Kentucky Bankruptcy Law

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Keeping the Homestead Safe in Bankruptcy: Chapter 7

This post will only apply to a narrow segment of people forced to consider bankruptcy – those who have a bunch of equity in their house along with a hefty debt in which their spouse does not have liability. Most often, this would be an entrepreneur whose business venture took a downturn.

I have discussed previously how Chapter 13 is a great mechanism for preserving one’s house if there are arrears to be dealt with or if there is excess equity beyond what can be covered by a homestead exemption. However, Chapter 13 is not for everyone. There are debt ceilings in a Chapter 13 that can operate to knock out business people who have personally guaranteed large amounts of unsecured business debt or even larger levels of secured debt. There also needs to be a somewhat predictable income upon which to base the budget and plan payment. This makes Chapter 13 difficult for people who may go months at a time without income due to the way their employment is structured, such as an entrepreneur.

Going into a Chapter 7, though, with excess equity in one’s house can be dangerous. Excess equity exists if there is a substantial value to the house even after subtracting the secured debt on it and the exemptions available. You see, a Chapter 7 trustee only makes about $60.00 per case unless they find non-exempt assets they can liquidate and distribute to unsecured creditors. The trustee gets a percentage of all such assets.

This brings us to the strategy that relies on a number of “ifs” being true. This strategy can be helpful (though certainly not a panacea): 1) If the Debtor is married and their spouse is NOT also indebted on the majority of debt so that they do not have to file also, 2) If the husband and wife share the home as tenants in the entirety (the deed gives then ownership “for their joint lifetimes with the remainder in fee simple to the survivor of them”), and 3) the Debtor has some exempt or non-estate resource to make a lump-sum offer to the trustee. The strategy is simply to go into Chapter 7 bankruptcy as an individual and then hope your spouse outlives you or you can make a deal with the Trustee.

The Trustee can seize non-exempt assets of the Debtor and liquidate them in a Chapter 7, but they must do this liquidating under state law. Kentucky law only allows a creditor (or Trustee) to sell the expectancy interest of a Debtor in real estate that they own as tenants in the entirety with a non-debtor spouse. The expectancy interest is that if they outlive their non-debtor spouse, then they have the entire undivided homestead as their own, but if their spouse outlives them then there is nothing – the entire undivided homestead goes to the surviving non-debtor spouse. So, the question becomes: “How much would someone pay for a chance that the non-debtor spouse dies first?” That amount, whatever it may be, is the actual value that the trustee would receive in selling the Debtor’s interest in the house.

In other words, a home owned in the way I described by a husband and wife cannot be stripped away from the non-debtor spouse. He or she is entitled to all of that home concurrently with the Debtor; it cannot be divided. A creditor cannot even get half the rents, if there were any. They can only obtain that expectancy – that chance that they may get it all. Because of that, many Trustee’s would be open to a reasonable lump-sum payment from the Debtor to retain their expectancy interest rather than risk coming up with a goose-egg by trying to sell what essentially amounts to a lottery ticket on the court house steps.

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

The One, Two Punch of Garnishment

No, this sort of garnishment is not found on a fancy Christmas dinner plate. This is a legal mechanism by which creditors can get the money you owe them without your consent. Once a creditor has obtained a judgment against you in a court of law (and there are some government creditors that do not have to go through the court process, but still have to issue notice), they can obtain a garnishment order that you will not be aware of until it hits.

Garnishments typically take two forms. The one most people are aware of is a wage garnishment. This is an order issued to the debtor’s employer to withhold up to a certain percentage of the pay. This can actually be a huge hit, but it is only the “one” punch that leaves your head spinning. The “two” knockout punch that often surprises people is a bank account garnishment. So, if your paycheck is direct deposited into an account, the creditor can scoop the rest of your income right out of the bank leaving you with no means to pay electricity, rent or a house payment.

While a wage garnishment is an ongoing order that allows for up to a certain percentage to be seized each month, the bank account is a one time hit, yet it takes all. However, the creditor can issue new bank account garnishments so as to hit the accounts repeatedly over time getting whatever happens to be in there at that moment.

The only defense once this barrage of punches starts flying is to file bankruptcy. If an individual creditor seizes more than $600.00 through these garnishments in the 90 days immediately preceding filing, then there is a chance of recovering them. So, it is important to take action and seek the counsel of a bankruptcy attorney before you are down for the count.

December 4, 2014 Posted by | Alternate Debt Relief, Bankruptcy, Chapter 13, Chapter 7, consumer bankruptcy, consumer debt, Consumer Protection, Debt collection, garnishment | , , , , , , , , , | Leave a comment

Things to be aware of when facing bankruptcy 9

If you have made it to an attorney and are preparing to file bankruptcy, then you have received a packet requesting a lot of information including a list of assets. Be sure to be complete in listing your assets. Now, I do not mean you need to count your skivvies or socks, but you do NOT want to exclude items of value (yes, do give an estimate of the number of outfits and wearing apparel in your household but no need for an exact inventory unless they are fancy designer clothes).

A few things that tend to get left off that list: life insurance policies (even term policies that have no cash value need to be listed), burial plots, and tax refunds. These are all out of sight and out of mind things that, nevertheless, are assets of your estate. Most people have enough exemptions to cover them, and so there is no down side to listing them. The up-side to listing them is a smooth bankruptcy.

November 4, 2013 Posted by | Assets, Bankruptcy, Chapter 7, Discharge, Exemptions, Planning | , , , , , , , , , , , | Leave a comment

Crazy you say? Bigger garnishment may be better

This is absolutely counter-intuitive, I know, but it may actually be better to wait a little bit longer to file a Chapter 7 or a Chapter 13 bankruptcy if your wages are being garnished. This is because of the operation of two different statutes in the bankruptcy code. First, we have to look at 11 USC Sect 522(h) which allows the Debtor to avoid (get back) transferred property if the property could be exempted and if the trustee could have gotten it back. Second, we turn to 11 USC Sect. 547 which says, in a very circuitous way, that any transfer aggregating more than $600.00 to an unsecured creditor in the ninety (90) days prior to filing the bankruptcy can be recovered by the trustee (see 547(b) and 547(c)(8)).

So, if you had only $599.99 garnished from you wages in the ninety (90) days prior to filing your bankruptcy, then you cannot touch that money; you cannot avoid or get back the transfer. But, if you wait just one more pay-check so that the amount garnished is $600.00 or more, then you can go after the money. You need to make sure your attorney knows your pay-checks are being garnished and you must have enough “wild card” exemption (see 11 USC Sect. 522(d)(5)) to cover the amount, but this usually is no problem.

The first step for your attorney is to make sure the amount garnished during those ninety days exceeds $600.00. Then, he or she must list that money as an asset and exempt it. After filing the petition, they should send a demand letter to the creditor and the creditor’s attorney demanding the money be returned. The creditor will want to wait and see if the trustee abandons the property as exempt, and then they will likely offer somewhere around 75% return. The reason is that many districts require an Adversary Proceeding (a lawsuit within the bankruptcy) to be filed in order to recoup the funds. This means litigation costs to you, the Debtor. Then you decide if you want to take the offer or push the matter further.

November 5, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Debt collection, Exemptions, Garnish, garnishment, Planning, Pre-filing planning, Property (exempt, The estate | , , , , , , , , , , | Leave a comment

Where Science Fiction and Bankruptcy Meet: The time traveling statute

When one files a bankruptcy, an estate is created. Essentially, everything the person filing (the debtor) owns goes into that estate so that at that moment, the moment of filing, they owe nothing and they own nothing. Now, certain debts cannot be discharged in a bankruptcy so it is not entirely accurate to say the debtor “owes nothing”. And, in fact, the discharge does not happen until the end of the process. Also, it is not entirely accurate to say one “owns nothing”.

It is true that an estate (basically a legal fiction – something that only exists as a matter of law) is created and nearly all the debtor’s possessions go into it. However, there are exemptions available (either state law exemptions or federal exemptions depending on your state of residences and some timing issues if you’ve moved – see this site for details by Attorney Max Garner). These exemptions allow you to retain property through the bankruptcy process.

This post is actually about an oddity in the law where there are certain assets that the debtor actually does not possess at the moment of filing that, nevertheless, become part of the estate. This provision is like legal time travel and causes an asset that was non-existent at filing to be sucked back into the bankruptcy as if it did exist. I am talking about 11 U.S.C. 541(a)(5). There are three assets that time travel from the future back to the filing date of the bankruptcy: 1) an inheritance, 2) assets from a property settlement subject to a divorce action, and 3) life insurance proceeds.

There is a limit to the time traveling capabilities of Section 541, and that limit is within 180 days. Some folks may be tempted to skirt around this tricky statute by avoiding actually receiving the asset until 181 days have passed, but the statute has thought of that in advance, as all time travelers should. The provision says “entitled to receive” rather than just receive. So, if your soon to be ex-spouse dies AFTER the settlement agreement is reached in the divorce that has not been finalized AND has not changed his or her life insurance beneficiary designation NOR changed his or her will AND it is only 179 days after you filed your bankruptcy, then you best contact your lawyer. Hopefully, you will have enough exemptions left to cover it all.

Now, you are astute and noticed that I said 181 days is safe and 179 days is not safe, but what if they die exactly on the 180th day? Well, that is where lawyers make their money – arguing over the definition of a single word: “within”. Does “within” include the day it references or refer to the day up until that day. Hmmm, I suppose I should research that.

It is also worth mentioning, because I am certain someone has wondered, “Well what if I just don’t mention the asset I became entitled too within 180 days?” (as if anyone thinks that way). There is a duty created by Federal Rule of Bankruptcy Procedure 1007(1) to update your schedules (where assets and other stuff is reported) if your circumstances change. Failure to do so could have worse results than just losing a few assets.

January 16, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Exemptions, The estate | , , , , , , , , , | Leave a comment

Keeping your property through a bankruptcy

It is a pretty common misconception that folks have that they can “bankrupt” only certain debts or include only certain items of property they have in a Chapter 7 or Chapter 13 bankruptcy. The truth is that every single debt, even the one to Aunt May for the bookshelf you bought from her, and all your property, even the rickety old bookshelf that you got from Aunt May, must be included. All that you owe and all that you own goes into an estate. The trustee is the party responsible for handling the estate in such a way that maximizes what the creditors in the case get. Exemptions are your way of holding onto property and are detailed in 11 U.S.C. Section 522.

Now, obviously people thinking of filing bankruptcy want to keep their stuff. I am often asked whether the trustee will come into their home and take things from them. Except for an incredibly unusual circumstance, the answer to that is “no”. The bankruptcy code gives you exemptions which allow you to keep a lot of property. Some states, such as Kentucky, allow you to choose between state law exemptions or federal law exemptions. For most situations, the federal exemptions are more generous than the Kentucky exemptions. Under the federal exemptions, the vast majority of debtors are able to keep all of their property.

A recent Supreme Court of the United States case decided on June 17th, 2010, Schwab v. Reilly, 130 S.Ct. 2652, clarified exactly how the exemption works. While this clarification will not impact you, the average debtor, in any noticeable way, it is an important distinction for your attorney to know. When you claim an exemption you are actually exempting a dollar value of your interest in the property and not the property itself. The property remains in the bankruptcy estate until the trustee abandons the property or the case is closed.

The fact that you are exempting a dollar value interest in the property has some practical implications. For example, you should not dispose of (sell, destroy, give away) any property that you had when you filed the bankruptcy without checking with your attorney. Now, no one cares if you throw away your old skivvies, but you should check before getting rid of anything of substantial value. Another implication is that if you have a piece of property or asset that is likely to increase in value quickly, your attorney may need to move to have the trustee abandon the estates interest if it appears your case will be open for an extended time.

February 28, 2011 Posted by | Bankruptcy, Chapter 7, Exemptions | , , , , , , | 1 Comment