Kentucky Bankruptcy Law

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It is getting downright expensive to file bankruptcy

This information just released from the National Association of Consumer Bankruptcy Attorney’s (of which I am a member):

The Judicial Conference approved new filing fee increases effective June 1, 2014.

The administrative fee and a.p. filing fee increases are as follows:

The total new filing fee for each chapter will be as follows:

  • For filing a petition, or for filing a motion to divide a joint case, under Chapter 7: $335
  • For filing a petition, or for filing a motion to divide a joint case, under Chapter 12: $275
  • For filing a petition, or for filing a motion to divide a joint case, under Chapter 13: $310
  • For filing a petition under Chapter 9, 11, or 15: $1,717

Shew!

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April 16, 2014 Posted by | Bankruptcy, Chapter 11, Chapter 13, Chapter 7 | , , , , , , , , | 1 Comment

Chapter 13 plan percentages

If you consult with a bankruptcy lawyer about a possible Chapter 13, then you will likely hear them tossing around phrases such as, “100% plan” or “7% plan”. This sounds foreign, but I want to give you a quick explanation. When one files a Chapter 13, they propose a plan. This is very much like the reorganization of debt plans that businesses (and sometimes individuals) use to restructure in a Chapter 11. On a miniature scale, the individual debtor in a Chapter 13 is restructuring their debt via their plan.

One aspect of a plan that can be confirmed (approved by the court) is that it divides debts and creditors into different classes. The common classes are priority debts, such as recent income tax debt; secured debt, such as a car loan or mortgaged loan on your house; and unsecured debts, such as most credit cards. There are different rules for each class. For example, priority debts get paid in full in a plan. The rule for unsecured creditors is that each gets treated the same and will receive a pro-rata share of the payments made over an above what is required to pay priority and secured debts.

So, unsecured creditors are the last on the list of who gets paid and they only receive the leftovers. They must get as much in leftovers as they would have gotten in a Chapter 7, but this bottom number is usually zero. That is, most individual Chapter 7 bankruptcies have no non-exempt assets to be liquidated, divided and distributed. But, if your assets in the Chapter 13 are not entirely exempt, then you may have a higher dollar amount that must go to unsecured creditors. For example, if you can exempt all but $10,000.00 of the equity in the home you are keeping, then your unsecured creditors will have to collectively receive $10,000.00 over the course of your Chapter 13.

Now, the percentages I referred to above speaks to the pro-rata share each unsecured creditor will receive through the plan. Ordinarily, trustees will give higher scrutiny to expenses listed in your budget (Schedule J) when your plan only pays a very low percentage. Despite this, there are plans that get approved for debtors who are barely getting by where unsecured creditors get zero percent payment. From my experience, though, the average Chapter 13 debtor is going to repay 3 to 7% of their unsecured debts.

I have seen a number of 100% plans for debtors with relatively high income who fell behind because of a temporary job loss or some snowball effect of debt. In these plans, the trustees are typically less concerned about relatively high expenses and lifestyles.

June 19, 2013 Posted by | Bankruptcy, Chapter 11, Chapter 13, Chapter 7, Disposable Income, Plan, Plan payments, Tax Debts | , , , , , , , , , , | Leave a comment

Name It, Claim It

Claims play a major role in Chapter 13 bankruptcies. They are essentially superfluous in a “no asset” Chapter 7 so they are often not filed in such cases except for secured creditors. If there are non-exempt assets that will be liquidated in a Chapter 7, then it is an “asset” Chapter 7 and claims serve a similar function as I’ll describe for the Chapter 13.

In a Chapter 13, a plan is proposed by the Debtor that spells out what the Debtor will pay in over time. The plan also describes how various creditors will be treated. Some districts, such as the Eastern District of Kentucky, treat provisions of the plan as motions that become orders of the court once the plan is confirmed (blessed by the court). In such districts the plan provisions can “cram down” or “strip off” liens by secured creditors based on the value of the asset they have a lien against pursuant to 11 U.S.C. Section 506. However, I am venturing a bit off of the topic of claims.

For a creditor to actually receive what is owed to them per the plan, they must file a claim. There is a form available just for this purpose and the creditor can either send it in to the court clerk to be electronically filed or, if they have set up an account, they can electronically file it themselves. The claims for most creditors (other than governmental agencies) must be filed by a deadline specified in the Notice that is sent out to all creditors when a bankruptcy is filed. If they miss the deadline, their claim will likely be denied and the full debt discharged as to the Debtor.

The claim also puts the Debtor on notice of any additional fees and penalties that the creditor may be entitled to receive under the loan contract or by law. It is up to the Debtor to review the claims and object to anything that is erroneous or to excessive fees. It is also good practice to object to secured claims if the plan calls for them to be crammed down or stripped off. The reason to object to claims is because they are presumed to be sufficient proof, on their face, to establish the existence and amount of a debt. This is because there are hefty penalties to filing false claims. In the next post I will give a little more detail as to when it is beneficial to object to a claim.

June 14, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Plan payments, Proof of Claim, Secured loan arrears | , , , , , , , , | Leave a comment

Delving Deeper: Where the tax code and bankruptcy intersect

My last post hit some highlights on tax debt from a presentation by Professor Williams at the 16th Biennial Judge Joe Lee Bankruptcy Institute. This post delves a bit deeper into a specific tax law I touched on in that last post. The tax code provision is 26 USC Sect 1398 and it applies specifically to Chapter 7 and Chapter 11 bankruptcy cases. It does not address Chapter 13 cases.

The main thrust of Sect. 1398 is to allow for a Debtor to make an election to treat their ordinary tax year as two separate, shorter tax years. The first tax year would go up to and include the day before a Chapter 7 or Chapter 11 is filed. The second tax year includes the filing date of the bankruptcy and runs through the remainder of the normal tax year. This does NOT happen automatically, so the Debtor must take affirmative action.

If a married couple file jointly, the Joint-Debtor may also make this same election, but again it has to be an affirmative step taken by the Joint-Debtor; the Debtor’s election does not automatically apply to the Joint-Debtor. The election of the Debtor and election of the Joint-Debtor must be made no later than the due date for filing the return for the first short year and it cannot be undone once made.

By making the election, income that is part of the bankruptcy estate is taxable to the estate instead of to the Debtor. An example of how this might matter for a consumer debtor is if the Debtor becomes entitled to an inheritance or lottery winnings during the 180 days after filing. These monies get pulled back into the estate and might not be exempt or only partially exempt. Without this election, the Debtor may be hit with taxes on monies they were not able to keep.

This tax code provision would most usually come into play for business related bankruptcy debtors. Even if the Debtor is an individual, they own a business entity that may not be exempt or only partially exempt. The revenue that business generates would be income to the estate to the extent that business entity is not exempt. This can occur through ongoing revenues of the business or liquidation. The Debtor, again, would not want to be liable for taxes on funds they cannot enjoy.

The 1398 provision does not, however, have any impact on tax debt arising prior to the filing of the bankruptcy and the vast majority of consumer debtors will never need to avail themselves of this election to split tax years. Business related debtors need to be mindful of this option when there are non-exempt assets. Businesses entering bankruptcy as an entity, rather than the individual owner, must remember this election.

June 12, 2013 Posted by | Bankruptcy, Business & small business, Business debt, Chapter 11, Chapter 7, Exemptions, Planning, Pre-filing planning, Tax Debts, The estate | , , , , , , , | Leave a comment

Special Concerns for Small Business Owners

These last years of recession afforded me the privilege of consulting with a number of small business owners. There are special concerns for the small business owner facing a debt crisis and so finding someone with experience in this area is paramount. Few small business owners would be good candidates for a Chapter 11 bankruptcy because of the expense involved, but it is wise to consult a practitioner that has a grasp of Chapter 11 issues even when looking at a Chapter 7 or possibly a Chapter 13.

Ordinarily, the small business owner’s personal finances are tied to the business finances in such a way that an individual Chapter 7 or Chapter 13 is necessary, even if most of the debt belongs to the business. In other words, just filing a Chapter 11 or Chapter 7 on the business almost always leaves the business owner still personally liable on the debt. The practitioner, then, must analyze whether both a business and an individual bankruptcy is necessary. If only a business entity needs to enter bankruptcy, then things remain fairly straightforward. If an individual (or joint for married folks) bankruptcy is required, then what will come of the business?

Very often the small business owner wants to keep their business up and running through the entire individual bankruptcy. Sometimes there are practical reasons behind this, but many times it is more of a sentiment. The small business owner understandably becomes very attached to the business entity. It is very common for the small business owner to have a hard time differentiating between themselves and the business because they have put so much work and care into it that it becomes an extension of themselves. Solid legal counsel can help you figure out just what the risk is of keeping the entity as a going concern versus letting is dissolve or filing a business bankruptcy.

One key factor the attorney must analyze is the value of the business. To do this, the assets, including accounts receivables, must be valued and any secured debt tied to those assets must be ascertained. Furthermore, is there transferable goodwill or a client list with substantial value? Is this a sole owner business or are there multiple owners? If multiple owners, how readily transferred are the debtor’s shares? Once a best estimate of the value is derived, the attorney must see if there are sufficient exemptions to cover the non-encumbered value (equity). If the value can be exempted, then the attorney must determine the likelihood of challenge by the trustee based on the nature of the business and help the small business owner decide what level of risk they are comfortable with. If the value cannot be exempted fully, then the lawyer should help sort out what a Chapter 13 plan payment would look like given the unique set of facts involved or if there is a source of funds to buy the non-exempt interest back from the trustee.

Depending on the option the owner/debtor chooses there are a number of other considerations to take into account beyond these basic ones listed. However, one thing is almost assured, unless the business is shut down or bankrupted too, a Chapter 7 will last one to two years rather than five to six months. The Chapter 13 would not be extended beyond its normal time frame, but that is three to five years.

February 11, 2013 Posted by | Bankruptcy, Chapter 11, Chapter 13, Chapter 7, Planning, Pre-filing planning, Property (exempt, Redeem / Redemption, Security interests, The estate | , , , , , , , , , , | 1 Comment

News You Can Use: New local rules for E. D. Ky Bankruptcy Court

A new set of local rules supplementing the Federal Rules of Bankruptcy Procedure  (FRBP) were ordered into being for the Eastern District of Kentucky Bankruptcy Court. These local rules went into effect on 1/1/2013. For the most part, they merely codify current practices or fill in some gaps. I will highlight a few of the more important changes discussed at a recent training sponsored by the Fayette County Bar Association.

  • 1002-2 If a debtor is a corporation, LLC, etcetera, be sure to also file authority to file.
  • 1007-2 Mailing lists: Be sure to find the right address for the Kentucky Department of Revenue and the IRS. These can be found on the right address.
  • 1009-1 A motion for the case for the meeting of creditors to be heard in a different location, you must file that motion with the petition.
  • 2002-1 Notice requirements generally are 14 days unless there is a different, specific rule. Be sure to file a motion to shorten time if you need that to be less than 14 days.
  • 2003-1 Trustees can continue the meeting of creditors without a court’s order. If the trustee does continue the meeting, the counsel for the debtor must send out notice to all creditors. Only file a motion if the trustee will not agree to a continuance and then explain the circumstances.
  • 2004-1 A motion for an examination under 2004 does not need a hearing and the order will be entered by the court after three business days without an objection.
  • 2016-2 The presumptively reasonable fee of $3,500.00 no longer includes the court filing fees.
  • 3002.1-1 When a secured creditor files notice of post-filing fees, the trustee no longer has to object – they simply will not be paid through the plan.
  • 3015-2 A modification to a Chapter 13 plan, must be filed seven (7) days prior to the hearing on confirmation to be considered.
  • 3015-3 Objections to a modified plan must be filed within seven (7) days after the first meeting or creditors or the date of the filing of a modified plan, whichever is later.
  • 3015-4 Adequate protection payments will not accrue or be paid until the creditor files a proof of claim. But, if this happens and a case is dismissed, the trustee will pay those adequate protection payments that have accrued.
  • 4001-1 Motions to lift the automatic stay filed prior to the meeting of creditors, must give the trustee fourteen (14) days after the meeting to object. If the trustee does not object, then the property is deemed abandoned.
  • 4003-2 A motion to avoid a judicial lien that encumbers exempt property must include more specific information to identify the lien: filing date, county filed, book and page number, and the lien (style of underlying case) to be avoided. The property, value of property, amount of other liens on the property also must be in the motions as well as the amount and statutory provision of the claimed exemption. A non-possessory and non-purchase money lien must identify similar information. There is specific language that must be in the order. These motions must now be filed separate from the proposed plan whereas they used to be included in the plan. Unfortunately, if there is a judgment lien filed, but the debtor owns no real property going into the bankruptcy, then one cannot request this 522(f) relief. By law, the judgment and lien become void upon entry of the discharge order.
  • 4004-5 Debtor’s counsel must file a Local Form 4004-5a, within thirty (30) days of the trustee filing their Certification of Plan Completion and Request for Discharge.
  • 7026-1 Provisions of FRCP 26(f) do not apply with adversary proceedings or contested matters.
  • 9013-1 Orders only need to list parties to be served that are NOT served by the ECF system.
  • 9070-1 How exhibits are filed are changed and this is set forth in the Administrative Procedure Manual. Essentially, each exhibit should be a separate attachment rather than lumped together. A clear and concise description of the exhibit should be input into the ECF system.

 

February 1, 2013 Posted by | Automatic Stay, Bankruptcy, Chapter 13, Chapter 7, Discharge, Plan, Plan payments, Planning, Pre-filing planning, Proof of Claim, Security interests | , , , , , , , , , , , , , | 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

A word about workouts

Whether you are a small business owner or an individual who is insolvent (cannot pay their debts as they come due), then you may look at doing a workout outside of bankruptcy. The starting point for this, oddly enough, is to get an analysis by a lawyer who practices bankruptcy to see what a Chapter 7, Chapter 13, or a Chapter 11 would look like. This requires looking at debt, assets and income. The attorney would see if you qualify for a Chapter 7 or if you can bypass the means test. It would also involve looking at what a plan would look like in a Chapter 13 and whether a Chapter 11 would actually be cost-effective. For example, if you have a certain level of debt, you are precluded from a Chapter 13, but if most your debt is personal rather than business, you could be precluded from filing a Chapter 7.

Once you know what is at stake and what is exempt in a bankruptcy, you have a cut-off point where it no longer makes financial sense to pursue a work-out with creditors. This helps one avoid the tendency to start down one path and just keep going no matter what to the bitter end. Instead, you draw the stopping point before hand. You will also know what you have to offer to bring creditors to the table; you’ll know what the creditors will lose and what you can afford to put forward as incentive. If you have nothing new to offer to creditors or if they would not lose significantly more in a bankruptcy, then the work-out will likely fail.

If a workout is going to be preferable, the next thing to do is avoid doing it one creditor at a time. Over and over again I have seen people tackle one creditor at a time to great success in negotiating a settlement only to arrive at the end to have one creditor refuse to play ball. In this scenario, the person has usually paid out thousands in lump sum payments settling with creditors but STILL be forced to file bankruptcy because of one recalcitrant creditor. Often, the thousands paid out would have been exempt assets they could have kept through the bankruptcy. So, to do a workout you must be negotiating simultaneously with all one’s major creditors and condition any deal with a single creditor on the remainder of the creditors coming to the table. Sound impossible? Unfortunately, it often is impossible, but with skillful negotiating and armed with knowledge, it can happen.

January 5, 2012 Posted by | Bankruptcy, Chapter 13, Exemptions, Negotaion & conflict resolution | , , , , , , , , , | Leave a comment

What options do small businesses have to deal with debt?

This economy has been tough on the small business owner. Many of the people I talk with are sole owners of a Limited Liability Company, S Corporation, or sole proprietorship. Invariably, the owner has invested a great deal of his or her own resources into the business to fuel their dream. Because small business ventures, especially start-ups, lack assets and reliable revenue streams, banks always insist that the company and the owner individually AND the owner’s spouse all co-sign any loans. They typically also insist on a lien against personal property, such as the family residence.

So, when a small business start-up becomes insolvent (which statistically accounts for the majority of new businesses) there is far more at stake than just the business assets. The home and other personal property are at stake as well. Because of what is at stake, many folks understandably push on past the point of wise investing and empty out retirement accounts and cash in other exempt assets to keep the business going just a little longer.

When the economy first began faltering, this strategy had some wisdom to it because everyone expected a rebound in a few months. Now, though, the new reality of our economy is setting in and fewer people are expecting a big turn around. Because of this, the small business owner is compelled to a new level of shrewd thinking.

However, what happens when one’s best laid plans simply are no match for sluggish sales? It basically boils down to two possibilities: 1) an out of court work-out, or 2) bankruptcy. The way to determine which route to go involves an analysis of debt, income and assets. One business owner I consulted with was being pressed very hard by creditors and wanted to do a bankruptcy, but when I reviewed the assets he had that were not encumbered (were not collateral on a debt) he realized how much he stood to lose in a bankruptcy. The analysis allowed him to explore an out of court restructuring of debt because he had a dollar number where it made sense to incur additional debt and a cut off point. In other words, the analysis gave him a make it or break it line. I’m happy to say he avoided bankruptcy and his business is still going.

Out of court work-outs are generally a good thing to attempt, but you have to be careful. I’ll visit that more in-depth soon. The other option is bankruptcy. If most of your total debt is from business debt (your home loan debt is non-business in nearly every instance, so that is often a stumbling point for this) then you can file a personal Chapter 7 bankruptcy without having to pass the means test (the test that sets a threshold of income for taking Chapter 7 bankruptcy). I say a personal bankruptcy because a business cannot receive a discharge from debt; only an individual, and as I said earlier, small business owners are on the hook individually 99 and 44/100s percent of the time. Whether or not the business also takes bankruptcy is a case by case analysis. Often, the company can be dissolved prior to filing bankruptcy and then a new business can be created afterwards. Sometimes the value of the business is so low that one can exempt their ownership interest.

Many small business owners have heard about Chapter 11 bankruptcy. This is an option to consider if you have too much at stake in terms of non-exempt assets (assets you stand to lose in a bankruptcy) to file a Chapter 7 but your creditors are unwilling to cooperate in a work-out. However, Chapter 11s are not a viable option for the overwhelming majority of small businesses because they are incredibly expensive. And, if any secured creditor has a perfected security interest against your cash collateral (including revenue coming in), then you are going to have to have a new source of funding on-line whether that is a new creditor who gets a super-priority position for the new value they bring or if it is an investor who will inject unencumbered cash.

January 3, 2012 Posted by | Bankruptcy, Planning, Pre-filing planning, Property (exempt | , , , , , , , , , , , , , , , , | 2 Comments