they become partners with the lender and that partner can make or break it. This is where entrepreneurship and bankruptcy intersect.
The typical scenario for entrepreneurs is that they are “all in” to birth their endeavor. They become personally obligated on the debts and usually collateralize their home and other assets. It is no surprise when small business owners blur the lines and end up identifying with their business as if it is an extension of themselves because they pour themselves into their fledling enterprise. Unfortunately, this over-identification often keeps the owners from seeing when the business has gone past the point of no return. That leads to the proverbial “good money after bad” scenario.
Compounding the dilemma for these entrepreneurs who have businesses that are failing to thrive is that the bankruptcy code only offers two options. I am not referring to Chapter 11 as an option because the business reorganization chapter of the bankruptcy code is a very expensive endeavor. Even with the changes to the code that made it easier for smaller businesses and individuals to file an 11, it is still cost prohibitive to the vast majority.
The two options are either shutting the business down and filing a personal bankruptcy, or attempting a “work-out” with the lenders. A work-out is essentially a systematic negotiation with lenders one on one to get enough relief to keep the doors open. This only happens when the lenders can see an upturn in revenue coming soon and when all the lenders are willing to cooperate. Only one lender drawing their line in the sand derails any work-out.
A personal bankruptcy can be filed in conjunction with an ongoing work-out. It might be the element that makes the lenders realize how serious the situation is so that they decide their best chance of getting paid is to cooperate. Unless the attorney in that personal bankruptcy and work-out are savvy, though, the owner could end up right back on the hook realizing no real relief from the bankruptcy.
The more likely way a personal bankruptcy plays out is coupled with the dissolution of the business. There is little to no benefit to the business entity filing a Chapter 7 because it does not receive a discharge of debt. The only time it would be beneficial is if the business has substantial assets. Then the bankruptcy allows for the controlled distribution of those assets to lenders. Usually, though, the business has few assets and so it is just dissolved prior to the filing of the personal bankruptcy.
After the bankruptcy is filed, a new business could be formed, but it needs to be done in consultation with the bankruptcy attorney. This approach is cleanest with a Chapter 7, but it can work with a Chapter 13. Usually the income of the debtor going into a bankruptcy determines whether they do a Chapter 7 or a Chapter 13, but there is a means test exception for individuals who have predominantly business related debt. So, most small business owners can do a Chapter 7. Personal debt does include one’s home loan though, and that is usually the largest personal debt weighing in against the business debt. The attorney needs to analyze the debts to insure there is more business debt than personal, and the formula used differs from circuit to circuit.
Even if you qualify for a business related Chapter 7, there may be other reasons to pursue a Chapter 13. One of the most common reasons for a Chapter 13 is when there are payroll tax arrears that end up being assessed personally to the owner. Another reason may be to cure priority income tax arrears. A Chapter 13 provides an avenue to cure these arrears over five years.
This will add a much appreciated and helpful payment option so that clients do not have to be concerned about checks through the mail. I do receive inquiries by clients from time to time where they are concerned that a check they mailed had not yet cleared the bank.
Debtors can now make their chapter 13 plan payments in EDKY online (for a fee) through www.TFSbillpay.com (“TFS”). Debtors’ attorneys, here is what you need to know about this new service.
First, payment by payroll deduction is still required by KYEB-LBR 3070-1, unless otherwise ordered by the court or agreed to by the trustee.
I generally agree to waive the payroll deduction requirement for debtors who: do not receive regular income from wages; have seasonal employment; work part-time and don’t earn enough to cover the plan payment; or change jobs often.
Even if a debtor is making regular plan payments by payroll deduction, payments for tax refunds, bonuses, other lump-sum payments, or to catch up delinquent plan payments will not be made by payroll deduction.
In all of those instances, debtors might prefer to make online payment via TFS rather than paying by check, money order, or ACH bank draft. …
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“I’ve Changed My Mind – I Want to Surrender My House”: What Effect Does Post-Confirmation Surrender Have on the Debtor’s Discharge?
The debtor’s attorney needs to take the time to discuss the probability of maintaining house and other secure debt payments over the course of the Chapter 13 – 3 or 5 years. A vehicle that may not survive the life of the bankruptcy but with significant debt may need to be surrendered at the outset.
Changing one’s mind about surrendering a house within a confirmed Chapter 13 could be a huge issue unless the debtor was eligible for a Chapter 7 at the inception of the Chapter 13. If they were eligible, but chose a 13 for other reasons, then the best practice would be to convert to a Chapter 7 and surrender the house in that bankruptcy.
If a confirmed plan provides that the debtors will cure arrearages through the plan and maintain ongoing payments on a mortgage or long-term car loan, and the debtors complete plan payments and get a discharge, those section 1322(b)(5) debts are not discharged per section 1328(a)(1). The debtors still have personal liability on those debts after discharge, just as if the debtors signed reaffirmation agreements in chapter 7 cases.
But what happens if after confirmation the debtors change their mind – they can’t afford the house or the car, and they let the creditor get relief from stay. Is the claim still a 1322(b)(5) claim that is excepted from discharge?
Even if a creditor gets relief from stay on a 1322(b)(5) claim after confirmation, the creditor’s claim remains a 1322(b)(5) claim according to In re Holman, 2013 WL 1100705 (Bankr. E.D. Ky. 2013). Taken to its logical conclusion, any resulting…
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This is such beneficial information for creditors, but also for debtors who suspect such a claim would be filed against them.
We all know that section 523 contains exceptions to discharge, but some of those nondischargeable debts, including 523(a)(6) debts (for willful and malicious injury) CAN BE discharged in a chapter 13 case when the debtor completes plan payments. If you represent creditors, you need to know how and when to seek nondischargeability under 523(a)(6) in chapter 13 cases.
Look at the first sentence in 523(a): “A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from” the debts listed in 523(a).
There are two discharge options in a chapter 13 case:
- the debtor can get a discharge upon completion of plan payments under 1328(a); or
- if the debtor has not completed plan payments, s/he can still get a so-called hardship discharge under 1328(b) if certain conditions are met.
Read the first sentence of 523(a) again – those 523(a) debts are nondischargeable…
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It is Christmas time! For many, this is a time of reflection and celebration of the birth of Jesus. For them and for many others, it is a time of celebrating one another and the giving of gifts. Hopefully, this gift giving is done out of the excess of resources that people find in their lives but, honestly, we know that a huge percentage of those gifts are purchased on lines of credit. As a bankruptcy attorney, I have noticed a seasonal drop in the number of bankruptcy filings in November and December followed by an uptick a few months later.
The courts and trustees recognize this seasonal event and seasonal spending as well but, let’s be reasonable in it because abuse has consequences. There are a few laws in place in the bankruptcy code that prevent debtors (the name given to the person who has the debts and seeks bankruptcy protection) from abusing the creditors (what those companies or persons are called who extend lines of credit). The chief provisions are found in 11 USC Sect. 523(2)(C)(i)(I) & (II).
The first one prevents debts being discharged if the money owed went to purchase “luxury goods”. A luxury good is defined as a single item or service that is worth more than $500.00. If this item was purchased using borrowed money from a single creditor within ninety days of the date the bankruptcy is filed, then that creditor has a valid objection to that particular debt getting discharged. Because of inflation, $500.00 does not go as far as it used to, so more and more things will count as luxury goods. I do not mean to suggest creditors pursue these claims often, because they do not, but it could happen and I would hate for you to be a creditor’s test case.
There is a sort of “safe haven” for luxury goods that specifies that they are NOT items or services to meet the needs of the debtor or a dependent of the debtor. So, if someone needs to get groceries, medical care, car repairs, or replace a NECESSARY and defunct appliance such as a dead refrigerator, then the luxury good prohibition does not apply even if purchased during Christmas. It must not be a gift for someone and, let’s still be reasonable, just because your refrigerator stops workings on the eve of a bankruptcy does not give license to buy the very best replacement (usually though, appliances purchased on credit create a type of debt called a purchase money security interests or PMSI which is a whole separate topic).
The second prohibition is for cash advances that aggregate more than $750.00 from an open end line of credit within seventy days of the filing date of bankruptcy. A an open ended line of credit is typically an unsecured signature loan or a credit card. Here, one needs to be careful because multiple cash advances from one line of credit can end up surpassing that limit in those seventy pre-filing day pretty quickly.
Finally, there is a specific protection built into the Chapter 7 bankruptcy laws. Some refer to Chapter 7 as “full” or “whole” bankruptcy though that is a bit of a misnomer. Anyway, 11 USC Sect. 727 stops ALL debts from being discharged if the debtor has engaged in fraud in creating their debts or obtaining a discharge of those debts. This statute has been interpreted on a practical level to require a pattern of conduct by the debtor instead of a single incident since it stops the discharge entirely rather than individual debts.
So, enjoy the season. Be generous from the bounty you have. Use credit judiciously if you must to meet your family’s needs. And feel free to contact us if you end up buried under more debt than you can handle.
It is an unusual circumstance, but occasionally I come across a home loan that can be crammed down in a Chapter 13. Cramming down a debt is a shorthand description of taking a debt that is secured against some sort of property and decreasing the amount that is secured down to the present day replacement value of that property. Debts can be secured against all sorts of property, but the two most common ones I see in consumer bankruptcies are votor vehicles and real estate. If there is a lienholder listed on the title of your car, then that indicates there is a debt owed which is linked to that car. Usually it is the money borrowed to buy the car, but not always. If you have a mortgage, then means your house is tied to a debt creating a secured debt.
Basically, a secured debt is a debt is where you personally owe the money and your property is also obligated to that debt. In bankruptcy, your personal obligation to repay the loan goes away, but you can almost never get rid of the obligation of the property to satisfy the debt. If you stop paying, then the property is taken to help satisfy (pay) the debt. When that happens with real estate, then a lawsuit is filed called a foreclosure (Kentucky law – some states vary the process). It is called a foreclosure because the plaintiff is asking that your interest in the property gets closed out so that only their interest remains. With a car, they just repossess the vehcle.
Cramming down a debt, then, tends to mirror what would happen outside of bankruptcy if the secured property is taken to satisfy the debt. So, if you go into a Chapter 13 owing $12,000 that is secured against a car that is worth only $8,000.00, then the secured debt gets lowered to $8,000.00 (subject to a 910 day time limitation). There is speicial rule for a debt owed on real estate which can be found in 11 USC Sect. 1322(b)(2). This special rule keeps the debtor from decreasing the principal owed now matter how little the house is worth.
This special rule is limited, though. First, the real property securing the debt must be the primary place where the debtor lives. So, if it is rental property, the rule does not prevent cramdown. Second, the loan must be secured solely against that residence. If the lender secured their loan against both your residence and against some other piece of property, then cramming down the debt is not barred.
The way I see this second condition falling through for the lender are in bridge loans where the debtor moved out of one place and into a new place they purchased. Then, when their first residence does not sell right away, then it just sits empoty or they convert it into rental property. The loan remains secured against the old property, but is also secured against the new place. This creates the circumstance where a bankruptcy lawyer can help you decide whether the values of the proeprty are such so as to cram down the loan and whether one of the properties should be surrendered in the bankruptcy.
I have written about this before, but it bears repeating. I am not offering smoke and mirrors here, but just straight up information. There is a competitor’s ad campaign that has garnered considerable attention and it promises to get a bankruptcy started for $78.00. The ad goes on to note that certain restrictions and qualifications apply to this offer. And, I am sure they do explain those once your come in to meet with them. I have not interviewed my competitors on this issue, so I cannot say with certainty, but I can only contemplate one way that they can actually get a bankruptcy started for $78.00 and that is in a Chapter 13. It just so happens that you can pay the $310.00 filing fee that the court charges for a Chapter 13 (or the $335.00 for a Chapter 7) in four monthly installments. Each installment for the Chapter 13 would be $77.50 and thus we have you entering into a Chapter 13 paying only that first installment (and rounding it up gives you the $78).
I can do this for you also. However, I would need to figure out how much of a plan payment you would be able to afford because paying payments each month makes up a Chapter 13 in contrast to a Chapter 7. That would be the restriction. The Chapter 13 can run as short as 36 months or as long as 60 months depending on your household income. Attorney fees run higher in a 13 than a 7 but those higher fees can be paid through the plan itself. I only recommend going this route if it is the only way you can get into a bankruptcy and get the relief you need. You must qualify for a Chapter 13 which includes having a regular source of income and that income must be sufficient to pay enough in a plan payment to cover the attorney fees, trustee commission, certain tax debts, and certain secured debt arrears. The hitch with going this route is that the less your pay up front on attorney fees, the higher the plan payment has to be after filing. That may be perfectly fine and work well, I just want you to know that in advance rather than when I have you already in my office. There is also a credit counseling course that must be done through a third party prior to filing and this can run anywhere from $10 to $25 directly to that company. This a legal requirement of the law and not something that can be circumvented.
How would I be able to go beyond a firm that can get you into a bankruptcy for $78.00? Well, I do all the work myself. From the initial phone call to the initial meeting all the way through to the discharge order being issued at the end of the bankruptcy – it is all with me personally. That is to say, you will not be interacting with secretaries, paralegals or other attorneys (unless there is a true emergency); you will be interacting with me. I will be the familiar face that shows up with you at the meeting of creditors and the same voice on the phone who helps explain things along the way. That is simply how I chose to practice law, by keeping overhead low and doing it myself rather than shooting for high volume. That competitor does a fine job from what I can tell; it just done using lots of staff. If my individualized and personal approach appeals to you, then come in to see me and I will see if I can match any competitors’ offer for a bankruptcy or even go beyond what they have to offer. There is no charge for that initial consultation and I do NOT limit it to 1/2 an hour.
- ‘Tis the Season
- How to Choose a Bankruptcy Lawyer
- The Entrepreneurship – Bankruptcy Intersection
- Making Chapter 13 Plan Payments in the E.D. Ky. – New Online Payment Option
- “I’ve Changed My Mind – I Want to Surrender My House”: What Effect Does Post-Confirmation Surrender Have on the Debtor’s Discharge?
- Nondischargeable Debts in Chapter 13 Cases
- Let’s be reasonable
- Saving Your Home: When can you cramdown a home loan?
- Matching the Competition? How about going beyond!
- Let’s try this again: Please check out our new Troutman & Napier website
- Concurrent Jurisdiction of State and Bankruptcy Courts
- Chapter 13 lasts awhile, but stay in touch
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