Kentucky Bankruptcy Law

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Trending in Chapter 13 in the Eastern District of Kentucky

The trustee’s office appears to be taking a closer look at expenses in Schedule J of Chapter 13 cases. Specifically, they appear to be pushing for decreasing recreational/entertainment expenses and miscellaneous expenses. Previously, this trustee’s office tended to utilize the standardized amounts provided for in the means test as a gauge. As a result, if a debtor reported a particular expense in excess of those amounts, I would encourage them to engage in “belt-tightening” in that area.

The interesting thing about those standardized expenses is people who make less money have lower expenses while people who make more money have higher expenses even when the family size is the same. In the prior approach, the trustee’s made some allowance for this dynamic. The trustee’s current approach seems to be to cram those relatively higher income families into the expense structure of the lower-income Chapter 13 families. Now, even if expenses fall within the standard allowance of the means test, the trustee is looking for deeper cuts.

On the surface, this seems fair – after all, why should richer people get to have higher expenses and still discharge their debts at the end? The problem comes down to human nature. Once people develop a set point of expenses, then it is extremely hard for them to do substantial cuts in those expenses. When one is talking about the extended timeframe of five years in a bankruptcy, well the likelihood of successfully maintaining extensive cuts drops dramatically.

So, what is the goal of Chapter 13? I suggest that we are best served when people successfully complete Chapter 13 plans. This will not happen when budgets are made so tight as to be unwieldy over time. Debtors will get into a tight spot with unexpected expenses and be unable to make their payments. This is not to suggest that people should get to engage in lavish lifestyles in a Chapter 13; rather, I suggest a balance between belt-tightening and sustainable budgets. Clothing makes for a good analogy: a really tight dress may look really trim and neat, but no one can wear it day in and day out. Rather, one needs slightly roomy clothes to go about their day-to-day business. Such an approach will increase Chapter 13 successful outcomes and, thus, increase the overall return to unsecured creditors.

May 28, 2014 Posted by | Bankruptcy, Chapter 13, Disposable Income / Budget, Plan, Plan payments | , , , , , , , , , , , , , | Leave a comment

Things to be aware of if facing bankruptcy 3

Next in my series of posts on “don’ts” to avoid when looking at the possibility of bankruptcy is one that either with get a “of course” from you or a “seriously?”.  Do not use your credit cards.

Again, this needs some fleshing out. You may not be able to both file the bankruptcy AND avoid use of credit cards. However, you need to be very judicious in use of credit. You do not want to make any large or luxury type purchases on credit in the months or weeks just before filing a bankruptcy. A luxury purchase does not have to be luxurious – just unnecessary.

Use of credit cards on the eve of a bankruptcy may trigger the credit lender to review your account and look for large or luxury type purchases. It could result in a motion to dismiss or at least a motion to deem those purchases as non-discharged. So, it just is not worth it.

Now, if you must use your credit cards coming up on a bankruptcy, be sure you use it only for necessities. Groceries are the perfect example. First, they are necessities and second they are consumed. This does not mean stock piling as if World War 3 was about to occur, but just meeting your families needs. Purchasing gas for your car is another example.

Furthermore, you may, IF NECESSARY, look at purchasing groceries and gas on credit instead of using your credit card to directly pay for your bankruptcy.

September 23, 2013 Posted by | Additional Debt, attorney fees, Bankruptcy, Cash Advances, Chapter 13, Chapter 7, Discharge, Planning, Pre-filing planning | , , , , , , , , , , , | Leave a comment

Things to be aware of if facing bankruptcy 2

I am continuing a series of posts on “don’ts” to be aware of if you are facing bankruptcy. This “don’t” is particular to filing a Chapter 7. Do not file a Chapter 7 if your income significantly exceeds your expenses. This takes a little explaining.

The means test determines whether you can file a Chapter 7 or not. However, it is not the end of the story. Because the means test is focused on the income of the six month preceding the month in which you file bankruptcy, it is somewhat arbitrary. Your current income on Schedule I is presumed to be the same as the average of those six months UNLESS there is something definite and quantifiable that is going to be different going forward.

For example, you may have just started or about to start a new job that pays MUCH better than what you had been making. That should be reported in your Schedule I. And, it may cause your disposable income (income minus reasonable living expenses) to be too high.

In my experience, I prefer a debtor going into Chapter 7 to have a disposable income of $150.00 or less per month on their Schedule I and J, but there is some wiggle room there. However, the worst case scenario if your disposable income is much higher than that is to either convert to a Chapter 13 or get dismissed from bankruptcy which causes greater legal expenses.

September 20, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Discharge, Disposable Income / Budget, Means test | , , , , , , , , , , , | Leave a comment

Bankruptcy: Just the beginning

Well, I am not being terribly original today because I just wrote a post on my family law blog entitled “Divorce: Just the beginning”, but it occurred to me that there are similarities that are worth comment. People sometimes look to divorce to end their interpersonal pain and conflict and, similarly, people sometimes turn to bankruptcy to end their financial stress and conflict. However, in both situations, it is really important to recognize that the legal process involved is merely a beginning. Rather than an end, both processes really just begin the process of working out whatever issues led to the problem. And, just as important, it may be that those issues can and should be worked out without going through the bankruptcy or the divorce.

I spoke about how this plays out in a divorce situation in that other post, so I want to focus on bankruptcy. When people come to me, I take a comprehensive look at their finances and give them one of three opinions: 1) you can work this out without bankruptcy, 2) you might be able to work this out without bankruptcy, but here are the dangers and where to draw the line, or 3) bankruptcy is inevitable short of a miracle. My hope when I take someone through the bankruptcy process is that they will have a fresh start and never, ever have need of my services again.

However, if the debtor sees bankruptcy only as an end to their financial struggles, chances of repeat business for me remains high. Instead, if the debtor recognizes that they must make major changes to how they deal with money in their life, then I may never see them again. Now, there are some folks facing bankruptcy purely due to circumstances beyond their control such as being laid off or the economic downturn. The majority, though, have a mix of misadventure coupled with poor financial management skills.

One red flag for me is when a potential client asks about how fast their credit score will go up. There is a legitimate reason to ask this and that is if there is a plan to buy a house in the near future. Sometimes, though, the question really turns more on when they can reestablish credit worthiness for credit cards. So, a second red flag is when a client asks if they can hold one credit card out of the bankruptcy (the answer, by the way, is “no”).

Here is what I hope my clients will realize: that credit scores should have no meaning in your life and credit cards should be the incredibly rare exception rather than a rule. If one wishes to really seize upon a financial fresh start from bankruptcy, then I highly recommend a cash system for their ongoing purchases. A cash system means if you do not have the cash, then you do not make the purchase.

There are two exceptions to the cash system: purchasing a house and purchasing an education. Even when purchasing either of these items, it is still important to use discretion. For a home purchase, one should not purchase a house where you do not have in hand 20% of the purchase price to put as a down-payment. This is a good rule of thumb and it will also lessen the monthly payments because you typically will not have to pay for PMI insurance (private mortgage insurance). A second rule is to never buy as much of a house as you can afford. I know this flies in the face of conventional wisdom and your realtor’s recommendation, but figure the most expensive house you can afford on your budget and then subtract AT LEAST 10% from that figure. Actually, subtracting 20% would be even better.

The rules for purchasing an education involves some research. Before going to school be sure to find out the trends in employment for the degree you are seeking. Find out the most common pay range in the geographic area where you hope to live. Find out the price tag (tuition, books, fees, etcetera) for the degree. After you find out all these things, take a look at how long it will take you to repay the debt you will owe from that degree. If you are still feeling called to this particular vocation, then by all means proceed.

There are many other financial habits that one can develop post-bankruptcy to insure a true fresh start. Some are really basic such as balancing one’s checkbook instead of using the ATM’s balance. Perhaps learning what exactly compound interest is and how it works (both for debt and savings). Another is developing a monthly budget and sticking to it. Two excellent resources for learning to be financially free are Dave Ramsey and the ever reliable Crown Ministry. These resources may even allow you to avoid bankruptcy in the first place. However, if you cannot avoid bankruptcy, be sure to realize that filing the petition is really just the beginning of a process of reforming your relationship to money.

February 20, 2012 Posted by | Uncategorized | , , , , , , , , , , | 1 Comment

Save your home from foreclosure: the rest of the story

I wrote recently about how one might save their home from foreclosure through a Chapter 13 bankruptcy. There is another side to that story. Chapter 13 will not help everyone keep their home. One of the issues I spend considerable time talking to my clients about is whether they can actually afford to keep their home no matter what they do regarding debt relief.

One’s home is nearly always the single largest expense that one has. Nearly everyone I know who buys a home purchases one that is the most they can possibly afford and then some. I know when my wife and I purchased our first home several (don’t ask how many) years ago, our realtor pointed out how our earning capacity would only increase and how we would get a tax break by deducting the interest paid. He was wrong about the tax break because the interest paid was so little, but that is beside the point. He was right about the earning capacity part, but it sure made for some really tight early years. Anyway, most people overreach a little when they buy a house.

So, the question becomes how much of an overreach are we looking at. To answer this, it is important to give your bankruptcy attorney a really good idea of what your monthly expenses are and definite numbers on what your income has been. I say a good idea of expenses because I have found that no one really knows how much they spend on things and most people tend to underestimate their expenses. Also, there are many annual expenses, such as taxes on cars and tax preparation costs, that many people forget to divide by 12 and put down as an expense in their monthly budget. The income part should be readily traceable though.

Anyway, if after crunching these numbers you still do not have enough to both maintain your ongoing monthly house payment, pay your monthly bills and expenses, and make a Chapter 13 payment, then you are better off surrendering your home from the very beginning. I know this is incredibly hard for people because owning their own home represented a dream and holding onto it gives a sense of security. Unfortunately, that sense of security may end up being incredibly expensive and ultimately elusive.

I have seen folks try desperately to hold onto their house by dipping into retirement reserves and cutting other expenses down to the miserable point to make the monthly house payment, only to see those payments disappear into the bank’s vault and their home still end up on the auction block. That is indeed too high a price. So, even though they do not like to hear it, I sometimes must tell folks that keeping their home just is not in their budget. And that is the rest of the story.

February 23, 2011 Posted by | Bankruptcy, Chapter 13, Chapter 7, Foreclosure, Plan, Plan payments | , , , , , | 23 Comments