Kentucky Bankruptcy Law

Counsel with Care

To File or Not to File: Attorney decision making

When you meet with an attorney to discuss your debt and the options for relief from the weight of that debt, he or she should engage in a decision making process. Some attorneys tend to keep that process to themselves (this is more of a style thing for the lawyer), and others, like myself, try to explain and educate the client. While I cannot lay out every twist and turn that the discussion may take with any particular situation, I will put forth a few basics.

I typically start with an overview of the debt which includes the numbers of different creditors as well as the amounts of debt. Part of this inquiry involves what debts are secured and unsecured. If there are secured debts (a lien or mortgage is filed on some sort of property), I look at whether the client is behind on those debts and whether they wish to keep the property securing the debt.

If there is one primary debt that is creating the financial consternation, then I pursue questions about whether there is any deal that might be worked out with them. Some creditors simply dig their heels in and refuse to accept payments or refuse to reduce the debt to a manageable level. But, if they will work with the debtor on a reasonable and feasible repayment plan, then that is often the best way to proceed.

However, if there are jseveral creditors where the debtor has fallen behind, working out multiple deals to avoid bankruptcy just will not work. There is always one creditor that throws a wrench into such a process; if any single creditor refuses to work out a deal, then working with the other ones becomes futile. The one creditor that refused to work something out and so files suit would create a snowball effect because insufficient funds would be available to successfully pay all the people who did negotiate a deal.

If the debtor is behind on secured debts and they want to be sure to keep the assets, then I must look at a Chapter 13 as the most likely way to make that happen. This leads to my second primary consideration of income. Regardless of whether a Chapter 13 is likely, I must look at the disposable income of the household (even if only one person is filing). This inquiry gives me two key pieces of information: 1) is there left over money after necessary living expnses are paid that can fund a Chapter 13 or a work-out deal, and 2) could the debtor qualify for a Chapter 7 instead.

At this point, I have a good idea of the recommendation I am likely to make. If there is only one creditor who is a problem and there are some spare funds to make payments, then it is good to attempt a work-out with them. If there are multiple creditors or the one creditor refuses negotiations, then a bankruptcy will be inevitable. If there are assets with liens that the person wants to keep or the household income is pretty high, then I probably steer towards a Chapter 13. In all other circumstances, a Chapter 7 serves best.

As a tangent to all of the above for business owners, I look at whether the debt is primarily consumer debt or primarily business debt.I will take this inquiry up in a separate post. But, this is a glimpes into the process I use to help people in debt trouble navigate their way to being financially healthy.

 

 

February 20, 2017 Posted by | Assets, Bankruptcy, Chapter 13, Chapter 7, Uncategorized | Leave a comment

Let’s be reasonable

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.

Merry Christmas!

 

December 8, 2015 Posted by | Alternate Debt Relief, Assets, Bankruptcy, Chapter 7, Discharge, Pre-filing planning, Uncategorized | , , , , , , , , | 1 Comment

Keeping the Homestead Safe in Bankruptcy: Chapter 7

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.

December 22, 2014 Posted by | Alternate Debt Relief, Assets, Bankruptcy, Business debt, Chapter 13, Chapter 7 | , , , , , , , , , | Leave a 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

How Creative Can One Get?

Since I do not focus on a volume practice in bankruptcy and because I have become known as someone who is able and willing to tackle some unusual situations, I get to consult with debtors that have really tough circumstances. A recent case led me down a path of seeing just how creative I could be in a bankruptcy situation to forestall and ultimately pay their home loan lender. Anyone who has talked to me or read many of my posts know that I am quite fond of Chapter 13 bankruptcies. This is partly due to the flexibility afforded by them to accomplish many things, such as saving one’s house from foreclosure. So, I fully expected to find that a Chapter 13 would be the best vehicle to solving this client’s issue where they were nigh on losing their home.

In the scenario presented to me, the debtor had a sizable asset they had not been able to touch which was in trust but not much in ongoing income. The trust was not a spendthrift trust, or else we would not even venture far down this path. However, the debtor hoped that in bankruptcy, the trust assets could be obtained in order to pay their debts – likely at 100%. There are many twists and turns to this matter which I simply cannot go into here. Negotiating this one particular twist will just bring us to another turn and so the analysis is far more complicated than I am putting forth. Other issues involve the couple being unmarried and looking at who actually owns what. There are issues related to the automatic stay when a foreclosure has already been granted, but on appeal. And, just how tight the trust actually is will determine much. However, this particular issue I am focusing on may be helpful to others. In theory, the debtor’s notion of satisfying their debts with this currently unattainable asset is appealing.

We must look at 11 USC Sect. 1322(b)(8) to start the analysis. This section allows the plan proposed by the debtor to provide for payment of all or part of a claim from their property or property of the estate (let’s not worry about that distinction too much – it is often one and the same, but not always). The debtor can do this, in part, because under 11 USC Sect. 1306(b), the debtor remains in possession of all property of the estate. In other words, if you have property you cannot cover with exemption and you really want to keep that property, the way to be assured of that and file bankruptcy is in a Chapter 13. In a Chapter 7, what you cannot exempt is subject to being liquidated.

So far, so good – the debtor keeps the trust assets and keeps the house. Oh, but then we have to look at other provisions of the code. Next, we turn to 11 USC Sect. 1325 which requires that they are able to make payments. If my debtor’s only means to make payments on the plan is accessing their trust, then we run into a problem because there is no reasonable certainty that they will get into that trust in bankruptcy. After all, they were unsuccessful before considering bankruptcy. Because of this uncertainty and the absence of regular income, the plan may not get confirmed. The second barricade the debtor hits is the dreaded “adequate protection” called for in 11 USC Sect. 361. If they cannot protect the secured creditor’s interest in the Chapter 13, then they have no right to keep the asset securing the debt. In essence, this is a carve out of the Section 1306 provision.

Oh, but the secured property is land which typically increases in value; it does not decrease in value. However, in our situation, the amount owed on the property is far more than the value of the land under current market conditions. Still, we may be able to show adequate protection if we show that the value of the land is increasing faster that the debt is accruing interest and other allowed charges. Let us leave this one alone then, since it is driven by things I do not wish to get mired in.

The real problem I find myself up against is caused by the very provision that usually helps people out so much in a Chapter 13: Section 1306. When we combine the fact that the debtor keeps possession of their assets with the other nicety of Chapter 13s: the debtor has an absolute right to convert to a Chapter 7 or dismiss their Chapter 13 case, that is where get to the rub. My debtor cannot show that she can and will make payments to unsecured creditors as required by Section 1325 when she could dismiss the case as soon as she gets hold of the trust assets. Such a plan is unlikely to get confirmed.

Only if her income could pay an amount equal to the non-exempt asset could she get confirmed because there is one other hurdle not yet mentioned. The final hurdle is back in Section 1325 which basically says that creditors have to come out at least as well as or better than if the debtor filed a Chapter 7. This is the creditor’s “best interest” test that balances out the debtor’s benefits in Chapter 13s. In our case, if the debtor filed a Chapter 7 which cannot be converted dismissed without permission and where the assets of the estate go into the trustee’s hands, my debtor cannot pass this test.

Oddly enough, given many facts that I did not go into, this case is actually one where Chapter 7 gives a better likelihood of saving the house. The trustee would be vested with the ability to crack open that trust and has more resources with which to do it than the debtor in a Chapter 7. And, if successful, the home loan would still likely be paid in full even after the commission and other expenses.

January 13, 2014 Posted by | Adequate protection, Assets, Automatic Stay, Bankruptcy, Chapter 13, Chapter 7, Conversion, Discharge, Disposable Income, Disposable Income / Budget, Exemptions, Foreclosure, Plan | , , , , , , , , , , , | Leave a comment

Getting the Whole Picture

For the second time in as many days a person I was speaking to highlighted the importance of getting the whole picture when looking at a bankruptcy matter. I accepted the compliment today when the potential client said that, after over a decade of trying to resolve certain debt issues and getting help from various professionals, I was the first person to sit and listen to the whole story. Actually, this is also true of family law cases such as custody or divorce. That may be why I am involved in both of these kinds of cases – because I naturally want to look at the whole picture to find a global resolution when possible.

Yesterday the issue was being served with a foreclosure notice on a house where the person was never named of the deed to the house. After a few more inquiries, it became clear that the person had a potential dower or curtesy (yes, that is spelled correctly) interest in the property as a result of being married to the owner at the time it was purchased. However, that was not the end of the story. I explained that we needed to look closer at the underlying documents. If the foreclosure was only extinguishing a dower or curtesy interest, then the person had nothing to lose. But, if they had ever signed a promissory note, even without ownership in the house, they could be hit with a deficiency debt. It is dangerous in law to stop at the simplest or most obvious answer; you gotta look at the whole picture.

Actually, that was more of a slice of the whole picture, but today’s story was more compelling on looking at the everything. To minimize wordiness, I will not explain the whole picture. This tale involved going back to 2003 and recounting several key events, tragedies, and attempts at resolving debt. What I learned was that nearly $100k of tax debt might be discharged except that there was a time they would have been “tolled”. I knew I had to get tax account transcripts to determine this. Also, there were events and circumstances that might actually allow for the rare discharge of student loan debt. However, it was clear that if I could help with the tax debt, then there might be enough relief that the student loans would not be so onerous. If I had not taken the hour plus to hear all the ins and outs of this families circumstances, I may have missed a key piece of the puzzle and blundered ahead making things worse rather than better.

The end result was that by looking at the whole picture, rather than just the immediate concern of the student loan debt, the potential client left with a sense of hope. I could not promise that the student loans could be discharged, but by coming at it from a different angle, relief was still at hand.

 

January 9, 2014 Posted by | Assets, Bankruptcy, Chapter 13, Discharge, Disposable Income / Budget, Priority debt, Property (exempt | , , , , , , , , | Leave a comment

Things to be aware of when facing bankrutpcy #10

I have said it many times – nearly everyone who I help with bankruptcy has already gone beyond reason in trying to pay off their debts by the time they reach my door. This post is about one of those very common steps people take in being as responsible as they can for their financial obligations: emptying retirement accounts.

I am not going to say it is a mistake to empty retirement accounts to pay off debt, nor am I going to say it is a good idea. It is simply a choice. However, it is a choice that you need to make armed with knowledge. Under the Federal bankruptcy code, retirement account funds are exempt pursuant to 11 USC 522. If you have over a million dollars in an Individual Retirement Account, though, you need to make sure your attorney is aware of this so their can maximize exemption amounts.

So, if you take money out of retirement to pay off debts, you are converting exempt assets. This is all well and good if, by doing so, you avoid bankruptcy altogether. However, if it only buys time and you end up filing bankruptcy regardless of the valiant effort, then you simply have lost those funds down the black hole of debt. Additionally, you will have incurred extra taxes if you withdraw the funds or borrow them but are unable to repay timely.

These are funds that would have ridden through the bankruptcy and remained available to for starting over after all debts were discharged. It is very difficult to gauge whether the strategy of raiding retirement accounts will pay off or not. Therefore, I strongly recommend getting a third-party, preferably and attorney familiar with the bankruptcy code, to review your situation before you withdraw those funds. As my dad would say, “There’s no use throwing good money after bad!”

January 6, 2014 Posted by | Alternate Debt Relief, Assets, Bankruptcy, Chapter 13, Chapter 7 | , , , , , , , , , , | Leave a comment