May you each experience the joy and hope promised by this Christmas season and may you spend responsibly. If you have already slipped up on that last part, be sure to come see me in the new year. Actually, you can come see me if that first part did not pan out either.
This post will only apply to a narrow segment of people forced to consider bankruptcy – those who have a bunch of equity in their house along with a hefty debt in which their spouse does not have liability. Most often, this would be an entrepreneur whose business venture took a downturn.
I have discussed previously how Chapter 13 is a great mechanism for preserving one’s house if there are arrears to be dealt with or if there is excess equity beyond what can be covered by a homestead exemption. However, Chapter 13 is not for everyone. There are debt ceilings in a Chapter 13 that can operate to knock out business people who have personally guaranteed large amounts of unsecured business debt or even larger levels of secured debt. There also needs to be a somewhat predictable income upon which to base the budget and plan payment. This makes Chapter 13 difficult for people who may go months at a time without income due to the way their employment is structured, such as an entrepreneur.
Going into a Chapter 7, though, with excess equity in one’s house can be dangerous. Excess equity exists if there is a substantial value to the house even after subtracting the secured debt on it and the exemptions available. You see, a Chapter 7 trustee only makes about $60.00 per case unless they find non-exempt assets they can liquidate and distribute to unsecured creditors. The trustee gets a percentage of all such assets.
This brings us to the strategy that relies on a number of “ifs” being true. This strategy can be helpful (though certainly not a panacea): 1) If the Debtor is married and their spouse is NOT also indebted on the majority of debt so that they do not have to file also, 2) If the husband and wife share the home as tenants in the entirety (the deed gives then ownership “for their joint lifetimes with the remainder in fee simple to the survivor of them”), and 3) the Debtor has some exempt or non-estate resource to make a lump-sum offer to the trustee. The strategy is simply to go into Chapter 7 bankruptcy as an individual and then hope your spouse outlives you or you can make a deal with the Trustee.
The Trustee can seize non-exempt assets of the Debtor and liquidate them in a Chapter 7, but they must do this liquidating under state law. Kentucky law only allows a creditor (or Trustee) to sell the expectancy interest of a Debtor in real estate that they own as tenants in the entirety with a non-debtor spouse. The expectancy interest is that if they outlive their non-debtor spouse, then they have the entire undivided homestead as their own, but if their spouse outlives them then there is nothing – the entire undivided homestead goes to the surviving non-debtor spouse. So, the question becomes: “How much would someone pay for a chance that the non-debtor spouse dies first?” That amount, whatever it may be, is the actual value that the trustee would receive in selling the Debtor’s interest in the house.
In other words, a home owned in the way I described by a husband and wife cannot be stripped away from the non-debtor spouse. He or she is entitled to all of that home concurrently with the Debtor; it cannot be divided. A creditor cannot even get half the rents, if there were any. They can only obtain that expectancy – that chance that they may get it all. Because of that, many Trustee’s would be open to a reasonable lump-sum payment from the Debtor to retain their expectancy interest rather than risk coming up with a goose-egg by trying to sell what essentially amounts to a lottery ticket on the court house steps.
Bankruptcy continues to evoke this notion of getting something for nothing. For some,that results in feeling a bit of judgment or disdain towards the whole idea of filing bankruptcy or the people who end up there. To that I say, “There, only by the grace of God go I”. Others see it with a bit of a glimmer in their eye as a great way to get free stuff. Both views are askew. Bankruptcy is a tough process to go through that is humbling and often anxiety provoking which is why people prefer to hire a lawyer than attempt it pro se. Few people actually abuse the system; most who file have tried everything they could think of to avoid it, but life’s curve balls and the accumulation of mistakes here and there just prove too daunting without assistance. For those hard working folks who end up in a bad spot, I do what I can to make the process smooth and effective so they can get on rebuilding their lives financially.
One of the things I do to ease the way is to stress the imperative in Chapter 13 bankruptcies that if you want to keep it, you must pay for it. This applies to bigger ticket items with a loan secured against it like a house or a car. Many people opt for a Chapter 13 because they fell behind in their house payments or their car payments but they do not want to lose that property. Well, a Chapter 13 can certainly make that happen, but they must still pay for the house or the car. There are NO free houses out there – and the only free cars are ones your would not want to drive.
Chapter 13 only halts the secured lenders collection process (and helps reduce interest costs in certain ways). That means that foreclosure proceedings for a house are stopped and repossession of a car is nixed. Then, the arrears that had accumulated must still be paid through the Chapter 13 plan payments as well as each ongoing payment as it comes due. Unfortunately, many home owners had the pre-bankruptcy experience of months going by without making house payments before the bank took legal action. That will NOT be the experience in the bankruptcy. The secured lenders are much quicker to file a Motion for Relief from the Stay (the automatic collection halting part of a bankruptcy). This motion allows them to then resume the foreclosure in state court if it is granted.
Often, this motion is filed by the lender quickly after a payment or two is missed as a wake-up call to the debtor. They really just want the debtor to get caught up on their payments and so they typically will enter into an agreed order with the debtor to do just that over the next few months rather than force their motion through. However, this is an exceedingly expensive process. The lenders insist on getting reimbursed for the hundreds of dollars they spent on an attorney and filing fees for that motion. So, you may have used that $1,000.00 house payment or two to buy Christmas gifts or cover an unexpected medical bill, but you will end up eating around $600 or $700 on top of catching up those missed payments.
To make it through your Chapter 13 smoothly and retain your house and car, those payment simply have to be a non-negotiable. There is no wiggle room on secured debt payments in a Chapter 13. If you want to keep it, you must pay for it.
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.
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.
- CAUTION: Tax Refund
- When Business Owners Should File Bankruptcy
- To File or Not to File: Attorney decision making
- Deadlines for Filing Prepetition Tax Returns in Chapter 13 Cases
- Delinquent Property Tax Claims in Chapter 13 Cases
- Lessons Learned the Hard Way
- Miscellaneous Hot Topics in the EDKY
- ‘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?
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