Kentucky Bankruptcy Law

Counsel with Care

Divorce, debt and the Devil’s heyday

I was sitting in state court just the other day and saw yet another example of the interplay between divorce and bankruptcy. A creditor had sued a woman for a delinquent debt. The woman came to court to defend against a motion for default judgment. Her defense was that she was not responsible for the debt because it had been assigned to her ex-husband in their divorce.

Unfortunately, that is not a valid legal defense. Many divorced persons erroneously assume that the divorce decree assigning debt to their ex also absolves them of liability on that debt. It does not. This woman is now facing wage and bank account garnishments because her ex-husband failed to pay the debt. He may have even filed bankruptcy which would explain why the creditor was only coming after the woman. Her only option is to go back to family court and get that judge to enforce the divorce order using contempt powers and make the ex re-pay her for what it cost her. If he only filed a Chapter 7, his obligation to her remains. If a Chapter 13, it would likely be treated as an unsecured debt that can be discharged since it is not the same as child support or alimony.

Regardless, if he is without resources, this may mean he spends some time in jail for contempt, but the woman’s finances are still wrecked and she may also have to file bankruptcy to get relief. Ah, divorce – the curse that keeps on cursing – the devil’s own little specialty area. Anyway, it is important for family law practitioners to know something about bankruptcy and bankruptcy lawyers to know something about family law so that their clients are not caught unaware.

April 19, 2013 Posted by | Bankruptcy, Debt collection, Divorce, Family Law, Garnish | , , , , , , , , , | 2 Comments

Tax debts can be discharged! – sometimes

A common misconception floating about is that income tax debts can never be discharged. This myth arises from the reality that income tax debts have a favored position in the bankruptcy code. Also, trying to figure out which tax debts are discharged can be mind boggling even for attorneys. Frankly the entire bankruptcy code can be mind boggling since most provisions relate back to other provisions that one must read before the original provisional can be understood.

Plain English is a foreign concept to drafters of legislation. All that aside, to determine if your income tax debt can be discharged, start at 11 U.S.C. Section 523(1). Section 523(1) immediately directs you to to two other provisions. The pertinent one here being 11 U.S.C. Section 507(a)(8). Section 507(a)(8) then circles you back into Section 523 making for a dizzying ride. You are welcome to go to these statutes and read them for yourself. If you understand them, you are either a bankruptcy attorney or you missed your calling.

Let me break it down for you with a plain English translation. In order for an income tax debt to be discharged, all these requirements must be satisfied:
1) The tax return filing must have been due more than three years before you file your bankruptcy petition. If an extension was filed, then that moved the due date for your filing out so extension periods do not count towards that three years.
2) The taxes were either officially assessed more than 240 days prior to the bankruptcy petition or were not yet assessed but were assessable. I know, that last part does not seem to be in the statute but that is because of how this statute is worded. It is listing what tax debts are excluded from discharge as those assessed within 240 days of filing, so those not assessed or assessed (but assessable) outside of the 240 days are not excluded. Offers in compromise and stays in other proceedings toll this time period plus add on 30 or 90 days respectively.
3) A tax return had to have been filed.
4) If it was filed after the final due date, including extensions (filed late), it had to have been filed at least two years before the bankruptcy petition is filed.
5) There can be no fraud or attempts at evasion of the tax at any time.

In order to know calculate these items precisely, one must obtain a tax Account Transcript from the IRS. This can be obtained by filing a Form 4506T from your friendly Internal Revenue Service agency.

March 29, 2013 Posted by | Bankruptcy, Discharge, Tax Debts | , , , , , , | 1 Comment

Bankruptcy Myth of Non-dischargeable Car Loans

I have heard from two different people looking for relief from their debt that they thought they could not discharge their car loan debt in a bankruptcy. In fact, one person said they had consulted an attorney on this very issue and they were told they could not discharge their car debt in a bankruptcy even though the vehicle was already repossessed. The source of the myth is one of the reforms that occurred to the bankruptcy code in 2005. The change was that if you had purchased a vehicle within 910 days (about 2.5 years) prior to filing your bankruptcy petition, that purchase money debt secured against the vehicle could not be “crammed down”.

Cramming down a debt is where the amount of the debt secured against property, such as a car, is reduced to the value of that property on the date of filing the petition. For a car, you may owe $15,000.00 but the vehicle is only worth $10,000.00. That debt could be crammed down so that you would have to reaffirm (agree to pay) only $10,000.00. Under the old law, the $5,000.00 debt above the value of the car was discharged. The change in the law prevents this from being done on cars purchased within 910 days.

However, what did NOT change is that the debt of a car loan can be discharged. If your car was repossessed or if you surrender it, then the whole remaining debt will be treated as unsecured and will be discharged. If you keep the car and you purchased it over 910 days prior to the bankruptcy you may want to consider a Chapter 13. In the Chapter 13, you propose a plan that includes valuing a car secured by a debt. You suggest what you believe to be the value of the car. The creditor can challenge that, but usually a compromise is reached. You then only pay the value of the car in the Chapter 13 while the rest of the debt’s principal is treated as an unsecured debt. Any remaining unsecured debt after the plan payments are paid in full gets discharged.

In a Chapter 7, if you have the resources, you could attempt to redeem the vehicle at its fair market value. This hardly ever occurs, however, because few debtors have the resources to pay a lump sum sufficient to redeem a vehicle. So, most debtors either have to reaffirm the debt for the full debt or surrender it. The Chapter 13, then, offers the most viable option to cram down debt on a car.

March 27, 2013 Posted by | Bankruptcy | , , , , , , , , | 9 Comments

Domestic Support Obligation and Bankruptcy (or No Discharge for the Durango Debt)

The Kentucky Court of Appeals just issued a decision directly related to family law and bankruptcy that shows why knowledge of both fields can be so important. In Howard v Howard, 2008-CA-001059-MR (June 12, 2009)(to be published) the Court addressed two important issues regarding domestic support obligations.

A domestic support obligation has a very broad definition under the bankruptcy code (11 USC 101(14A)) encompassing any debt owed to or recoverable by “a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative” including a “government unit”. This includes alimony (maintenance), child support, or other obligations arising out of a divorce or separation. The debt can be established through a separation agreement, decree or other order of the court. 11 USC 523(a)(15). For Kentucky Courts, it also includes a Dodge Durango debt.

In this case, Mr. Roy Shane Howard divorced his wife, but he agreed to, and was later ordered in the decree, to pay towards a deficiency judgment arising from the repossession of their Durango. The case does not say, but that repossession may have been the final straw that broke the back of their marriage. Some folks really love their Durangos.

Anyway, after the divorce, he listed this deficiency judgment as a debt in his bankruptcy and his ex-wife did not object to its discharge so he figured he no longer owed that debt. However, little did he realize that Kentucky Courts share jurisdiction with Federal courts to determine whether an obligation is discharged and the Court of Appeals wasn’t buying the argument that she had to object in the bankruptcy case. After all, the bankruptcy code declares such debts as non-discharged and spells out no special action required by the creditor.

This Court determined that Roy’s obligation in the divorce to pay part of the Durango deficiency was a domestic support obligation. While the bankruptcy discharged the debt as to the original lender, it did not disturb his responsibility for the debt to Sondra, his ex-wife. In other words, the original creditor could not come after Roy for the debt any longer, but they could go after Sondra and Sondra could bring it right back around and get Roy for contempt in the divorce court. And that is exactly what happened.

So, if debts are an issue in a divorce proceeding, it is wise to plan carefully what will happen to those debts. Often, it is best for the each person to set aside the anger and honestly analyze if they can pay those debts once the one set of living expenses becomes two separate households. If not, and they otherwise qualify for bankruptcy, then a joint bankruptcy may be the best option.

I said there were two important domestic support obligation issues. suffice it to say that this sort of deficiency debt could have been discharged in a Chapter 13 instead of the Chapter 7 he filed.

March 22, 2013 Posted by | Bankruptcy, Divorce, Family Law, Marital Assets | , , , , , , , | 4 Comments

Can I keep my tax refund?

Timing is very important when considering bankruptcy and during the tax season one aspect of timing is when to file in regard to when one will be receiving their tax refund. This is one of those fact driven determinations where no one answer can be given in a general post like this, so be sure to consult with an attorney about your particular situation. What is surprising to many, though, is that even though they have not yet received their refund check, it is an asset of a bankruptcy estate. This is because they have already earned the money prior to filing a Chapter 7. So, if one files a Chapter 7 today and then receives their refund next week, the trustee can take that money to distribute to creditors.

Here is where making a decision on filing gets a little more complicated. Each person has certain exemptions they can use to hold onto property and assets through a Chapter 7 bankruptcy. If you have sufficient left over exemptions to cover your tax refund, then it does not matter if you file before or after receiving it. However, if you do not have spare exemptions, but you still really need to file a Chapter 7 soon, then it would be best to try and get that refund before filing.

Now, it becomes important to use that refund money carefully to keep from getting on the wrong side of the trustee or the bankruptcy code. The guiding idea is to use it for necessities for your family and NOT to pull one over on creditors. You cannot use it to buy luxury items (there is a specific dollar amount limit in the code) and you cannot use it to pay one creditor over others.

You can use it to buy necessities. For example, stock up on food stuffs and if your clothes are getting threadbare, get a few items of clothing but be REASONABLE about it. If you have children, get them some school clothes if they actually need them. Do not get fancy clothes – just basic items. In doing this, you are basically converting non-exempt cash into exempt personal property. You could also use the refund to pay for the bankruptcy. AGAIN: Consult with an attorney regarding your particular situation and plan and do not blindly apply these general principles to your particular situation because there are limits to personal property or household items exemptions.

March 20, 2013 Posted by | Bankruptcy, Plan, Planning, Pre-filing planning, Property (exempt | , , , , , , , | 2 Comments

Looking out for extended family can cost them in your bankruptcy

When faced with bankruptcy, people hate to turn away from family that have helped them. The natural and common thing to do is try and 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 funds that 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 cemetary. 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 cemetary 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.

March 18, 2013 Posted by | Bankruptcy, Chapter 7, Discharge, Estate Planning, Exemptions, Planning, Pre-filing planning, Property (exempt | , , , , , | Leave a comment

Tips for Tough Times #2

In my last post I discussed a general strategy for going a little further into debt in the event of a crisis such as lost employment or major illness. I want to clarify that the intent is not to figure out how to “trick” the system; rather, the intent is to be shrewd in surviving tough times. While some folks will misuse the suggestions, my hope is that honest folks who want and plan to repay their debt if possible once they get back on their feet, will use the information to plan for worst case contingencies.

Given that preface, another temptation to avoid during tough times is raiding retirement accounts to make ends meet. Much like the strategy of maximizing your homestead exemption, leaving retirement accounts intact maximizes your assets across a bankruptcy. In a Chapter 7 or Chapter 13, retirement account funds are exempt up to a “reasonable” need level which varies based on how close to retirement one is. I routinely see retirement accounts in the two and three hundred thousand dollar range for a middle-aged person go without challenge by the trustee. I suspect that even retirement accounts double that could pass muster, but I rarely see ones that large.

To dip into these accounts means converting exempt funds into payments on debt that will end up discharged in a bankruptcy anyway or leaves cash lying about which is much harder to exempt. Taking funds out (unless you meet qualifying events such as age, etc.) not only converts exempt funds into non-exempt, but you will also likely incur a federal tax penalty for early withdrawal. Such taxes would be unlikely to get discharged in a bankruptcy (unless it is a particularly old tax debt). So, if you have unsecured credit available to you during a crisis, it is best to use that resource to pay for necessities than dipping into your retirement.

Loans from your retirement are a more acceptable means of acquiring resources in a crisis because you are expected to repay those loans despite a bankruptcy. One must still be careful, though, because failure to repay timely can cause the loan to be treated as a disbursement and taxed. The other downside to loans is that instead of having the funds available as a post-bankruptcy resource to use to re-build, you are having to use post-bankruptcy income to repay it.

March 13, 2013 Posted by | Bankruptcy | , , , , , | 2 Comments

Tips for Tough Times #1

It is human nature: we often wait until the last possible moment (or later) to seek help we need. This goes for medical issues, retirement planning, home repair, etc. It is doubly true for legal matters. This is unfortunate because lawyers can be so much more effective (and less expensive) acting preemptively rather than reacting to a crisis. Consulting an attorney practicing in bankruptcy law can benefit one whether filing is imminent or a distant possibility.

One example of the benefit of a proactive use of an attorney is evident during tough financial times. Many people are still experiencing layoffs in our present economy even though the employment numbers show improvement. During these times, it is tempting to dip into retirement savings despite tax penalties or deplete one’s home of any remaining equity. While these offer lower initial costs compared to higher interest credit cards, they may be incredibly costly in the long run.

An individual in Kentucky can claim up a little over $22,600 in a homestead exemption and a married couple can claim double that in a Chapter 7  or Chapter 13 bankruptcy. So, if you have considerably more than that exempt amount in equity in your home, it is smart to obtain a loan secured on your property to make ends meet while searching for work. However, if possible, you do not want to borrow past that exemption threshold so that you can maximize post-bankruptcy resources to re-bound if it comes to that course of action.

To make sure this is kept in perspective though, you must be able to afford the payments on the loans secured by your house subsequent to a Chapter 7 filing for this to work. You also do not want to run up debts on luxury or fluff items – this strategy is for the necessities of food, clothing, shelter, and medical care.

Of course, this is a strategy for temporary events beyond your control, such as being laid off or suffering a major injury, where you expect things to turn around in a matter of several months. Because of all these complexities, the general suggestions I am offering need to be applied to your specific situation. The facts in your situation may call for a very different strategy so it is worthwhile to invest in preventive legal counsel.

All of this comes together for my point: when economic difficulties begin, seek the counsel of an attorney early to plan well.

March 11, 2013 Posted by | Bankruptcy, Exemptions, Planning, Pre-filing planning | , , , , , | 1 Comment

SMALL BUSINESS OWNERS: Backed into a corner

The economic situation we face has hit small business owners broadside and many are scrambling to figure out how to get relief. Developers who specialize in building upscale homes were particularly troubled by the recession. Although home sales in the Lexington and Bluegrass area remain more stable than much of the country, folks appear to be shying away from building those half-million to million dollar abodes. These builders are proving especially vulnerable to what I describe below because they rely so heavily on secured loans. However, other small businesses are finding themselves in the same circumstances. The vulnerability of which I write is having one’s personal residence secured against primarily business loans.

Here is the general scenario which appears over and over again: Small Business Owner (SBO) goes to the bank to get a loan to either purchase a business or purchase a new asset, such as land to develop. The bank is glad to lend money to SBO after looking over the business proposal and sets up a time to close the deal. SBO drops by the bank and is told, by the way, granting this loan is contingent upon SBO giving their personal guaranty on the loan AND granting a security interest against their personal residence for the full value of the loan. Now, not all banks wait until closing to announce this, but a few persons I have talked with stated they had no idea they would have to put their own house up until they showed up at the bank. At that point, the whole business deal was dependent on getting that loan soon. Due to time constraints, SBO acquiesces to the security interest. “After all,” they think “the debt is primarily secured by the land owned by the business which will increase in value.” And there is the kicker.

Land values decreased and only now are increasing slightly. So, many of the loans are “under water”; that is, the land providing the primary security interest end up bringing less than the amount of the loan. The SBO faces having any excess debt of that business loan remain against their personal property. As the banks know, now the SBO cannot simply let their business fail while remaining safe in their home; they must navigate the personal debt gauntlet as well. Has their income been low enough to file a Chapter 7? Do they have sufficient income to even qualify for a Chapter 13, and if so, could they fund a plan? Could they afford a Chapter 11 and would it bring the relief they need personally? Throughout all those considerations the main question is: can I keep the home that I have worked so hard for so that my family has a home?

Unfortunately, there is often no clear course where I can confidently tell them that, “yes, you will keep your home.” If they have a primary debt that secures the home close to the allowed homestead exemption (currently over $21,600.00 per person; over $43,200.00 for a married couple), and their income is low enough, then they may be able to reaffirm on that home purchase loan and strip off the business debt. It is a different analysis if the business debt is secured first against the developed lot and secondarily by the builder’s personal residence which would otherwise have over $100k in equity. That means they have far too much equity for a Trustee to ignore when the debt securing so much of it is contingent. In other words, depending on the value of that developed lot, they may have $100k in equity or they may have zero equity and anything in between. Those details often do not become defined until after the bankruptcy has been initiated. They could attempt a Chapter 13, but their plan must still show that the unsecured creditors would do just as well or better than in a Chapter 7.

There are a few points I wish to highlight with the scenario I have briefly outlined: 1) Do your best, if you are a SBO, to avoid letting your personal residence secure a business loan; 2) If you do not have the clout or leverage to avoid using your residence as collateral entirely, negotiate limiting the amount of the personal guaranty to a manageable level if your business did fold; 3) Consult with an attorney, preferrably one familar with bankruptcy law, before signing on the dotted line any deal that directly involves the assets of your family; 4) Remember that bankruptcy can be far more complicated for a Small Business Owner, so if you find yourself facing a debt crisis, seek out an attorney that will meet with you personally and discuss all aspects of your financial and family situation. Pre-deal planning with an attorney is so much more cost efficient than bringing one in after the crisis.

March 8, 2013 Posted by | Bankruptcy, Marital Assets | , , , , , , | 1 Comment

Philosophy of practice in bankruptcy

My philosophy of practice comes through in most of my posts. Sometimes I am more direct about it like in this post on why I am a counselor at law rather than an attorney at law. As my practice in bankruptcy law grows, I thought it timely to express a few direct thoughts regarding my philosophy of practice in this area. As I alluded to here, I want to help decent, hard working people overwhelmed by debt get a fresh start. I also want to help people who have dug themselves into a hole, but who wish to learn how to live lean in the future. Conversely, I do not want to enable people with harmful habits to continue in a cycle of debt. To that end, I practice differently than many high volume consumer bankruptcy lawyers.

When you call to get assistance, you will talk to a lawyer rather than support staff. It will be either myself of one of the other two attorneys in the firm. This does mean a little bit of phone tag occurring, but it is worth the extra effort. When you come in for an appointment, you will meet with myself or the other attorney you spoke with at the firm. We will talk about your situation and you will get actual feedback about your overall circumstance and the best approach. Of course, once the detailed information comes in, some revisions to the plan will occur, but you will hear about those revisions from an attorney rather than a secretary or paralegal. When you go to court, you will already be familiar with the attorney who will be there with you and he will have prepared you for what is going to occur.

This contrasts to many bankruptcy specialty firms in that most of your interactions in those firms is with support staff. In some situations, you may not even meet with the attorney who will represent you until the meeting of creditors. This raises the question of how we can do this when our competitors are maximizing low cost support staff. I can answer that question easily enough: we charge a tiny bit more than those firms. The fee is not so much higher that you will notice the difference, especially since the attorney’s fees are a drop in the bucket for the amount of debt that will be eliminated, but you will feel the difference of personal attention as you go through the process.

That brings me to the second way my philosophy of bankruptcy practice expresses itself. We plan from the very beginning for you to achieve a discharge. For Chapter 13 bankruptcies, we plan from the start to have a plan of repayment that gets approved and works. You will find some few practitioners that are more concerned about having a high number of filings and less concerned with the end result. We are concerned about the end result, and would rather do fewer filings. We care about this because it is the right thing to do and because it is a good way to do business. That is to say, it will bring more wealth to us in the long run than doing a high volume business.

March 6, 2013 Posted by | Bankruptcy | , , , , , , | Leave a comment