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

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

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

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 bankruptcy: How exemptions work

When a person files a bankruptcy (referred to as a debtor in bankruptcy parlance), everything they owe and everything they own goes into an estate. In effect, at the moment your attorney pushes that button to electronically file your case, you both as poor and as rich as the day you were born – well, sort of. Unlike a newborn babe, you still have duties under the bankruptcy code and there are some debts that do not go away without a fight (such as some tax debts and student loans). But, for the sake of this missive, we will not concern ourselves with those issues.

Debtors want to keep their stuff. As George Carlin has noted at some length, our stuff is important to us and drafters of the bankruptcy code felt the same way. The avenue to retaining possessions is through the use of exemptions. The overly simplified explanation of exemptions is that you can exchange the exemption that the code provides to you for the property you want to keep. Everyone is afforded certain exemptions. In many state, such as Kentucky, you can elect to use the federal exemptions under 11 U.S.C. Sect. 522(2) or state law exemptions under 11 U.S.C. Sect. 522(3). I touched on this choice briefly in an article about the importance of knowing state law exemptions as well as the federal.

As I noted, though, that view of exemptions is overly simplified. For the vast majority of bankruptcies, that very simple explanation will suffice. However, the truth is that your exemption only covers your “interest” in the property. Interest, in this instance, refers to the monetary value of that property that is exempted. In other words, the estate actually has the property and the trustee, who is under a duty to maximize the return to creditors from the estate, can sell that property. If the property is sold, you would receive the dollar amount of the exemption you claimed and the rest would be distributed to creditors.

What Debtors want is for the trustee to ‘abandon’ the property. This means they are going on record as releasing the property from the estate. If the property is not secured against a debt, then abandoned property comes back to the debtor free and clear. Until the trustee has abandoned the property, then the debtor needs to be careful about selling or otherwise disposing of the property and careful about encumbering the property as collateral for new debt. The trustee almost never does, but can take months or, in some cases, years to abandon property and in rare circumstances you may need to prompt your attorney to file a motion for the trustee to abandon the property if they are taking an unreasonably long time to do so.

Now, there is no need to be concerned if the amount of your exemption covers the fair market value of the property. There is no motivation there for the trustee to take action because they will incur costs in selling the property and they would end up losing money. The only time to be concerned is if the value of the property may be significantly higher than the available exemption. Then, it may be worthwhile to the trustee to attempt a sale of the property.

Another time to be concerned is if your property is likely to increase significantly in value while it is part of the estate. This can happen with real estate (during a normal market) if the trustee keeps the case open for a really long time to administer it. Remember, though, this is very rare. You may have been able to cover the full amount of the equity in your house at the beginning of the case, but the trustee could attempt to realize any increase in equity that goes beyond the exemption limit down the road. Combine increasing value of property with an initial underestimate of its value and you could have something to be concerned about.

From a purely financial standpoint, none of this matters, because you are assured of holding onto the value of your exemption either way. To remember where this whole discussion even matters, we return to George Carlin. Quite frankly, your stuff is probably far more valuable to you than to the free market simply because it is yours. You would rather have that antique chest of drawers your aunt passed down to you than the $750.00 representing your exempt interest in it because of the sentimental value and familiarity of the item.

So, be sure to give a reasonable dollar value for your property to your attorney. Let them have good information so that they can make the best use of the exemptions available. Secondly, be aware that if you have property that currently exceeds exemptions; you may not be able to retain that property. Finally, for any property of significance (e.g. real estate as opposed to the pots and pans in the kitchen) do not dispose of it or encumber it until the trustee abandons it.

March 18, 2011 Posted by | Bankruptcy, Exemptions, Planning, Pre-filing planning, Property (exempt, Uncategorized | , , , , , , | 1 Comment

Federal versus Kentucky exemptions

It has only been a handful of years that Kentucky residents entering bankruptcy could choose to use the federal law exemptions of 11 U.S.C. Sec. 522 instead of the Kentucky exemptions (many, but not all Kentucky exemptions are in Chapter 427 of the Kentucky Revised Statutes). Most debtors in Kentucky choose to apply the federal exemptions because of the much more generous homestead and general (a.k.a. “wild card”) exemptions. However, it is important that your bankruptcy practitioner is aware of the Kentucky exemptions because your situation may be the exception to that general rule.

An example of where this would matter is if you have used whole life or cash value life insurance policies as an investment strategy. Instead of retirement accounts that are 100% exempt under the federal or Kentucky exemptions, you have $50,000.00 in cash value accrued in whole life insurance policies. Under the federal exemption, you will only be able to cover $11,525.00 of that $50,000.00 (unless you have some wild card exemption left over). If it is a qualifying insurance company, that entire $50,000.00 would be exempt under KRS Sec. 427.110. Your bankruptcy attorney should be able to recognize those exceptions and determine which set of exemptions will help your retain the most assets.

March 16, 2011 Posted by | Bankruptcy, Exemptions | , , , , | 2 Comments