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.

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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

Tax Refunds: A “hidden” bit of disposable income

In a Chapter 13, the debtor puts together a budget they present to the court. This budget encompasses Schedule I (income) and Schedule J (expenses). In order to get a Chapter 13 plan confirmed, it has to be feasible. Part of showing that a plan is feasible involves demonstrating that the debtor can actually make the payments proposed by the plan. If the money left over (the disposable income) when expenses are subtracted from income is substantially less than the proposed plan payment, then the plan is not feasible.

Sometimes the plan calls for payments that are just a bit of a stretch for debtors. This happens when the debtor is using the Chapter 13 to pay off arrears on a house facing foreclosure or when there is priority, non-discharged income tax debts that have to be paid in full during the plan. In these instances, the debtor and their attorney will likely engage in “belt-tightening” by shaving off amounts from expense items that they believe they can realistically accomplish.

However, there is a source of disposable income that may be lying hidden in all the paperwork. Many people over-withhold on their taxes. Some do this to avoid owing a tax debt at the end of the year and others like to have a self-created bonus. This latter practice is essentially loaning the United States government money for several months at zero percent interest. So, while it is a nice little psychological trick to force one to save money up, it is definitely not maximizing use of one’s resources.

Worst of all, if you have engaged in the belt-tightening on your budget as I mention above then you have created a set-point in the eyes of a trustee. They assume that is your actual budget. So, when they see tax refunds exceeding $1,200.00 per year (state and federal combined), then you belt-tightening budget may backfire.

Let me unpack that a little. In my hypothetical scenario, the debtor gets back an average of $3,600.00 per year in tax refunds. That comes to $2,400.00 more than the threshold that many trustees look too for reasonable withholding levels. This is $200.00 per month. The trustee would argue, and rightly so, that if the debtor used the proper withholding levels, they would have $200.00 more in pocket each month.

Now, in order to achieve the $200.00 plan payment needed to pay off the arrears on the house during the five-year bankruptcy, the debtor “shaved” expenses down by $200.00 each month less than actual expenses. This makes the budget really tight and barely sustainable, but the debtor thinks they can manage it. However, at the meeting of creditors, the trustee challenges the tax refunds and insists on a $400.00 per month plan payment reflecting what the debtor proposed plus the $200.00 per month that has been withheld in excess of taxes actually owed.

A quandary develops. The only way to preserve the $200.00 plan payment is to go back and amend Schedule J to show actual expenses. Ah, but that set-point I mentioned is already established. Now, the debtor will have to produce documentation to support higher expenses than they originally claimed (under oath I might add). Most people do not keep records accurate enough to document all their expenses.

So, if your attorney suggests that you plan to change your withholding on taxes so that less is taken out of your paycheck, trust them. This will allow you to set expenses at reasonable, sustainable levels from the very beginning and yet meet the needs of the plan. Honestly, $200.00 more in hand each month is exactly the same as $2,400.00 once a year. Actually, it is more because when you let that money build up with the Internal Revenue Service, you are losing a tiny bit of the “time value” of those dollars.

July 25, 2013 Posted by | Bankruptcy, Chapter 13, Discharge, Foreclosure, Plan payments, Planning, Pre-filing planning, Priority debt, Secured loan arrears, Tax refund, The estate | , , , , , , , , , , | 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

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

Chapter 13 Plan: What’s in, what’s out?

In a Chapter 13 bankruptcy, everything is driven by the Debtor’s proposed plan. The plan determines payment amount, treatment of secured debts and the assets to which they attach, and a number of other items. You may hear your bankruptcy attorney use the phrases, “pay inside the plan” and “pay outside the plan”. To pay inside the plan means that part of your payment to the Trustee is distributed to that creditor or class of creditors by the trustee. To pay outside the plan simply means that you, the Debtor, must continue to make payments directly to the creditor for that specific debt in addition to your plan payment.

The reason why it may be valuable to you to pay some debts outside the plan is that the Chapter 13 Trustee earns their money by receiving a commission from your payments. This percentage is different from State to State or District to District. In the Eastern District of Kentucky, the Chapter 13 receives around 5.4 or 5.5 percent of each payment. So, the lower your payment, the less you pay in Trustee’s commissions. Likewise, the Trustee has some motivation to get the highest plan payment possible within the structure of the bankruptcy. It is also beneficial, though, to the Chapter 13 to have a successful Chapter 13 – one which the Debtor is able to see through.

Generally speaking, it is in the discretion of the Chapter 13 Trustee what can be paid outside the plan because they are the gatekeeper that recommends approval or rejection of the plan (confirmation or not). In the Eastern District of Kentucky, it is routine for secured debts that will mature (need to be paid in full) later than the end of the plan to be paid outside of the plan. So, ongoing house payments are best paid outside the plan.

Some attorneys prefer to have car payments made outside of the plan even though they will be paid in full before the close of the Chapter 13. This results, though, in having to do a “step-up” of payment amounts when the car is paid off. My recommendation is to pay all car payments inside of the plan. Usually this draws out the payments, allows for a lower interest rate, and possibly a reduction in the principal (this depends on when the debt was incurred). I often find the plan payment actually ends up being really close to what the ongoing car payment was and sometimes even less.

If the interest rate on the car loan is below 4.25%, and the car was purchased within 910 days of the filing date, then paying it outside the plan would be best, even if a step-up payment has to be built into the plan. The step-up payment basically takes whatever that car payment is and adds it to the plan payment the month after the car loan is paid in full.

It is very important that Debtors the importance of remaining current on payments to be made outside of the plan. Failing to make a few payments to a creditor outside the plan can probably be remedied, but the Debtor needs to quickly advise their attorney of the circumstance. Eventually, though, if missed payments are chronic, it will go beyond the point of remedy within the Chapter 13 and the lender will take steps to foreclose. That usually results in changing the Chapter 13 to a Chapter 7 or it means modifying the plan to surrender the house.

November 28, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Conversion, Foreclosure, Plan, Security interests | , , , , , , , , , , , , , , , | 2 Comments

$@&# HAMPens: Home loan modification revisited

I am currently sitting in a continuing legal education training with hundreds of other Kentucky lawyers listening to a foreclosure defense seminar. Of the approximately 10% of the attorneys who have attempted to help make home loan modifications for clients, NONE have had success. This is not a scientific study, but I thought I would offer it as a follow-up to my prior post, Miracles HAMPen.

Other information offered include: though the foreclosure crisis has plateaued  it has not abated; banks only have to decide if the modification will profit THEM more than foreclosure, they have no incentive to get good information to KNOW the answer, so they default to “no, it won’t profit us”; short sale offers are being denied even if reasonable; and nothing has really changed in the court system.

Now, there are many strategies to defend against foreclosure actions, but the real dilemma is that people who have not been able to catch up on their home loans are not likely to be able to afford a lawyer. I explain to people that they can pay me to defend against a foreclosure, but most of the time the bank will likely prevail AND they will likely still have to look at bankruptcy though I will be able to buy some time. Or, they can invest the legal fees into going ahead and doing a Chapter 13 which forces the banks and other creditors onto a level playing field. I just want people to make an informed choice based on the circumstances.

October 31, 2012 Posted by | attorney fees, Bankruptcy, Chapter 13, Foreclosure, Home loan modifications, Planning, Pre-filing planning, Property (exempt, reaffirm or surrender), Security interests | , , , , , , , | Leave a comment

Miracles HAMPen

I met with a new client recently and listened as they described their fifteen month attempt at getting a home loan modification. This time, though, the client had retained a national law firm to negotiated the modification. Did I mention they had been at this for fifteen months with professional assistance? The arrears now extended into the tens of thousands of dollars. They want to save their home!

My heart went out to them and I ended up feeling bad for being so negative about their prospects for finally getting the modification in place. They showed me a correspondence asking for just two more documents. So close….oh, why can I not encourage them on and give them some hope that these last two documents really would be the last two? What if they really are that close and here I am discouraging them? I am sure I mentioned the fifteen months invested so far…Sorry, I really want to be hopeful for them and I just keep being negative.

I want this home loan modification to work, but the best I can muster is this: I absolutely believe that miracles happen every day. Truly I do. I know this may sound like sarcasm and to a certain extent it is because I find it easier to believe the lame walking and the blind seeing than I do a bank modifying a loan voluntarily. But, I do believe in miracles and so I believe that home loan modifications happen. In fact, I have personal knowledge of one. I just ask that folks consider where their hope is springing from. If your hope is based solely in the representations made by the bank, then it is time to get a back up plan and start preparing along other lines. If you have hired an agency or law firm to do a modification, they need to be able to show you if your income, expenses and home loan debt fall within the ranges where you should qualify. Otherwise, take your business elsewhere.

September 25, 2012 Posted by | Bankruptcy, Chapter 13, Debt solution centers, Foreclosure, Home loan modifications, Plan, Pre-filing planning, Property (exempt, Security interests | , , , , , , , , , , | 1 Comment

The Dark Side of Home Loan Modifications

I have heard from one colleague that home loan modifications do occur and I have seen a successful one, but I have heard from far more people, clients, the crazy hoops they had to jump through only to be turned down time and again. When I ask if someone has attempted a home loan modification, the answer begins playing in my mind before they ever open their mouths:

“I submitted paper work back at such and such time and waited only to call back and they could not locate my documents. This happened a couple more times. I finally received confirmation that they received my documents, but they want updated ones. They told me not to make a payment and so I haven’t made one in several months, and they said that I should have an answer here in the next 20 days. But, then I got this letter from an attorney saying they are representing Big Bank and are going to institute a foreclosure action. I called back to the modification folks to see if I could start making payments to stop the foreclosure, but they said they could not accept payments at this time.”

Give or take a few minor deviations from the above script, I have correctly anticipated the response of my client every time. Worse than this is the rude awakening my client, now the Debtor, receives after I file their Chapter 13 as their last-ditch chance to save their home. The claim invariably lists a few thousand dollars in delinquency fees and “inspection fees”. The Debtor is shocked because they were repeatedly told not to worry and not to make a payment until they got an answer on the modification. They justifiably relied on these assurances and expected that no penalties were accruing during this period of negotiating the modification. Sadly, I then ask if they have anything in writing, email, or otherwise from the Big Bank folks saying they were suspending fees they are contractually entitled to during the modification application process. Again, I correctly anticipate the answer to be simply, “No, they just kept assuring me on the phone.”

Sometimes the arrears (past due amounts) on the home loan simply are too high to make a feasible Chapter 13 plan which includes saving the house. This is because the Debtors relied on the good faith of the Big Bank in negotiating the modification and went too long without making a payment. The entire arrears must be paid in full during the three to five years of the plan. If the amount exceeds what their budget can handle, then keeping the house is no longer feasible and they have to surrender it in the Chapter 13 and possibly convert to a Chapter 7. The good faith of the Big Bank assumed to be there by Debtor was a mere figment, a glimpse of an illusion, because the underlying home loan contract was never modified in writing. Hopefully, a class action lawsuit with claims of promissory estoppel and other such legal doctrines based on the Debtors’ justifiable reliance on oral promises will bring about reform, but the Big Bank will not do so voluntarily. The promise by Big Banks of doing these modifications appears to have been mere political puffery.

None of this makes sense economically for the Big Bank or for our nation. Big Bank is simply inflating arrears making it ever more unlikely that the Debtors can cure the default on their loan and bringing about more foreclosures. This results in more houses sitting empty on streets and on bank ledgers thus continuing to erode home values. It makes no sense whatsoever, but, Big Bank would rather insist on playing this modification game. It is as if Big Bank is convinced that these home owners are secreting away riches that they will ultimately turn over if Big Bank just plays hard ball. That is not the case, though. Would Big Bank not profit more by having all the principal and most of the interest paid instead of realizing about two-thirds of the value of the home in a foreclosure? Nevertheless, Big Bank marches on oblivious to the consequences even to themselves.

If you are going to do a home loan modification, seek out an attorney who has had an experienced track record of succeeding in them. He or she will be able to tell you up front if you qualify. But, do not wait too long before consulting with a bankruptcy attorney about Chapter 13 to save your home. The clock is running.

PS: These “inspection fees” apparently are charged every time someone calls the home owner and asks if they are still living in the house – incredible!

August 21, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Conversion, Foreclosure, Home loan modifications, Plan, Plan payments, Planning, Pre-filing planning, Property (exempt, Security interests | , , , , , , , , , , , | 1 Comment

Saving your home in Chapter 13

Chapter 13 is an extremely effective legal mechanism for saving one’s house if it is being threatened with foreclosure. The trend these days is for home loan lenders to refuse to accept payments while “modifications” are being “reviewed”. This means arrears mount higher and higher. I have known of an extremely few home loan modifications actually coming to fruition. However, I have heard person after person recount to me how the lenders “lost” paperwork submitted for modifications multiple times, countless delays, requests for more information, and ultimately refusal to modify. This whole process can destroy the chances of a Chapter 13 to save your home.

In a Chapter 13, the entire arrears on a house have to be paid in full during the 60 months of the plan duration. The arrears can include certain fees, penalties, and other costs prior to the filing, but gets zero (0%) percent interest in the plan in the Eastern District of Kentucky.  So, if the arrears mount too high prior to filing the Chapter 13, then the plan payment can end up being so high that the plan is not feasible. On top of the plan payments, one has to resume making the ongoing regular monthly payment.

I strongly recommend that you consult a bankruptcy attorney about a Chapter 13 early in the process because modification efforts are usually unsuccessful. I do not know why lenders are taking the approach they are to home owners because it does not seem economically logical, but then we are talking about huge, mindless organizations. But, in a Chapter 13, the lenders HAVE to play by the rules.

Debtors also must play by the rules and they MUST make those monthly payment to the lender and their Chapter 13 plan payments for the whole thing to work. So, their budget must support both payments. This means taking action early.

July 23, 2012 Posted by | Bankruptcy, Chapter 13, Plan, Planning, Pre-filing planning, Property (exempt | , , , , , , , , , , , , | 1 Comment