Kentucky Bankruptcy Law

Counsel with Care

Let’s be reasonable

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.

Merry Christmas!



December 8, 2015 Posted by | Alternate Debt Relief, Assets, Bankruptcy, Chapter 7, Discharge, Pre-filing planning, Uncategorized | , , , , , , , , | 1 Comment

Saving Your Home: When can you cramdown a home loan?

It is an unusual circumstance, but occasionally I come across a home loan that can be crammed down in a Chapter 13. Cramming down a debt is a shorthand description of taking a debt that is secured against some sort of property and decreasing the amount that is secured down to the present day replacement value of that property. Debts can be secured against all sorts of property, but the two most common ones I see in consumer bankruptcies are votor vehicles and real estate. If there is a lienholder listed on the title of your car, then that indicates there is a debt owed which is linked to that car. Usually it is the money borrowed to buy the car, but not always. If you have a mortgage, then means your house is tied to a debt creating a secured debt.

Basically, a secured debt is a debt is where you personally owe the money and your property is also obligated to that debt. In bankruptcy, your personal obligation to repay the loan goes away, but you can almost never get rid of the obligation of the property to satisfy the debt. If you stop paying, then the property is taken to help satisfy (pay) the debt. When that happens with real estate, then a lawsuit is filed called a foreclosure (Kentucky law – some states vary the process). It is called a foreclosure because the plaintiff is asking that your interest in the property gets closed out so that only their interest remains. With a car, they just repossess the vehcle.

Cramming down a debt, then, tends to mirror what would happen outside of bankruptcy if the secured property is taken to satisfy the debt. So, if you go into a Chapter 13 owing $12,000 that is secured against a car that is worth only $8,000.00, then the secured debt gets lowered to $8,000.00 (subject to a 910 day time limitation). There is speicial rule for a debt owed on real estate which can be found in 11 USC Sect. 1322(b)(2). This special rule keeps the debtor from decreasing the principal owed now matter how little the house is worth.

This special rule is limited, though. First, the real property securing the debt must be the primary place where the debtor lives. So, if it is rental property, the rule does not prevent cramdown. Second, the loan must be secured solely against that residence. If the lender secured their loan against both your residence and against some other piece of property, then cramming down the debt is not barred.

The way I see this second condition falling through for the lender are in bridge loans where the debtor moved out of one place and into a new place they purchased. Then, when their first residence does not sell right away, then it just sits empoty or they convert it into rental property. The loan remains secured against the old property, but is also secured against the new place. This creates the circumstance where a bankruptcy lawyer can help you decide whether the values of the proeprty are such so as to cram down the loan and whether one of the properties should be surrendered in the bankruptcy.

October 23, 2015 Posted by | Uncategorized | , , , , , , , , , | 1 Comment

Matching the Competition? How about going beyond!

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.

May 29, 2015 Posted by | Alternate Debt Relief, attorney fees, Bankruptcy, Chapter 13, Chapter 7, consumer bankruptcy, consumer debt, Credit Counseling & Debtor Education, Discharge | , , , , , , , , | Leave a comment

Concurrent Jurisdiction of State and Bankruptcy Courts

There is a nice little Kentucky Supreme Court opinion called Howard v Howard, 336 S.W.3d 433 (Ky. 2011) every Kentucky family lawyer and consumer bankruptcy lawyer should read. The first part of the opinion addresses child support and contempt sanctions, which to be sure are fun things to know about, but the meat of the opinion spells out the concurrent jurisdiction of Kentucky Courts with the Federal Bankruptcy Courts and how that effects discharge of certain kinds of debt.

Under 28 U.S.C. Sect. 1334(b), a state court has the same and concurrent jurisdiction as a bankruptcy court to make a determination as to whether a particular debt is discharged by a bankruptcy. In the Howard case, the ex-husband had agreed to be responsible for certain debts the ex-wife had also co-signed. However, he went into a Chapter 7 and received a discharge of that debt. Even though the ex-wife had notice of the bankruptcy and did NOT file any objection in the Chapter 7, she was still able to go to the Kentucky Circuit Court where the divorce had occurred and get a ruling that ex-husband still owed the obligation to her.

You see, the divorce decree created an obligation between the ex-husband and ex-wife even though a third party was the direct creditor. This obligation was found to be an 11 U.S.C. Sect. 523(a)(15) obligation as a result of a divorce. Therefore, by operation of that law, that obligation to the ex-wife was not touched by the bankruptcy. When the original creditor came back to collect from the ex-wife, she was able to pursue contempt against the ex-husband and win. This saved ex-wife from having to pay for a lawyer in the bankruptcy in addition to paying for a lawyer in the Circuit Court case.

February 7, 2015 Posted by | attorney fees, Bankruptcy, Chapter 7, child support, Civil Procedure | , , , , , , , , , , | Leave a comment

Chapter 13 lasts awhile, but stay in touch

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

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

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

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

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

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

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

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

Who wants to file bankruptcy right before Christmas!?!

Well, no one does. That is a given. However, there are a few things to remain aware of if bankruptcy is something you have been contemplating here recently:

1) Any gifts you receive of substantial value at Christmas are going to have to be listed in your bankruptcy on Schedule B and exempted on Schedule C. You will need to individually identify any particular item you received that is worth hundreds of dollars.

2) Any expensive item you purchase, whether keeping it in house or giving it away to someone else, will have to be reported as well. If it is a luxury item, that is something costing more than $650.00, you will be raising red flags and risk losing the discharge of that debt.

3) Your right to receive a tax refund arises on December 31st of each year if you overpaid your income taxes. This is true whether you file a tax return right away or wait until the last minute. That tax refund is an asset of the bankruptcy estate upon filing your petition and must be listed on Schedule B and exempted on Schedule C even if you do not know the exact amount you will be receiving.

If you own a home and have a large amount of equity in that property (equity meaning value minus secured debt), you may have a very limited amount of exemption to put towards these assets mentioned above. Consulting with a bankruptcy attorney prior to Christmas may be a wise gift to yourself.

December 2, 2014 Posted by | Alternate Debt Relief, Bankruptcy, Chapter 13, Chapter 7, Consumer Protection | , , , , , , , , , , | Leave a comment

Overcoming a “Presumption of Abuse” in Chapter 7 Bankruptcy

Overcoming the “presumption of abuse” in Chapter 7 bankruptcy is not always as daunting as it may sound. In order to qualify for an individual Chapter 7 one either must have predominantly business debts or qualify for it under a “means test”. The means test essentially looks at your household income for the six month preceding the month in which the bankruptcy is filed. Certain things can be deducted out of that income as well as certain standardized costs of living. Once the information has been run through the formula, a potential debtor either falls under the median income for their household size and state of residence, thus qualifying for a Chapter 7, or it does not.

One might be tempted to think that failing to fall under the median income is the end of the story and they cannot file a Chapter 7 (they almost always can still do a Chapter 13). This is true for the majority of persons where the presumption arises. However, it is not automatically the end of the analysis that your bankruptcy attorney should engage in. They need to also explore any changes in circumstances that would justify going into the Chapter 7 anyway.

So, having an income above the median only creates a “presumption” that doing a Chapter 7 would be abusive of the bankruptcy process. This presumption can be overcome by a showing of a change of circumstances. For example, a sudden change in one’s health could decrease the current income or increase health costs that can be deducted from that income. Such a sudden event may not show up in the means test results for months since one is looking at a six month snapshot but, one may not be able to wait that long to file.

The way to overcome that presumption of abuse requires your attorney to prepare two extra documents. First, they should prepare a sworn statement for you to sign (an affidavit) that explains the change in circumstance that justifies overcoming the presumption. Second, they should prepare a mock means test showing what that change in circumstances would look like over time. These can be filed  concurrently with the petition.

The United States Trustee would look at these extra documents and make their own determination whether to pursue dismissal of the Chapter 7 or decline to pursue it. Even if the US Trustee declines to pursue the presumption of abuse dismissal, individual creditors could still pursue it, though they are unlikely to do so.

November 19, 2014 Posted by | Bankruptcy, Chapter 13, Chapter 7 | , , , , , , , , , , , , , | Leave a comment

Friends, Family, and the Debt Dilemma

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.

October 17, 2014 Posted by | Bankruptcy, Chapter 7, Discharge | , , , , | 2 Comments

Chapter 13 Flexibility: A parting of ways

Many of my posts espouse the flexibility of a Chapter 13 bankruptcy. Two of the ways that a Chapter 13 shows its flexibility are the absolute right to dismiss the bankruptcy under 11 U.S.C. Sect. 1307(b) and the somewhat limited right to convert the 13 to a Chapter 7 under 11 U.S.C. Sect. 1307(a). These two diverse directions of flex can actually happen concurrently in a Chapter 13.

Let us presume that a married couple files a joint Chapter 13. If one of the spouses comes into to funds that would be non-marital under State law and that are sufficient to resolve the debt issues leading to bankruptcy in the first place, then that spouse can voluntarily dismiss their Chapter 13. They essentially step out of the bankruptcy and it becomes an individual Chapter 13 even though the parties remain married.

Then, the lawyer needs to engage in a second level analysis as to whether the remaining spouse continue the Chapter 13 or convert based on various factors, including: that spouses assets and whether any are not exempted, if they have arrears for secured debts they still need to cure, and if they have any income tax debt they need to cure through the Chapter 13.

September 22, 2014 Posted by | Bankruptcy, Chapter 13, Chapter 7 | , , , , , , | Leave a comment