Kentucky Bankruptcy Law

Counsel with Care

Things to be aware of when facing bankruptcy 8

This post can be found on my family law website here. It addresses issues connected to post-divorce debt and distribution of assets and is a must read.

November 1, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, child support, Discharge, dissipation of assets, Divorce, Family Law | , , , , , , | Leave a comment

Another intersection of divorce law and bankruptcy: Bifurcation

Bifurcation sounds like a painful surgical procedure, but it merely means splitting a joint bankruptcy into two separate ones. Marriage takes tremendous effort (I should know – I have been married to the same woman for 23 plus years) and when a couple is also stretched and stressed by financial tribulations, the marital relationship can take hit after hit. Often, bankruptcy can provide the relief needed on the financial front that allows the husband and wife to redirect their emotional resources to restoring the marriage.

I have encountered a few couples, though, where the relief of bankruptcy was insufficient for them to turn back towards each other. I am sad for these times when one or both decide that they have gone too far and divorce must happen. When this happens after a joint Chapter 7 has been filed, then there is no impact on the bankruptcy. However, in a Chapter 13 the couple will probably opt to split the case. At the point of divorce, the parties financial interest and desire for maximum separation makes the case split, or bifurcation, necessary. After all, who wants to keep pooling resources with an ex-spouse.

The process to bifurcate is simple enough. An entirely new filing fee is assessed by the court for the new case. A motion to split the cases must be filed and served on all creditors and the trustee in the case. Typically, the motion provides for a 14 day notice and opportunity to object to the case split, but each district is likely to have variations on this. After that period has run and the fee paid, then clerks create two identical cases.

Once the split occurs, though, each party must file new Schedules I & J showing their individual budgets. They also must create separate payment plans, modifying the confirmed plan or amending a pending plan. If there is real estate, at least one party is likely surrendering the house in their plan. If either party could have filed a Chapter 7 to begin with  or their new income would qualify them for a Chapter 7, then that party may opt to convert to a Chapter 7.

June 24, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Conversion, Disposable Income, Divorce, Plan, Plan payments, Planning | , , , , , , , , , , , | 1 Comment

Exempting alimony in bankruptcy

Alimony, or maintenance as it is called here in Kentucky, is an interesting topic because how state law defines and treats alimony does not necessary mesh with the bankruptcy code. In this post, I am talking about when a non-debtor ex-spouse owes the person filing bankruptcy (the debtor) alimony or maintenance (the two terms are interchangeable and I’ll stick with alimony since it is the most recognized). The scenario is a divorced debtor filing a bankruptcy (it can be either a chapter 7 or a chapter 13) because their ex has failed to pay the alimony as ordered as is now in a world of hurt. So, the debtor has to list the alimony owed to him or her because it comes into the bankruptcy estate through 11 USC Sect. 541. There is even a “clawback” provision in 11 USC 541(a)(5)(C) that reaches 180 days beyond the filing date of the petition in cases where a divorce has not yet been finalized.

To be sure, 11 USC Sect. 522(d)(10)(D) appears to exempt alimony (“the right to receive”) so that the debtor gets to hold on to it. However, appearances can be deceiving because the bankruptcy courts do not have to accept the determination of the parties or the state court in deciding if a certain asset is alimony. The debtor may have a court order that calls what the ex owes them alimony and he or she may believe it is alimony, but the bankruptcy court can decide differently. If the bankruptcy court deems the awarded monies to actually be a property settlement, then it is not exempt beyond any available “wild card” exemption from 11 USC 522(d)(5).

The bankruptcy court makes its determination as to whether or not an award of alimony is truly alimony or if it is actually a property settlement mechanism by looking at what actually transpired. There are different aspects that the court may focus on and so it is more likely to be alimony if: 1) it ends at death or remarriage, 2) it can be modified based on need, 3) the debtor did not have property or resources to meet their basic needs, 4) it is subject to the tax treatment for alimony in the tax code (taxable to recipient; deductible by payor), and 5) the payments go directly to the debtor. If, on the other hand, the award of monies was in lieu of other property or debt, then it may not be deemed alimony. These are not necessarily exclusive factors, but they give an idea of how the courts analyze an alimony claim of exemption. The bottom line is that the court wants to be sure that the monies are actually for the support and sustenance of the recipient. This is consistent with the other items in Sect. 522(d)(10)(D) because each is a replacement for wages.

Be careful entering into a bankruptcy if you are the recipient of alimony or maintenance. When you interview your prospective attorney, but sure they understand the nuance behind the stated words of the law. They need to be able to analyze how likely the court is to see the award as alimony. If the award is sizable, then you can expect to have an objection to the exemption be filed by the trustee. If you win by convincing the court that it is indeed alimony, you will still have to show that all of it is “reasonably necessary” to live on – and that does not mean living in style or luxury.

April 30, 2013 Posted by | Bankruptcy, Estate Planning, Exemptions, Family Law, property allocation | , , , , , , , , , | Leave a comment

Settlement strategies in divorce with an eye to bankruptcy

As a follow-up to my prior post on domestic support obligations, I wrote a post on my family law blog that goes into a little more detail on strategies to keep in mind in reaching a financial settlement.  This is worth reading if you are in a pre-divorce situation where bankruptcy seems likely.

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

Bankruptcy and Divorce: when to file and when to finalize

Please know that even though I represent folks in divorce actions, I truly hate to see divorces happen. If you are interested in knowing why, shoot me an email or give me a call. However, sometimes divorces do occur and often there is a tremendous amount of debt involved. In Kentucky, there is no presumption that debt incurred by one spouse is marital debt, but in these circumstances it is common for there to be marital debt being argued about. It is very smart to get an attorney who understands both family law for your state and bankruptcy law to review the situation and give a recommendation.

True, this involves bringing in yet another lawyer because the lawyer representing either spouse is ethically forbidden from doing a joint representation regarding bankruptcy. The small extra expense may well save a tremendous amount of grief or stress though. The assessment by the bankruptcy attorney will look at whether the couple can file Chapter 7 or if they would be forced into a Chapter 13 because of income levels. They would also help figure out what is marital debt and what is non-marital though this ultimately would be a determination made by the divorce action judge. They would also determine if bankruptcy must be filed prior to the divorce being finalized.

I recently did such an assessment for a couple and informed them, after months of trying to figure this out, that together they would HAVE to file Chapter 13 because their combined income, even with two households, was too high. This knowledge freed them up to look at other options, including finalizing the divorce first and one spouse possibly being able to avoid bankruptcy entirely. I was able to give both attorneys, due to a waiver of conflict, information they needed to consider regarding the settlement agreement and how it treated debts so as to allow the one spouse to achieve bankruptcy without the repercussion of non-dischargeable domestic support obligation of assigned debt.

However, ordinarily it is essential that any bankruptcy be filed prior to finalizing a divorce action so that both parties can realize a fresh start from debt. It is ordinarily much cheaper for a couple to file a joint bankruptcy, even with separate households, than to file separately. Some bankruptcy attorneys do charge more for a joint filing, but it is usually limited to only $200.00 more rather than doubling the fee. I do not routinely charge more for joint filings at this time.

January 18, 2012 Posted by | Uncategorized | , , , , , , , , , , | 2 Comments

Debt and Divorce

In Kentucky marital law there is no presumption that debt incurred by one spouse is marital debt and the recent Supreme Court of Kentucky opinion in Rice v Rice, 2009-SC-000730-DG, March 24, 2011 (to be published) reaffirms that doctrine. Sometimes you can tell when a court gets hacked off, and some of that comes through in this opinion written by Justice Noble. One clue as to the court being upset is when they use the word “egregious” and it appears in this opinion.

The husband and wife had been married for 42 years. The wife, Carolyn, worked at an $8.00 an hour job. The husband, Jackie, allowed their adult son to accumulate around $65,000.00 debt by letting him use credit cards and co-signing for loans. This went on for about four (4) years before Carolyn got wind of her husband allowing this mountain of debt to arise and when she confronted Jackie about it, he just changed the mailing address for the bills so she would not find them. Are you starting to see what lead to the divorce?

Anyway, the trial court that granted the divorce assigned each of the parties one half (1/2) of this debt even though Carolyn had not authorized it. The Court of Appeals let that decision stand, but the Supreme Court would not tolerate it. They held that a debt incurred or authorized by one spouse and which the other spouse neither authorized nor received a benefit from is not marital debt.

The reason it was important that Carolyn take her fight to the Supreme Court of Kentucky instead of filing bankruptcy is that the assignment of debt may have been deemed a “domestic support obligation” by the bankruptcy court. So, even though her legal obligation to the creditors may have been extinguished in bankruptcy, she might have remained on the hook to Jackie for around $32,500.00 because domestic support obligations are not discharged.

May 21, 2011 Posted by | Bankruptcy, dissipation of assets, Divorce, Family Law, Planning | , , , , , , | Leave a comment

Hanging out at the intersection of divorce and business

The Supreme Court of Kentucky recently issues it decision in Medical Vision Group, PSC v Philpot, 2008-SC-000017-MR (Aug. 21, 2008)(to be published) which technically creates no case law, but is instructional regardless. The appeal was dismissed because at the time it came before the Supreme Court, the receivership issue was resolved and so the matter was moot.

The short version is that the Judge Philpot, Fayette Family Court Judge, put two companies under receivership because the sole owner of the companies, Dr. Dudee, abandoned the businesses. Dr. Dudee had refused to pay court ordered maintenance and other property distribution from his divorce and so he was jailed for contempt. While in jail, he refused to participate in work release, so his businesses were not generating revenue. Bottom line, Dr. Dudee refused to honor his obligations ordered in the divorce from his wife. Whether he was a conscientious objector or a had just been hijacked by a really bad attitude, I will let the public decide based on the facts in the case should you choose to read it.

The Kentucky Court of Appeals ruled in favor of the trial court by asserting that the judge did the right thing because the two companies were essentially “alter egos” of Dr. Dudee. However, since the trial court judge entered no findings of fact or conclusions of law in his decision regarding “alter ego” doctrine that would allow for the piercing of the corporate veil, the Supreme Court said that could not be the basis of upholding Judge Philpot’s decision. They did opine, though, that Judge Philpot was well within his discretion to enjoin the two companies in the divorce action pursuant to KRS 403.150(6) as proper parties to allow the court to exercise its judicial authority. The Court went on to point out that no third party was harmed by enjoining the businesses because Dr. Dudee was the sole owner. They also elaborated on the obligations that Dr. Dudee was refusing to honor and then added that he initially agreed to the receiver while stating he did not believe the court had jurisdiction to do so (kind of a half-hearted objection meant to move things along, but hoping to preserve an appeal – not terribly effective).

A few lessons emerge. First, if you want to preserve an appeal, be clear on the record rather than ambivalent. Second, if you are the sole owner of a company, it is ineffective to hide or divert assets into that company to keep them out of a divorce situation. Third, other parties can be brought into an action for a dissolution of marriage action, including a company that one of the parties has ownership interest in even if they are not the only owner. Lastly, no one emerges from a divorce unscathed emotionally, spiritually, or financially, but the extent of the injury can be mitigated or worsened by the attitude one adopts in the proceedings.

September 3, 2008 Posted by | Civil Procedure, Divorce, Family Law, property allocation | , , , , , , , | 1 Comment