Kentucky Bankruptcy Law

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Concurrent Jurisdiction of State and Bankruptcy Courts

There is a nice little Kentucky Supreme Court opinion called Howard v Howard, 336 S.W.3d 433 (Ky. 2011) every Kentucky family lawyer and consumer bankruptcy lawyer should read. The first part of the opinion addresses child support and contempt sanctions, which to be sure are fun things to know about, but the meat of the opinion spells out the concurrent jurisdiction of Kentucky Courts with the Federal Bankruptcy Courts and how that effects discharge of certain kinds of debt.

Under 28 U.S.C. Sect. 1334(b), a state court has the same and concurrent jurisdiction as a bankruptcy court to make a determination as to whether a particular debt is discharged by a bankruptcy. In the Howard case, the ex-husband had agreed to be responsible for certain debts the ex-wife had also co-signed. However, he went into a Chapter 7 and received a discharge of that debt. Even though the ex-wife had notice of the bankruptcy and did NOT file any objection in the Chapter 7, she was still able to go to the Kentucky Circuit Court where the divorce had occurred and get a ruling that ex-husband still owed the obligation to her.

You see, the divorce decree created an obligation between the ex-husband and ex-wife even though a third party was the direct creditor. This obligation was found to be an 11 U.S.C. Sect. 523(a)(15) obligation as a result of a divorce. Therefore, by operation of that law, that obligation to the ex-wife was not touched by the bankruptcy. When the original creditor came back to collect from the ex-wife, she was able to pursue contempt against the ex-husband and win. This saved ex-wife from having to pay for a lawyer in the bankruptcy in addition to paying for a lawyer in the Circuit Court case.

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February 7, 2015 Posted by | attorney fees, Bankruptcy, Chapter 7, child support, Civil Procedure | , , , , , , , , , , | Leave a comment

Bankruptcy and Family Law go hand in hand

I have been building up my bankruptcy practice and now that it is going well, I am directing effort back to family law as well. I practiced family law from the very beginning and so this is not a new practice area. Bankruptcy and Family Law are an excellent pairing of law practices because they so often overlap.

September 19, 2013 Posted by | Bankruptcy, Family Law | , , , , , | Leave a 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

Divorce, debt and the Devil’s heyday

I was sitting in state court just the other day and saw yet another example of the interplay between divorce and bankruptcy. A creditor had sued a woman for a delinquent debt. The woman came to court to defend against a motion for default judgment. Her defense was that she was not responsible for the debt because it had been assigned to her ex-husband in their divorce.

Unfortunately, that is not a valid legal defense. Many divorced persons erroneously assume that the divorce decree assigning debt to their ex also absolves them of liability on that debt. It does not. This woman is now facing wage and bank account garnishments because her ex-husband failed to pay the debt. He may have even filed bankruptcy which would explain why the creditor was only coming after the woman. Her only option is to go back to family court and get that judge to enforce the divorce order using contempt powers and make the ex re-pay her for what it cost her. If he only filed a Chapter 7, his obligation to her remains. If a Chapter 13, it would likely be treated as an unsecured debt that can be discharged since it is not the same as child support or alimony.

Regardless, if he is without resources, this may mean he spends some time in jail for contempt, but the woman’s finances are still wrecked and she may also have to file bankruptcy to get relief. Ah, divorce – the curse that keeps on cursing – the devil’s own little specialty area. Anyway, it is important for family law practitioners to know something about bankruptcy and bankruptcy lawyers to know something about family law so that their clients are not caught unaware.

April 19, 2013 Posted by | Bankruptcy, Debt collection, Divorce, Family Law, Garnish | , , , , , , , , , | 2 Comments

Domestic Support Obligation and Bankruptcy (or No Discharge for the Durango Debt)

The Kentucky Court of Appeals just issued a decision directly related to family law and bankruptcy that shows why knowledge of both fields can be so important. In Howard v Howard, 2008-CA-001059-MR (June 12, 2009)(to be published) the Court addressed two important issues regarding domestic support obligations.

A domestic support obligation has a very broad definition under the bankruptcy code (11 USC 101(14A)) encompassing any debt owed to or recoverable by “a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative” including a “government unit”. This includes alimony (maintenance), child support, or other obligations arising out of a divorce or separation. The debt can be established through a separation agreement, decree or other order of the court. 11 USC 523(a)(15). For Kentucky Courts, it also includes a Dodge Durango debt.

In this case, Mr. Roy Shane Howard divorced his wife, but he agreed to, and was later ordered in the decree, to pay towards a deficiency judgment arising from the repossession of their Durango. The case does not say, but that repossession may have been the final straw that broke the back of their marriage. Some folks really love their Durangos.

Anyway, after the divorce, he listed this deficiency judgment as a debt in his bankruptcy and his ex-wife did not object to its discharge so he figured he no longer owed that debt. However, little did he realize that Kentucky Courts share jurisdiction with Federal courts to determine whether an obligation is discharged and the Court of Appeals wasn’t buying the argument that she had to object in the bankruptcy case. After all, the bankruptcy code declares such debts as non-discharged and spells out no special action required by the creditor.

This Court determined that Roy’s obligation in the divorce to pay part of the Durango deficiency was a domestic support obligation. While the bankruptcy discharged the debt as to the original lender, it did not disturb his responsibility for the debt to Sondra, his ex-wife. In other words, the original creditor could not come after Roy for the debt any longer, but they could go after Sondra and Sondra could bring it right back around and get Roy for contempt in the divorce court. And that is exactly what happened.

So, if debts are an issue in a divorce proceeding, it is wise to plan carefully what will happen to those debts. Often, it is best for the each person to set aside the anger and honestly analyze if they can pay those debts once the one set of living expenses becomes two separate households. If not, and they otherwise qualify for bankruptcy, then a joint bankruptcy may be the best option.

I said there were two important domestic support obligation issues. suffice it to say that this sort of deficiency debt could have been discharged in a Chapter 13 instead of the Chapter 7 he filed.

March 22, 2013 Posted by | Bankruptcy, Divorce, Family Law, Marital Assets | , , , , , , , | 4 Comments

Domestic Support Obligations: child support, alimony, and equitable distributions

There are two different sorts of domestic support obligations defined in the bankruptcy code.  The first kind of domestic support obligation encompasses things such as child support payments and alimony (called maintenance in Kentucky).  The second sort comes from an equitable distribution of property subsequent to a divorce. The term “domestic support obligation” first appears in 11 USC Sect. 101(14A), but these two different kinds of domestic support obligations only become apparent when one looks at how they are treated in terms of discharge of debt.

At first glance at 11 USC 523(a)(5) & (15) it looks like these two types of domestic support obligations are treated the same. That is to say, neither child support and alimony type obligations nor equitable distribution of property appear to be discharged in bankruptcy. This is true when it comes to Chapter 7 liquidation type bankruptcy. However, it is a different story in Chapter 13, but one has to look at the bankruptcy code carefully to discern this difference.

So, now we have to turn to 11 USC Sect 1328(a)(2) to see the rest of the story. This oddly written statute basically says that all debts except for certain ones get discharged once all the plan payments are made. The specific provision mentioned includes 11 USC Sect 523(a)(5) as an exception that does NOT get discharged. However, that provision conspicuously leaves our 11 USC Sect. 523(a)(15). This latter provision, 523(a)(15) pertains to equitable distribution of assets subsequent to a divorce.

Bottom line: if you agree to let your soon to be ex-spouse pay you later for your share of equity in the marital residence, then you may end up losing out if he or she ends up in a Chapter 13. That chunk of equity may well end up being treated as a general unsecured debt receiving only pennies on the dollar. However, child support and alimony (maintenance) will not be discharged in a Chapter 7 or a Chapter 13.

July 16, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, child support, Divorce, Family Law, Marital Assets, Pre-filing planning | , , , , , , , , , | 1 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

Domestic Support Obligations: child support, alimony, and equitable distributions

There are two different sorts of domestic support obligations defined in the bankruptcy code.  The first kind of domestic support obligation encompasses things such as child support payments and alimony (called maintenance in Kentucky).  The second sort comes from an equitable distribution of property subsequent to a divorce. The term “domestic support obligation” first appears in 11 USC Sect. 101(14A), but these two different kinds of domestic support obligations only become apparent when one looks at how they are treated in terms of discharge of debt.

At first glance at 11 USC 523(a)(5) & (15) it looks like these two types of domestic support obligations are treated the same. That is to say, neither child support and alimony type obligations nor equitable distribution of property appear to be discharged in bankruptcy. This is true when it comes to Chapter 7 liquidation type bankruptcy. However, it is a different story in Chapter 13, but one has to look at the bankruptcy code carefully to discern this difference.

So, now we have to turn to 11 USC Sect 1328(a)(2) to see the rest of the story. This oddly written statute basically says that all debts except for certain ones get discharged once all the plan payments are made. The specific provision mentioned includes 11 USC Sect 523(a)(5) as an exception that does NOT get discharged. However, that provision conspicuously leaves our 11 USC Sect. 523(a)(15). This latter provision, 523(a)(15) pertains to equitable distribution of assets subsequent to a divorce.  

Bottom line: if you agree to let you soon to be ex-spouse pay you later for your share of equity in the marital residence, then you may end up loosing out if he or she ends up in a Chapter 13. That chunk of equity may well end up being treated as a general unsecured debt receiving only pennies on the dollar. However, child support and alimony (maintenance) will not be discharged in a Chapter 7 or a Chapter 13.

February 1, 2012 Posted by | Uncategorized | , , , , , , , , , | 8 Comments

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

The case of mismatched law: alimony and 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.

June 30, 2011 Posted by | Bankruptcy, Chapter 13, Chapter 7, Divorce, Exemptions, Family Law, Planning, Pre-filing planning, Property (exempt | , , , , , , , , , | Leave a comment