Kentucky Bankruptcy Law

Counsel with Care

Chapter 13 lasts awhile, but stay in touch

Chapter 13s last either three (3) years or five (5) years depending on a households income at the inception. That is quite a long time and it can be easy to let it fade into the background of one’s mind after settling into the rhythm of monthly payments to a Chapter 13 trustee. A debtor in a Chapter 13 likely had considerable contact with their attorney at the very beginning of the case, but this becomes less and less frequent after the plan is confirmed and all the claims have come in. After a couple of years, some old habits can creep back in, and the debtor may never think to contact their lawyer when faced with certain financial decisions.

Many of my Chapter 13 clients come to me to help save their home from foreclosure. A Chapter 13 is a grand tool for just such a thing. Most of these clients got to the point of facing a foreclosure action in State court because they made choices between paying a house payment and getting needed car repairs or paying for a necessary medical procedure. That first time of missing the payment, they likely started getting some calls, but nothing earth shattering happened. Next thing they knew, several missed payments have racked up, they are served with a civil summons, and the only way to catch them up is through a five-year Chapter 13.

Then Christmas rolls around that second year into the Chapter 13 and the belt-tightening budget worked out with the trustee really only left room for macrame’ gifts for the children or perhaps a Chia pet or two. It is heartbreaking for a parent when their children’s friends are getting the newest iPhone or PlayStation 4. Perhaps the car broke down again or the refrigerator they had been nursing along for an extra 10 year lifespan finally goes out. Well, that old pattern kicks in and it seems pretty harmless to miss a house payment. After all, nothing bad happened before until a good six months down the line. Well, bankruptcy is a different world.

Most home loan creditors will file a motion for relief from the automatic stay (the law that precludes them from going ahead with the foreclosure once bankruptcy is filed) with just one or two missed payments post-petition. Being in Chapter 13 basically puts them on high alert and they are much quicker to pull the trigger.

This is not the end of the world – yet. Their attorney can object to the motion and almost always work out an Agreed Order to get caught back up again in about six (6) months. However, there is a hefty price to be paid. The creditor will add in their own attorney fees and they will also likely insist on a drop-dead provision where if those payments do not roll in on time, the stay will be lifted without filing another motion and they can then proceed with the foreclosure.

The better course of action is to call one’s bankruptcy attorney to do some problem solving when an unforeseen expense comes about. In the Eastern District of Kentucky, the Chapter 13 Trustee typically does not oppose a motion to suspend plan payments for a month or three if there is a good reason. That is often enough to get past some unexpected expense and get back on track making up the payments. The upside to this is that the debtor will not get hit with hundreds more in attorney fees or end up on a probation sort of situation. So, even if it has been a long time since you talked to your bankruptcy attorney, if things go awry, call them first and get help.

January 15, 2015 Posted by | Additional Debt, Automatic Stay, Bankruptcy, Chapter 13, Disposable Income / Budget, Foreclosure, Plan, Plan payments, Planning, Pre-filing planning, Secured loan arrears | , , , , , , , , , , , , , | Leave a comment

Keeping the Homestead Safe in Bankruptcy: Chapter 13

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.

December 19, 2014 Posted by | Additional Debt, attorney fees, Automatic Stay, Bankruptcy, Chapter 13, consumer debt | , , , , , , , , , , , , | 1 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

My bankruptcy was dismissed, now what?

If you filed a prior bankruptcy, either Chapter 7 or Chapter 13, then there is no time limit on filing another bankruptcy with regard to receiving a discharge as I have been explaining the last several days. However, the problem this does create is with the automatic stay.

If the first bankruptcy was pending and dismissed during the year preceding the filing of the next bankruptcy, then the automatic stay of the bankruptcy terminates automatically on the thirtieth (30th) day after the subsequent case was filed. See 11 USC Sect. 362(c)(3). This is not the end of things, but it does require careful pre-filing planning after a case has been dismissed.

May 29, 2013 Posted by | Automatic Stay, Bankruptcy, Chapter 13, Chapter 7, Discharge | , , , , , , , , | Leave a comment

Well, I am here again – what are my options?

I began looking a the time between Chapter 7s if one wishes to receive a discharge. The time frame is different when the subsequent case is a Chapter 13 showing the favored status of Chapter 13 bankruptcy. If the preceding bankruptcy was a Chapter 7 (or Chapter 11 or 12), then you cannot receive a discharge in a subsequent Chapter 13 if is filed four (4) years or less of when the Chapter 7 was filed. See 11 USC Sect. 1328(f)(1).

If  one gets a discharge of unsecured debt in a Chapter 7 but still has some non-dischargeable priority debt in income taxes, they may want to turn right around and file a Chapter 13 without waiting the four years because they will be paying the debt in full over the length of the plan. So, there is no need for the discharge. This is a strategy discussion to have with your attorney.

May 22, 2013 Posted by | Automatic Stay, Bankruptcy, Chapter 13, Chapter 7, Discharge, Planning, Pre-filing planning, Priority debt, Student loans, Tax Debts | , , , , , , , , , , , , , | Leave a comment

Will I get to keep my tax refund?

The answer to this question, as with so many bankruptcy questions, comes down to timing. The set-off provision of the bankruptcy code, 11 U.S.C. 553, basically says that the bankruptcy code does NOT change the rights of the IRS (and certain other creditors/debts) to retain your tax refund. However, not only does the debt owed to the IRS need to already exist prior to the date your filed your bankruptcy petition, but your right to receive the refund had to arise before your filed the petition also.

This gets a little tricky because most people think their refund came about (or arose) when they filed their tax return. Actually, the right to receive that tax refund arises at the end of the taxable period. See 11 U.S.C. 362(b)(26). So, if you are filing a tax return on 4/15/2013, the right to receive the refund arose on 12/31/2012 because that was the end of the taxable period of 2012. The return on 4/15/2013 only quantifies (liquidate) how much is owed.

How this plays out is that if you owed taxes for the 2011 tax year and expect a refund for the 2012 tax year and you filed your bankruptcy petition on or after 1/1/2013, then the IRS will keep enough of your tax refund from 2012 to cover the debt owed from 2011. Any extra would be refunded to you. If there are still taxes owed from 2011, then they will either need to be paid in full in your Chapter 13 (because they would be priority debts – another post explains this) or they will still be there for you after a Chapter 7. Older tax debts may be discharged, but in this example they would not.

This is where advanced bankruptcy planning can help. If you already know you are likely to receive a sizable tax refund for the tax year you are currently in and you owe tax debt from a prior year, your best chance at keeping those funds is to file the bankruptcy before December 31.

March 1, 2013 Posted by | Automatic Stay, Bankruptcy, Chapter 13, Chapter 7, Planning, Pre-filing planning | , , , , , , , , , , , , , | Leave a comment

News You Can Use: New local rules for E. D. Ky Bankruptcy Court

A new set of local rules supplementing the Federal Rules of Bankruptcy Procedure  (FRBP) were ordered into being for the Eastern District of Kentucky Bankruptcy Court. These local rules went into effect on 1/1/2013. For the most part, they merely codify current practices or fill in some gaps. I will highlight a few of the more important changes discussed at a recent training sponsored by the Fayette County Bar Association.

  • 1002-2 If a debtor is a corporation, LLC, etcetera, be sure to also file authority to file.
  • 1007-2 Mailing lists: Be sure to find the right address for the Kentucky Department of Revenue and the IRS. These can be found on the right address.
  • 1009-1 A motion for the case for the meeting of creditors to be heard in a different location, you must file that motion with the petition.
  • 2002-1 Notice requirements generally are 14 days unless there is a different, specific rule. Be sure to file a motion to shorten time if you need that to be less than 14 days.
  • 2003-1 Trustees can continue the meeting of creditors without a court’s order. If the trustee does continue the meeting, the counsel for the debtor must send out notice to all creditors. Only file a motion if the trustee will not agree to a continuance and then explain the circumstances.
  • 2004-1 A motion for an examination under 2004 does not need a hearing and the order will be entered by the court after three business days without an objection.
  • 2016-2 The presumptively reasonable fee of $3,500.00 no longer includes the court filing fees.
  • 3002.1-1 When a secured creditor files notice of post-filing fees, the trustee no longer has to object – they simply will not be paid through the plan.
  • 3015-2 A modification to a Chapter 13 plan, must be filed seven (7) days prior to the hearing on confirmation to be considered.
  • 3015-3 Objections to a modified plan must be filed within seven (7) days after the first meeting or creditors or the date of the filing of a modified plan, whichever is later.
  • 3015-4 Adequate protection payments will not accrue or be paid until the creditor files a proof of claim. But, if this happens and a case is dismissed, the trustee will pay those adequate protection payments that have accrued.
  • 4001-1 Motions to lift the automatic stay filed prior to the meeting of creditors, must give the trustee fourteen (14) days after the meeting to object. If the trustee does not object, then the property is deemed abandoned.
  • 4003-2 A motion to avoid a judicial lien that encumbers exempt property must include more specific information to identify the lien: filing date, county filed, book and page number, and the lien (style of underlying case) to be avoided. The property, value of property, amount of other liens on the property also must be in the motions as well as the amount and statutory provision of the claimed exemption. A non-possessory and non-purchase money lien must identify similar information. There is specific language that must be in the order. These motions must now be filed separate from the proposed plan whereas they used to be included in the plan. Unfortunately, if there is a judgment lien filed, but the debtor owns no real property going into the bankruptcy, then one cannot request this 522(f) relief. By law, the judgment and lien become void upon entry of the discharge order.
  • 4004-5 Debtor’s counsel must file a Local Form 4004-5a, within thirty (30) days of the trustee filing their Certification of Plan Completion and Request for Discharge.
  • 7026-1 Provisions of FRCP 26(f) do not apply with adversary proceedings or contested matters.
  • 9013-1 Orders only need to list parties to be served that are NOT served by the ECF system.
  • 9070-1 How exhibits are filed are changed and this is set forth in the Administrative Procedure Manual. Essentially, each exhibit should be a separate attachment rather than lumped together. A clear and concise description of the exhibit should be input into the ECF system.

 

February 1, 2013 Posted by | Automatic Stay, Bankruptcy, Chapter 13, Chapter 7, Discharge, Plan, Plan payments, Planning, Pre-filing planning, Proof of Claim, Security interests | , , , , , , , , , , , , , | Leave a comment

Chapter 13 and Post-Petition Arrears

In my prior post, I warned Debtors to be aware of payments made outside the Chapter 13 plan on certain secured debts and to make it a priority to stay current on those debts. Unfortunately, unexpected expenses can hit anyone as well as job losses or other income decreases. So, sometimes a Chapter 13 Debtor will be forced into a tough spot of whether to make a house payment or not. If this happens, all is not lost.

First, if the expense or income drop is beyond the Debtor’s control and it is ongoing, then the Chapter 13 should be modified to reflect the new circumstances. It may even be necessary to re-evaluate if the home can still be saved within the Chapter 13. But, if this is one of those out of the blue events and the Debtor can soon be back on track, then the question becomes whether brand new, post-petition arrears can be cured (caught up). Again, this usually arises when one is trying to save their home by way of the Chapter 13 (see this prior post). So, I will focus on post-petition home loan arrears, especially since there are special protections for these creditors in the Code.

First, let me explain what is special about home loans. Under 11 U.S.C. Sect. 1322(b)(2), the Chapter 13 plan cannot modify the rights of secured creditors where the loan is secured only by a principal residence. This is targeted to fit all your ordinary home loan situations. Creditors have argued that this provision stops Chapter 13 plans from forcing them to allow post-petition arrears to be cured. However, 11 U.S.C. Sect. 1322(b)(5) says that “any” defaults while the case is pending so long as the final payment on the whole loan is not due until after the Chapter 13 ends (technically after when the last payment in the Chapter 13 is due). I suppose creditors may misunderstand the “notwithstanding paragraph (2)” language to mean the opposite, but in truth, it makes it very clear that 1322(b)(2) does not preclude curing post-petition arrears.

It is no surprise, then, that the Eastern District of Kentucky Bankruptcy Court ruled just this last June, 2012, that Debtors could cure post-petition arrears that developed (See In re Cable, 11-70169 entered June 19, 2012). So, if you fall behind a little in your Chapter 13 on your home loan or other secured loan paid outside the plan, then it is vital you let your attorney know right away so the plan can be modified. Whether it will work or not depends on how much the new arrears will raise your plan payment.

But, this is not the end of the story…

November 30, 2012 Posted by | Automatic Stay, Bankruptcy, Chapter 13, Foreclosure, Plan, Secured loan arrears | , , , , , , , , , | 1 Comment

I filed a prior bankruptcy but I never got a discharge, when can I file again?

c there is no time limit on filing with regard to receiving a discharge. The problem this does create, though, is with the automatic stay.

If the first bankruptcy was pending and dismissed during the year preceding the filing of the next bankruptcy, then the automatic stay of the bankruptcy terminates automatically on the thirtieth (30th) day after the subsequent case was filed. See 11 USC Sect. 362(c)(3). This is not the end of things, but it does require careful pre-filing planning after a case has been dismissed.

October 23, 2012 Posted by | Automatic Stay, Bankruptcy, Chapter 13, Chapter 7, Discharge, Planning, Pre-filing planning, Uncategorized | , , , , | Leave a comment

Yet another reason to consider Chapter 13 over Chapter 7

In either chapter 13 or chapter 7 bankruptcy there is an automatic stay with broad protection that stops creditors from attempting to collect debts. This stay is found in 11 USC Sect. 362 of the bankruptcy code. There is an additional “stay” afforded debtors who file chapter 13 and it is found in 11 USC Sect. 1301.

Upon first glance at Section 1301 it appears to be a protection given to non-filing co-debtors such as mom or dad who co-signed on the car loan. However, the intent is actually to expand the protection given to debtors. In other words, if the provisions are violated, it is the debtor who would file the action against the creditor. The co-debtor can join in that action, but it does not give standing to the co-debtor to pursue the action unilaterally (or at least that is what some courts have decided). See In Re: Marlon Durone Stacker (Bankr. S.D. Ill., 2011). This explains why there is no provision for the awarding of attorney fees for a violation of Section 1301 whereas there is such an award under Section 362.

The idea is that during the protracted chapter 13, a creditor would take action against the co-debtor and in so doing, would coerce the debtor into paying more to that creditor than the plan allowed. Congress wanted to prevent such an end run around the automatic stay by crafting this more limited provision.

Section 1301 is also limited in that if the co-debtor received consideration (something of value) from co-signing on the loan, then then stay does not protect them to that extent. So, if a non-debtor business partner co-signed a loan and the consideration (value) came into the business to both his and the debtor’s benefit, then action against that co-debtor is not prevented. Or, perhaps a friend co-signed a loan for $1,000.00 and received $200.00 of it, then the creditor can pursue him or her for that $200.00, but no more than that. Another limitation is that if the chapter 13 plan only provides for a certain amount of the loan to be repaid, then the amount in excess of the plan is not protected. So, if the plan provides for $9,000.00 of a $10,000.00 debt to be repaid, then the creditor can still pursue the co-signor for the extra $1,000.00.

There are some other, non-enumerated limitations to Section 1301. For example, the creditor may still be able to report a delinquency on the co-debtor’s credit report. One could say that this constitutes a false report because the terms of the agreement have been altered by the chapter 13 plan. But, the plan only altered the relationship between the creditor and the debtor, not the creditor and co-debtor. However, such an action could constitute a violation of both Section 362 and Section 1301 if one can show that there was intentional action by the creditor likely to coerce the debtor into paying beyond the plan. See In re Singley, 233 B.R. 170 (Bankr. S.D. Ga., 1999). If you look at the Singley case, be aware that the court there said the intent of the creditor had to be shown to be one of coercing the collection of the debt, but other courts say the intent only has to be that the act of violation was intended to occur regardless of the result.

Despite the limitations of Section 1301, non-filing co-debtors being protected from lawsuits, garnishments and the like may make the extra work of a chapter 13 worthwhile.

June 16, 2011 Posted by | Automatic Stay, Bankruptcy, Chapter 13, Plan, Planning | , , , , , , | 1 Comment