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!

 

Advertisements

December 8, 2015 Posted by | Alternate Debt Relief, Assets, Bankruptcy, Chapter 7, Discharge, Pre-filing planning, Uncategorized | , , , , , , , , | 1 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 danger of short term loans on your house

You home is an incredible source of collateral for loans when there is equity (value minus debt secured against it), but there is also danger in using your home this way. There are still lenders who will do rather large, short-term loans secured against a private residence. These loans can be tempting because they often will provide for relatively low-interest loans. However, they can be dangerous. especially when they are balloon loans. Such loans are seductive because they have low monthly payments with a final huge payment due at the end.

I have seen these often used by people trying to get a business venture off the ground. However, people sign up for them for many reasons. The business folks are essentially betting on having a solid and very profitable business going in three to five years. I admire their confidence, but most businesses that survive take three years just to start making a modest return. And so, many find their balloon payment looming without adequate resources to cover the debt. Sometimes banks will roll it into a new loan, but there is no guarantee of this. Therefore, it is wise to talk to a lawyer who knows about bankruptcy prior to that maturity date.

Banks like loans against your personal residence because the revisions to the bankruptcy code back in 2005 gave special treatment to loans secured solely against one’s residence. Basically, 11 USC Section 1322(b)(2) prevents such loans from being modified in a Chapter 13 bankruptcy. Therefore, the only thing one can do is cure the arrears through the bankruptcy, but the underlying agreement remains intact. There is a nice little exception, though, found in 11 USC Section 1322(c)(2) for loans that come due DURING the Chapter 13. So, if one times things right and files a Chapter 13 BEFORE the last payment on your short-term loan is due, a Debtor CAN modify that loan to some extent.

The most likely use for this exception is to move the maturity date of the loan out for the duration of the Chapter 13 plan and thus provide for the cure of arrears on that loan. The Debtor still has to show that the lender is adequately protected, but that hurdle is usually overcome easily with real estate that is either holding its value or increasing in value. This is NOT a complete remedy, but it can buy more time for a Debtor to either find alternative financing that has no balloon payment or make those profits they hoped for that would cover the debt.

September 9, 2014 Posted by | Additional Debt, Adequate protection, Bankruptcy, Chapter 13, Financing, Foreclosure, Home Loan Modification, Home loan modifications, Plan, Plan payments, Planning, Pre-filing planning, Secured loan arrears, Security interests | , , , , , , , , , , , , , , , | Leave a comment

Student Debt v Student Loan – viva la difference!

A recent decision out of the Norther District of California Bankruptcy Court bolsters a position I have already been espousing. In re Christoff, 510 BR 876 (N.C. Cal. 2014) looked at 11 USC Sect. 523(a)(8) which makes three types of loans non-discharged unless certain things are proven in an adversary proceeding (a lawsuit within the bankrutpcy). The three types of loans are, in essence: government subsidized loans, IRS qualified education loans, and “an obligation to repay funds received as an educational benefit, scholarship or stipend[.]” 11 USC Sect (a)(8)(A)(ii).

This case involved Meridian University directly funding the debtor’s studies in their Psychology program and whether that constituted the third type of debt above.  The court ruled against Meridian because that statutes says “repay funds” thus requiring that actual funds are distributed. Instead, Meridian simply kept a “tab” of sorts of what the debtor owed them for tuition and fees. There was no third-party lender involved that distributed funds to Meridian or to the debtor.

I expect this would be the same outcome if such a debt discharge were challenged here in the Eastern District of Kentucky. This impacts many technical schools that simply charge the student debtor directly for tuition rather than involving an independent third-party lender. It is very good news for student debtors who went to such schools and then discover their training is not quite as marketable as the school led them to believe. So, the student debtor in the case above had student debt, but not a student loan.

August 11, 2014 Posted by | Bankruptcy, Chapter 13, Chapter 7, Discharge, Student loans | , , , , , , , , , , | Leave a comment

When should I file bankruptcy?

First of all, I want to clearly state that bankruptcy is not something to aspire to achieve. Almost no one wants to file a Chapter 7 or a Chapter 13 and get a discharge of debts. Nearly everyone I talk to would rather have the means with which to pay their creditors. So, if you are reading this post, you have likely already tried everything you can think of to make things work and you are considering bankruptcy as a last resort. I can appreciate that. And I know that also means many of you have already gone past the point where wisdom would have you go. And that is why I hope to lay out some general principles as to when one should file bankruptcy. Everyone’s situation has its own unique twists and turns, so you should find a lawyer who will provide a free consultation to see if it is time for you to file.

If a creditor has filed a lawsuit against you to collect a debt because you have not had the means to pay it, then you likely should file.

If the only way you can pay all your bills next month is to take a loan out from your retirement account, you likely should file.

If your house has been sold at a foreclosure auction, you likely should file.

If your car has been repossessed and sold at auction for less than you owed on it, you likely should file.

If you are seriously considering utilizing a payday loan provider in order to stay afloat, you likely should file.

If you feel crushed by debt and you do not see an end in sight unless you win the lottery, you likely should file.

If your employer notified you that they just received a wage garnishment order, you likely should file.

The main thing is to not wait until you are right up against the wall. It takes time to properly assess a persons financial situation and make sure that a petition and schedules are accurately completed. This means that you have to pull together a lot of documents in a very short period of time. It is far better to seek counsel when the crisis is still off in the future a bit.

August 7, 2014 Posted by | Bankruptcy, Chapter 13, Chapter 7, Credit Counseling & Debtor Education, Planning, Pre-filing planning | , , , , , , , , | Leave a comment

Practice Tip: Filing fee installment payments

A debtor filing bankruptcy can apply to the court to pay the filing fee in installments AFTER filing the petition. For example, the filing fee now for a Chapter 7 bankruptcy is $335.00. It can be really hard for a person to come up with that AND their attorney fees. Since their unpaid attorney fees would be discharged along with everything else in the bankruptcy, those nearly always have to be paid up front. But, the filing fees are a different matter since the court retains the power to dismiss the case if they go unpaid.

In the Eastern District of Kentucky, installment applications taking up to 120 days post-petition to pay the fees are routinely granted. However, there has been a shift in how the court handles those installments. Until recently, the clerks had a lot of latitude as to when those payments were made so long as they all were paid by the final deadline. NOW, though, if debtors run late on ANY of the installments, a Show Cause Order is being issued to make the debtor appear in court. If they cannot convince the judge that they have a good reason for running late, their bankruptcy may be dismissed.

So, if you are going the installment fee route and paying monthly payments of $83.75 for a Chapter 7, make sure you give yourself reminders. Also, you cannot pay by personal check. You either have to show up in person with exact change or you must mail in a money order for the exact amount. The courts system does not account for payments that are even a penny off. You can double or triple up (i.e. $167.5 or $251.25) or even pay it in full early. Just do not round up to $84.00.

July 8, 2014 Posted by | attorney fees, Bankruptcy, Chapter 13, Chapter 7 | , , , , , , | Leave a comment

The scoop on the $71.00 bankruptcy ad

I posted awhile ago about a neighboring high-volume bankruptcy firms TV advertisements to “get your bankruptcy started for just $71.00”. I speculated on how they did that, but I have since learned what the deal is from a client who went to them first. She clearly was a candidate for a Chapter 7: below median income, no secured debt arrears, no priority debt, and nothing else that would lend itself to Chapter 13. However, she could not come up with the attorney fees to do the Chapter 7 right then. So, they offered to put her into a Chapter 13 with just $71.00 up front.

This seems like an acceptable approach. Basically the attorney is using the ability to have their fees paid through the Chapter 13 as administrative expenses. The up side for the debtor is that they get the relief from creditors including garnishment right away. The downside is that this is a much more expensive and involved process than the Chapter 7. Debtors need to be made aware of how much more they would pay in the long run for the Chapter 13 as compared to the Chapter 7 – sort of fair credit act kind of disclosure. Perhaps my colleague is giving that kind of disclosure – I have no reason to doubt that they are. If so, then I give them props for giving another option for debtors that needs relief from debt right away, but whom cannot afford the attorney fees.

May 28, 2014 Posted by | attorney fees, Bankruptcy, Chapter 13, Plan | , , , , , , , , , , | Leave a comment

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

Car Cares and the Chapter 13 Dilemma

While I often extol the virtues of Chapter 13 bankruptcy, there is one issue in them that can be most vexing to a Debtor in need of help. Nearly every Chapter 13 Debtor owns a car with a secured debt attached to it when they file. Previously I have talked about the benefit of being able to reduce the interest rate on high interest car loans through the Chapter 13 and even, when the debt is old enough, cram down the principal owed to the actual value of the car. These all remain true. However, there is a hidden danger to having a car loan in Chapter 13.

The danger lies in 11 USC Sect. 1235(a). This provision lists a number of things that must be true about a Chapter 13 plan for it to be confirmed. Conversely, if all the requirements of 1325 are met, the court must confirm the plan. Shaw v. Aurgroup Financial Credit Union, 552 F.3d 447 (6th Cir., 2009). The Sixth Circuit Court of Appeals has issued case law based on this code provision that severely restricts the flexibility of a Chapter 13 bankruptcy in this one area of car loans. Those decisions are In re Adkins, 425 F.3d 296, 300 (6th Cir.2005) and In re Nolan, 232 F.3d 528 (6th Cir.2000).

Essentially, these two court opinions determine that once a plan is confirmed and the car lender’s claim is allowed, then it shall always be a secured claim. This may not sound formidable, but here is how the scenario plays out: Debtor has a car worth $7,000.00 which is working okay at the start of the plan. The plan gets approved and the secured claim is filed by the lender for $7,000.00. Perhaps there is another claim for excess debt on the car that is treated unsecured, but that does not matter in this situation. A couple of years into the plan, the car starts messing up and it becomes more costly to fix than the car is now worth. The Debtor, who is paying all their disposable income into their Chapter 13 cannot get the car fixed. So, they seek to modify the plan, surrender the car, and purchase a more roadworthy vehicle. They can only manage this if they can reduce their plan payment. They can only reduce their plan payment if the deficiency of the car loan, what’s left after the car is surrendered and auctioned, is unsecured debt. However, In re Adkins and In re Nolan preclude this.

That $7,000.00 cannot be re-characterized as unsecured. Let’s say the loan after two years of payments through the Chapter 13 plan is now $6,000.00 but the car auctions only for $1,000.00. That leaves a $5,000.00 deficiency. That $5,000.00 remains a secured debt that MUST be paid in full during the remainder of the Chapter 13 plan. The Debtor still must pay the exact same amount in plan payments and thus cannot afford to buy another vehicle. Now they have no car but they still must pay for their surrendered car in full.

The Sixth Circuit used solid statutory construction and policy considerations in coming to this result. They wanted to keep a Debtor from being able to enjoy a car for a while and then shift the depreciation value to the creditor. However, because the creditor knows they will be paid in full regardless of what they do, they have no incentive to realize the actual fair mark value of the car that was surrendered. The Debtor cannot sell the car due to the lien in place and the because of the Chapter 13 bankruptcy so they are stuck. They might as well keep the car and make do for the life of the Chapter 13.

The main point in all of this is to do a careful assessment of one’s vehicles and car loans prior to filing. Going into a Chapter 13 with high value cars that also have a high debt load can leave one with almost no wiggle room for the life of the Chapter 13. It would be best surrender such vehicles prior to confirmation of the plan and obtain an inexpensive used car prior to filing. And, if they have cars with debt, the Debtor needs to have some comfort that the car will actually last the life of the bankruptcy.

March 3, 2014 Posted by | Uncategorized | , , , , , , , , , , , | Leave a comment