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.
I have written about this before, but it bears repeating. I am not offering smoke and mirrors here, but just straight up information. There is a competitor’s ad campaign that has garnered considerable attention and it promises to get a bankruptcy started for $78.00. The ad goes on to note that certain restrictions and qualifications apply to this offer. And, I am sure they do explain those once your come in to meet with them. I have not interviewed my competitors on this issue, so I cannot say with certainty, but I can only contemplate one way that they can actually get a bankruptcy started for $78.00 and that is in a Chapter 13. It just so happens that you can pay the $310.00 filing fee that the court charges for a Chapter 13 (or the $335.00 for a Chapter 7) in four monthly installments. Each installment for the Chapter 13 would be $77.50 and thus we have you entering into a Chapter 13 paying only that first installment (and rounding it up gives you the $78).
I can do this for you also. However, I would need to figure out how much of a plan payment you would be able to afford because paying payments each month makes up a Chapter 13 in contrast to a Chapter 7. That would be the restriction. The Chapter 13 can run as short as 36 months or as long as 60 months depending on your household income. Attorney fees run higher in a 13 than a 7 but those higher fees can be paid through the plan itself. I only recommend going this route if it is the only way you can get into a bankruptcy and get the relief you need. You must qualify for a Chapter 13 which includes having a regular source of income and that income must be sufficient to pay enough in a plan payment to cover the attorney fees, trustee commission, certain tax debts, and certain secured debt arrears. The hitch with going this route is that the less your pay up front on attorney fees, the higher the plan payment has to be after filing. That may be perfectly fine and work well, I just want you to know that in advance rather than when I have you already in my office. There is also a credit counseling course that must be done through a third party prior to filing and this can run anywhere from $10 to $25 directly to that company. This a legal requirement of the law and not something that can be circumvented.
How would I be able to go beyond a firm that can get you into a bankruptcy for $78.00? Well, I do all the work myself. From the initial phone call to the initial meeting all the way through to the discharge order being issued at the end of the bankruptcy – it is all with me personally. That is to say, you will not be interacting with secretaries, paralegals or other attorneys (unless there is a true emergency); you will be interacting with me. I will be the familiar face that shows up with you at the meeting of creditors and the same voice on the phone who helps explain things along the way. That is simply how I chose to practice law, by keeping overhead low and doing it myself rather than shooting for high volume. That competitor does a fine job from what I can tell; it just done using lots of staff. If my individualized and personal approach appeals to you, then come in to see me and I will see if I can match any competitors’ offer for a bankruptcy or even go beyond what they have to offer. There is no charge for that initial consultation and I do NOT limit it to 1/2 an hour.
When faced with bankruptcy, people hate to turn away from family that have helped them. The natural and common thing to do is try to 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 fundsthat 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 cemetery. 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 cemetery 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.
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 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, the court still granted their motion.
A recent decision out of the Norther District of California Bankruptcy Court bolsters a position I have already been espousing. In re Christoff, 510 BR 876 (N.C. Cal. 2014) looked at 11 USC Sect. 523(a)(8) which makes three types of loans non-discharged unless certain things are proven in an adversary proceeding (a lawsuit within the bankrutpcy). The three types of loans are, in essence: government subsidized loans, IRS qualified education loans, and “an obligation to repay funds received as an educational benefit, scholarship or stipend[.]” 11 USC Sect (a)(8)(A)(ii).
This case involved Meridian University directly funding the debtor’s studies in their Psychology program and whether that constituted the third type of debt above. The court ruled against Meridian because that statutes says “repay funds” thus requiring that actual funds are distributed. Instead, Meridian simply kept a “tab” of sorts of what the debtor owed them for tuition and fees. There was no third-party lender involved that distributed funds to Meridian or to the debtor.
I expect this would be the same outcome if such a debt discharge were challenged here in the Eastern District of Kentucky. This impacts many technical schools that simply charge the student debtor directly for tuition rather than involving an independent third-party lender. It is very good news for student debtors who went to such schools and then discover their training is not quite as marketable as the school led them to believe. So, the student debtor in the case above had student debt, but not a student loan.
I am often asked by Chapter 13 debtors if they can pay their Chapter 13 off early. This is a problematic question with no one clear answer. It is problematic because certain property of the debtor continues to come into the Chapter 13 estate while the bankruptcy is pending. This is different from a Chapter 7 where the property of the estate is established and remains static at the moment the bankruptcy is filed. The clearest example of this ongoing inclusion in a Chapter 13 are wages and other earned income of the debtor.
Since ongoing wages and earned income of the debtor comes into the estate of the Chapter 13 so long as the case is pending, then one cannot use those wages to pay your plan off early IF you were not below the median income on the means test OR you are paying 100% of unsecured debts in the Chapter 13. This makes sense because the idea with a Chapter 13 is that you repay creditors to the extent that you reasonably can. So, if you end up getting promotions or a better paying job during the bankruptcy, then you could reasonably pay a higher percentage of your unsecured debts.
Some Chapter 13 trustees require a new budget (Schedules I & J) to be submitted each year. If they see a substantial bump up in disposable income, they then require the plan to be modified to pay a higher percentage of the unsecured debts. In the Eastern District of Kentucky, the trustee does not automatically require this. However, if you begin to pay ahead on your Chapter 13 plan, they well may pay attention and decide you must be making more money. This can trigger a demand from the trustee for a new budget and probably a higher plan payment.
There are some things that clearly and unquestionably CAN be used to pay off a Chapter 13 plan early. If you use property of the estate that was exempt at the inception of the bankruptcy, such as a 401k account, then there should be no issue if you fell below the median on the means test. However, there are other things that need to be investigated and carefully considered by your attorney. Therefore, I must abstain from listing those things that are in the grey area here lest I miss some peculiarity of your situation.
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.
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.
Everything in our culture drives towards giving bigger and better gifts for Christmas. Even when our budget is tight, we do not want to let our families down. So, we are tempted to buy gifts on credit. The risk is that this will put us over the top of our threshold for handling debt leading to a new year’s bankruptcy.
This raises the specter of challenges to discharge of debt for luxury items and having assets that cannot be exempted. That is because the laptop you bought for your child who lives with you is still an asset of yours to report and exempt. Gift items worth several hundred dollars are likely luxuries.
Take a deep breath and remember, the best gift is actually you being present.
First, I want to give a shout-out to my law school compatriot and all ’round helpful attorney, Ben Carter, for his pointers in the consumer protection arena. I recently was approached by a young lady for help with a particular debt. Other than this one liability, she had no debt to speak of and so bankruptcy really would not be the most cost-effective way of dealing with the issue. Bankruptcy will definitely extinguish a debt that arose out of bad practices by the creditor, so if the particular debt is high enough or if there are several issues that could be wrapped up at one time, then bankruptcy would be a route to consider. But when the only issue is a liability that came about by unlawful practices of the creditor, then one can consider another line of attack – pursuing an action under the Kentucky Consumer Protection Act (KCPA).
In my client’s situation, she was approached by a home security company. I do not want to go into the details at the moment because this matter is still pending, but I will say the salesperson for the home security company engaged in some bait-and-switch tactics and made some representations that she relied upon that turned out to be false. She quickly decided to cancel the contract but, as a result of one of those misrepresentations and deceptive acts, she missed the window in which the company (actually it turned out there were two separate companies which made it even harder to know what was what) claimed they would have honored the cancellation. Further, they claimed the damages for stopping the contract were the exact same amount as it would cost for the home monitoring service over three years. I did some research online via the Google (if I call it “the Google” it just sounds more impressive don’t you think?). Apparently complaints of this nature against these two cohort companies is quite widespread.
Now, the really nice thing about pursuing a company for a violation of the KCPA is where suit can be brought. The ordinary rule of procedure in a civil lawsuit is that the suit must be brought where the defendant is located. However, if a person buys stuff or services mainly for personal use, and is subjected to “unfair, false or deceptive acts or practices” (KRS Sect. 367.170) then they can bring suit in their own county’s Circuit Court (KRS Sect 367.220). This is incredibly helpful when, as in this young lady’s situation, both companies are non-Kentucky based businesses. If she had to sue them on their home turf, the cost would be astronomical.
That same statute, KRS 367.220, goes on to make sure judges know that they can award attorney fees to the consumer if they prevail and they can even award punitive damages against the offender. However, to position oneself the best way possible to make either of those things happen, the consumer must document extensive efforts to settle the matter along the way.
Given the generous jurisdiction, venue, and damages provisions of the KCPA, one would think more suits would be brought. This is where the economics of fraud come into play. Businesses that engage in fraudulent practices typically do not go after huge amounts of money. I venture to say that, other than that deposed prince of Nigeria, nearly all businesses who are fraudulent seek to acquire well under $2,000.00 from the consumer. That means that someone seeking to redress the wrong through court could end up spending about as much on a lawyer as the debt itself. And, as with all litigation, there is no certainty of prevailing nor of being awarded attorney fees. Attorneys rarely will pursue one of these cases without some assurance that their time will be compensated and so the “cost-benefit analysis” often favors the dishonorable business. And, there is a dearth of low-income or pro bono legal advocacy programs because our society does not wish to fund them.
There is one more avenue a consumer can take if they cannot find a lawyer. Although there is absolutely no guarantee it would right their own personal injury, they can report the matter to the Attorney General’s Office and that office may investigate the businesses practices. Even if they do investigate and pursue an action, they would not be representing you individually. Furthermore, they state several steps to take first on their website.
All this considered makes bankruptcy a more attractive option to get out from under a debt arising from fraudulent or unfair business practices. When bankruptcy does not make sense, though, it is good to know that other avenues are available.
- 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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