Kentucky Bankruptcy Law

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I am glad to announce that Matthew D. Henderson will be joining Troutman & Napier, PLLC as an associate attorney. Matthew comes to us from the Fayette County Attorney’s office. Prior to that, he served as Judge Philpot’s judicial intern in Fayette Family Court. He will be bringing tremendous skills and knowledge in areas of criminal law and family law as well as estate planning and general litigation. With the addition of Matthew, Troutman & Napier, PLLC offers a full range of services and practice areas for our clients.

July 7, 2014 Posted by | Bankruptcy, child custody, child support, Civil Procedure, Divorce, Estate Planning, Family Law, Guardianship, Life & Law, Negotaion & conflict resolution, Paternity, Politics, Solo & Small Firm | , , , , , , , , | Leave a comment

Special Needs Trust

I just wanted to mention a post over on my family law blog site that has some indirect implications on bankruptcy, specifically pre-bankruptcy planning and asset protection. You can access that post here.

October 4, 2013 Posted by | Bankruptcy, Estate Planning, Family Law | , , , | Leave a comment

Exempting alimony in bankruptcy

Alimony, or maintenance as it is called here in Kentucky, is an interesting topic because how state law defines and treats alimony does not necessary mesh with the bankruptcy code. In this post, I am talking about when a non-debtor ex-spouse owes the person filing bankruptcy (the debtor) alimony or maintenance (the two terms are interchangeable and I’ll stick with alimony since it is the most recognized). The scenario is a divorced debtor filing a bankruptcy (it can be either a chapter 7 or a chapter 13) because their ex has failed to pay the alimony as ordered as is now in a world of hurt. So, the debtor has to list the alimony owed to him or her because it comes into the bankruptcy estate through 11 USC Sect. 541. There is even a “clawback” provision in 11 USC 541(a)(5)(C) that reaches 180 days beyond the filing date of the petition in cases where a divorce has not yet been finalized.

To be sure, 11 USC Sect. 522(d)(10)(D) appears to exempt alimony (“the right to receive”) so that the debtor gets to hold on to it. However, appearances can be deceiving because the bankruptcy courts do not have to accept the determination of the parties or the state court in deciding if a certain asset is alimony. The debtor may have a court order that calls what the ex owes them alimony and he or she may believe it is alimony, but the bankruptcy court can decide differently. If the bankruptcy court deems the awarded monies to actually be a property settlement, then it is not exempt beyond any available “wild card” exemption from 11 USC 522(d)(5).

The bankruptcy court makes its determination as to whether or not an award of alimony is truly alimony or if it is actually a property settlement mechanism by looking at what actually transpired. There are different aspects that the court may focus on and so it is more likely to be alimony if: 1) it ends at death or remarriage, 2) it can be modified based on need, 3) the debtor did not have property or resources to meet their basic needs, 4) it is subject to the tax treatment for alimony in the tax code (taxable to recipient; deductible by payor), and 5) the payments go directly to the debtor. If, on the other hand, the award of monies was in lieu of other property or debt, then it may not be deemed alimony. These are not necessarily exclusive factors, but they give an idea of how the courts analyze an alimony claim of exemption. The bottom line is that the court wants to be sure that the monies are actually for the support and sustenance of the recipient. This is consistent with the other items in Sect. 522(d)(10)(D) because each is a replacement for wages.

Be careful entering into a bankruptcy if you are the recipient of alimony or maintenance. When you interview your prospective attorney, but sure they understand the nuance behind the stated words of the law. They need to be able to analyze how likely the court is to see the award as alimony. If the award is sizable, then you can expect to have an objection to the exemption be filed by the trustee. If you win by convincing the court that it is indeed alimony, you will still have to show that all of it is “reasonably necessary” to live on – and that does not mean living in style or luxury.

April 30, 2013 Posted by | Bankruptcy, Estate Planning, Exemptions, Family Law, property allocation | , , , , , , , , , | Leave a comment

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

Working knowledge of bankruptcy essential to MANY areas of law

I was just talking the other day to a client who had a real estate transaction question. The context of the real estate transaction included a co-signed debt, a family law issue, and a high risk of bankruptcy for the co-debtor. If I only understood one of those areas of law or only knew a part of the context of his question, then I would have given the wrong advice.

If I had only thought about the transfer from the family law perspective, I would have advised against the transfer. If I have only contemplate real estate law and looked at the value of the property versus the debt load, I probably also would have advised against the transfer. However, knowing the impact of the imminent filing of bankruptcy by the co-signer and how that would interplay with the family law issue and the ability to enact a transfer post-bankruptcy, made the exact opposite answer the better advice to give him.

Bankruptcy law permeates every single other area of law that involves financial transactions of any sort. This is because the bankruptcy code preempt debtor and creditor rights and obligations of state law to a huge extent. So, whether you are contemplating a divorce settlement, a real estate transfer, a debt settlement, or a multi-million dollar contract, ask your lawyer what would happen if you or the other party ended up in bankruptcy. If they have no idea, ask them to research it or consult with a bankruptcy practitioner.

September 8, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Divorce, Estate Planning, Family Law, Negotaion & conflict resolution, Planning, Pre-filing planning, property allocation | , , , , , , , , , , , | 1 Comment

Here I am dead and my ex-wife (ex-husband) got all of my retirement!?

It is common for a Separation and Property Settlement Agreement to be reached in a divorce situation where retirement benefits are divided up. When one spouse’s retirement is split up and a portion is given to the other spouse, family law practitioner’s know that a Qualified Domestic Relations Order (“QDRO”) is required in addition to the agreement document. However, due to off-setting of funds, one spouse generally has a retirement account that remains unmolested and sometimes each spouse keep their retirement wholly as their own through negotiations. In this latter situation, a QDRO is not required and so they are rarely prepared and entered with the court and the plan administrator. A recent Supreme Court of the United States (“SCOTUS”) decsion, KENNEDY, executrix of the ESTATE OF KENNEDY, DECEASED v. PLAN ADMINISTRATOR FOR DuPONT SAVINGS AND INVESTMENT PLAN et al., Decided January 26, 2009(available here at Findlaw) points out the danger assuming the divorce’s settlement agreement wraps up loose ends regarding retirement accounts.

In the Estate of Kennedy case, Husband and Wife entered into an agreement where Wife gave up her interest in Husband’s savings and investment plan (“SIP”) that was governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). The divorce was granted and the settlement was accepted by the courts. Husband’s attorney did not see the need for a QDRO and Husband assumed that was that and never changed his designation of beneficiary with the SIP administrator. When Husband died, the SIP administrator disbursed the remaining funds to ex-Wife. Everybody else got a bit peeved over this and sued in Federal District Court because it involved a question of federal law under ERISA.

Without getting too far into the analysis, SCOTUS decided to keep things simple and straightforward for plan administrators: either you do a QDRO or you change your beneficiary. The plan administrator is to look to the documents of the plan under ERISA to determine where the money goes avoiding complicated inquiries into a person’s intent. While a QDRO is an exception to this that could require the administrator to look outside of the plan documents, such an inquiry would be limited.

The lesson here is that if your are able to keep your retirement accounts intact through a divorce, you cannot rely on the divorce settlement agreement to direct those funds upon your death. You must either change your designated beneficiary, or have a QDRO entered – changing your beneficiary is by far the simplest and least costly of those options. Family lawyers need to provide their clients with follow-up directions at the end of a divorce to tie up loose ends such as changing beneficiaries for retirement accounts.

January 31, 2009 Posted by | Divorce, Estate Planning, Family Law, Marital Assets, property allocation | 1 Comment

No (financial) worries for Heath Ledger’s child

A story out today revealed that Heath Ledger’s minor daughter, Matilda Rose, was not included in his last will and testament. The will was drawn up before Heath had any children and left everything to his parents and three sisters (Herald-Leader story from March 11, 2008 on page A2). Heath’s immediate family issued assurances that Matilda Rose would be provided for. If I were advising Matilda Rose or her mother, I would express my appreciation, but I would point out that many states have statutes (and common law) covering “pretermitted heirs”. A pretermitted heir is a child who was accidentally or inadvertently omitted from a will. That describes Matilda Rose. I have not looked up the statute or common law in New York where Heath’s will would be probated, but it most likely has such a provision protecting pretermitted heirs. Therefore, I would insist that she receive the inheritance due to her. In many states with there being only one child, that may be the entire rest and residue of the estate (roughtly everything except for specific gifts to particular persons). Hopefully, Matilda Rose’s mom, Michelle Williams, will obtain legal counsel that will point this out to her.

If I had been advising Heath Ledger, I would have talked to him about having a will that covered many contingencies. One of those contingencies would have been the likelihood of having children and how he wished they were to be treated. Generally, even if a person has no children, it is wise to draft the will as though he or she would have them before they die. This would even be true for elderly persons because of the possibility of adopting a child. One can disinherit their children or a specific child, but to do so requires a provision drafted to address this particular wish rather than silence. It is important to carefully approach such an action and never disinherit a child lighlty because of both the moral consequences of such an action and because of the possibility of a court reforming the will under a few different doctrines.

March 11, 2008 Posted by | Estate Planning, Family Law | , , , , , , | Leave a comment

Living Trusts and probate

Here is an overview of an estate planning tool known as a Living Trust. It is often referred to as an inter vivos trust. Such estate planning tools target one or more of three issues in estate planning with the overall goal being wealth maximization. Those target areas include: minimizing estate and gift taxes, providing for long-term nursing care, and eliminating probate costs.

Those with individual estates in excess of one (1) million dollars need to plan to minimize or eliminate the federal estate and gift tax. I say one (1) million because that will be the exemption amount in 2011 unless Congress extends the repeal of the tax. Currently, the exemption is at two (2) million and increases to three and a half (3.5) million in 2009. In 2010 there will be no federal estate and gift tax. A married couple can plan carefully to combine their exemptions, but for those with smaller estates, planning around this issue is unnecessary.

Providing for long-term care takes two forms: obtaining long-term care insurance or decreasing assets and income so as to qualify for medicaid funding. Obtaining long-term care insurance can be too expensive to achieve if one waits until they are of an advanced age. Decreasing assets involves navigating complex and changing medicaid regulations which go beyond the scope of this overview.

While expected probate costs are often exaggerated, avoiding them and especially avoiding the aggravation for family members who are still grieving can be achieved at low cost. The most used tool for avoiding probate is the Living Trust. Where there are no estate and gift tax concerns, using a revocable trust is preferred. A trust is a legal vehicle where an individual transfers the ownership of their assets. The trust then owns the persons stocks, bonds, bank accounts and other property. Since it is revocable, the person setting up the trust (the grantor) can take those assets back out of the trust and cause the trust to no longer exist. The grantor can still receive the income and have use of the assets and property. Typically, when a person is using this as an estate planning tool they are becoming older or have health concerns and they will designate a trusted loved one to be the trustee who will manage the assets.

The difference between a trust and a will is that a living trust becomes effective immediately, while the grantor is still alive. A will, however, has no effect until the individual passes away. This is how a living trust bypasses probate. The assets are already transferred. When the grantor dies, the trustee has the power distribute the income or assets of the trust in the way the trust document prescribes. In that way, it serves the same function as a will. There is no need for court involvement or probate fees.

July 21, 2007 Posted by | Estate Planning | 5 Comments

Recent Medicaid changes create significant changes in estate planning

Changes made to Medicaid from the Deficit Reduction Act of 2005 closed off significant estate planning routes. This excerpt from Kentucky’s Medicaid manual detail the changes:

Most significantly, the look back period for ALL transfers from the date of application for Medicaid coverage for nursing home care is five years (60 months) for any tranfer made after 2/8/20067. Previously, you could transfer assets to a friend or relative and have only a three year (36 month) look back. So, if you owned a $200,000.00 house outright and wanted it to remain in your family, you could deed it to that person and hold your breath for three years, hoping you did not need long term care during that time. Two years have now been added on to that period. Since long term care averages around $4,500 per month (about $150 per day) in Kentucky, any substantial time in long term care could exhaust the estate you have worked your entire life to obtain.

Another significant change is that the transfered resource factor applied to transfers within that look back period will be a daily rate instead of monthly. This factor is based on the average private pay cost of nursing home care in Kentucky and is $4,584 per month for Kentucky in 2007. In previous years, any transfer within the look back period would be divided by the factor and rounded down. So, if you transferred $8,700 to a relative, then that would have been about 1.9 times the factor. Your penalty would be denial of Medicaid coverage for 1 month of care because the 1.9 would be rounded down. Now, with the factor being applied as a daily rate of $150.71, the same transfer would be 57 days. This overlaps with the final significant change. All transfers during the look back period are aggregated as a total amount prior to applying the factor. Careful giving to maximize that rounding down no longer works to shorten your penalty period.

What this all amounts to is that estate planning must be done relatively early in life and revisited with significant changes to Medicaid and to the tax code. However, even into ones 70s, 80s and beyond, estate planning can make differences. Essential to the process is holding in reserve enough assets to pay for private care during any penalty period expected from transfers of assets.

July 8, 2007 Posted by | Estate Planning | 1 Comment

Real estate and probate

It may be tempting, in dealing with a relatively small estate of a loved one who has passed away where there is no will, to avoid probate. This is especially tempting when the only asset of value is a piece of real estate that is passing to the children of the deceased. It is tempting because real estate, unlike some types of property, passes directly to intestate heirs. All that is necessary is for an affidavit of descent to be filed in the county clerk’s office. However, there is one caution. If there are any creditors of the deceased remaining that could file a claim against the estate, avoiding probate prevents the time limitation on such claims from running. So, if the heirs then try to sell the property a few years down the road, that creditor could make a claim on the property and complicate or ruin the sale. Probate provides a six month time limit for creditors to file their claim leaving, no doubt as to clear title on the property.

June 3, 2007 Posted by | Estate Planning, Family Law | 1 Comment