Kentucky Bankruptcy Law

Counsel with Care

My “best kept secret” practice

Most of my colleagues know that I find a tremendous overlap between practicing bankruptcy and practicing family law. One of the top reasons, if not the very top reason, for people filing bankruptcy is a divorce. However, I also have another practice area that fits well with both of these other practices and that is Family Law Mediation. I encourage you to please check out my other blog here at Bluegrass Conflict Resolution. Not only am I a trained mediator in this area, but my former career was focused on counseling and helping heal relationships. So, it is a natural extension that draws upon my skill set and experience.

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May 23, 2017 Posted by | Alternate Debt Relief, Blogroll, child custody, Divorce, Family Law, Mediation, Uncategorized | , , , , , , , | 5 Comments

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.

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

Expanding Services

I am glad to announce that Matthew D. Henderson will be joining Troutman & Napier, PLLC as an associate attorney. Matthew comes to us from the Fayette County Attorney’s office. Prior to that, he served as Judge Philpot’s judicial intern in Fayette Family Court. He will be bringing tremendous skills and knowledge in areas of criminal law and family law as well as estate planning and general litigation. With the addition of Matthew, Troutman & Napier, PLLC offers a full range of services and practice areas for our clients.

July 7, 2014 Posted by | Bankruptcy, child custody, child support, Civil Procedure, Divorce, Estate Planning, Family Law, Guardianship, Life & Law, Negotaion & conflict resolution, Paternity, Politics, Solo & Small Firm | , , , , , , , , | Leave a comment

Special Needs Trust

I just wanted to mention a post over on my family law blog site that has some indirect implications on bankruptcy, specifically pre-bankruptcy planning and asset protection. You can access that post here.

October 4, 2013 Posted by | Bankruptcy, Estate Planning, 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

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

Working knowledge of bankruptcy essential to MANY areas of law

I was just talking the other day to a client who had a real estate transaction question. The context of the real estate transaction included a co-signed debt, a family law issue, and a high risk of bankruptcy for the co-debtor. If I only understood one of those areas of law or only knew a part of the context of his question, then I would have given the wrong advice.

If I had only thought about the transfer from the family law perspective, I would have advised against the transfer. If I have only contemplate real estate law and looked at the value of the property versus the debt load, I probably also would have advised against the transfer. However, knowing the impact of the imminent filing of bankruptcy by the co-signer and how that would interplay with the family law issue and the ability to enact a transfer post-bankruptcy, made the exact opposite answer the better advice to give him.

Bankruptcy law permeates every single other area of law that involves financial transactions of any sort. This is because the bankruptcy code preempt debtor and creditor rights and obligations of state law to a huge extent. So, whether you are contemplating a divorce settlement, a real estate transfer, a debt settlement, or a multi-million dollar contract, ask your lawyer what would happen if you or the other party ended up in bankruptcy. If they have no idea, ask them to research it or consult with a bankruptcy practitioner.

September 8, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Divorce, Estate Planning, Family Law, Negotaion & conflict resolution, Planning, Pre-filing planning, property allocation | , , , , , , , , , , , | 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