Kentucky Bankruptcy Law

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Things to be aware of when facing bankrutpcy #10

I have said it many times – nearly everyone who I help with bankruptcy has already gone beyond reason in trying to pay off their debts by the time they reach my door. This post is about one of those very common steps people take in being as responsible as they can for their financial obligations: emptying retirement accounts.

I am not going to say it is a mistake to empty retirement accounts to pay off debt, nor am I going to say it is a good idea. It is simply a choice. However, it is a choice that you need to make armed with knowledge. Under the Federal bankruptcy code, retirement account funds are exempt pursuant to 11 USC 522. If you have over a million dollars in an Individual Retirement Account, though, you need to make sure your attorney is aware of this so their can maximize exemption amounts.

So, if you take money out of retirement to pay off debts, you are converting exempt assets. This is all well and good if, by doing so, you avoid bankruptcy altogether. However, if it only buys time and you end up filing bankruptcy regardless of the valiant effort, then you simply have lost those funds down the black hole of debt. Additionally, you will have incurred extra taxes if you withdraw the funds or borrow them but are unable to repay timely.

These are funds that would have ridden through the bankruptcy and remained available to for starting over after all debts were discharged. It is very difficult to gauge whether the strategy of raiding retirement accounts will pay off or not. Therefore, I strongly recommend getting a third-party, preferably and attorney familiar with the bankruptcy code, to review your situation before you withdraw those funds. As my dad would say, “There’s no use throwing good money after bad!”

January 6, 2014 Posted by | Alternate Debt Relief, Assets, Bankruptcy, Chapter 13, Chapter 7 | , , , , , , , , , , | Leave a comment

That Pesky Equity Line of Credit

Many people who own a home have more than one loan secured against their residence. These junior liens (a consensual lien against real property is also called a mortgage) may be home equity lines of credit, business loans where the lender insisted on a personal residence as security, judgment liens, and so on. Judgment liens can be “stripped off” (the security interest ended) in either a Chapter 7 or Chapter 13 if it cuts into the debtor’s exemption. 11 USC Sect 522(f)(A). However, voluntary liens (one the debtor consented to) are more challenging.

The Sixth Circuit Court of Appeals made clear that voluntary security interests against real estate in this neck of the woods (including Kentucky) cannot be stripped off in a Chapter 7. In re Talbert, 344 F.3d 555 (6th. Cir. 2003). They stuck with the pre-code rule that “real property liens emerge from bankruptcy unaffected.” Id. at 561. This case focused on the role of 11 USC Sect. 506 which provides for the determination of a secured debt status.

So, if the only way to save your home is to get rid of (strip off) a second or third mortgage, you must file a Chapter 13 bankruptcy. However, the relief provided in a 13 is limited as well. If the loan is secured solely against the debtor’s real property which is also their principal residence, then the loan cannot be modified. 11 USC Sect. 1322(b)(2). The one exception to that takes us back to 11 USC Sect. 506: If the loan is completely underwater – that is, if there is zero equity in the property for the security interest to attach to (and I mean not even $1), then even such a loan can be stripped off and treated as wholly unsecured debt in the Chapter 13. When home prices were dropping consistently, this was a more common occurrence but it still happens.

What can be done with junior loans where there is some equity to which their lien attached? Well, this is where your bankruptcy attorney needs to take a careful look at the promissory notes, mortgages, and secured property. In an interesting case coming out of Ohio, the Sixth Circuit took a look at the meaning of the words “only”, “real property” and “principal residence” and found that they all three must come together for the 1322 protection to come into play. The In re Reinhardt, 563 F.3d 558 (6th. Cir. 2009) case involved a loan secured against a mobile home and the real property upon which it sat. Most would see that as real property which is the principal residence, but under Ohio law, the mobile home was personal property. Just like in Kentucky, that mobile home only became real property (affixed thereto) when the title was surrendered and the proper documents filed with the County Clerk.

Because the Reinhardt’s never surrendered the title of the mobile home, the loan was secured BOTH in the real property and an item of personal property. Therefore, the terms of the loan could be modified by the Chapter 13 plan. Basically, this means that the loan could be valued under 11 USC Sect. 506 and split into a secured claim and an unsecured claim. The part that was secured (equal to the value of the property at the time of the filing) would be paid in full (not necessarily in the plan though) and the rest would be paid pro-rata as with all the other unsecured debts. The other place where it is common for a loan to be secured against both one’s principal residence real estate and other property is with business loans. These lenders often want security in the home and in any assets of the business. However, this makes those loans vulnerable to modification (cram down).

Be sure that you bankruptcy attorney takes a careful look at all the factors that come into whether a secured debt with a lien against your home can be stripped off or crammed down.

November 8, 2013 Posted by | Bankruptcy, Chapter 13, Exemptions, Foreclosure, Home loan modifications, Planning, Pre-filing planning, Property (exempt | , , , , , , , , , , , , , , | Leave a comment

Good Riddance Judgment Lien!

In a Chapter 7 or a Chapter 13, one can avoid a judicial lien on property that impairs an exemption pursuant to 11 USC Sect. 522(f).  The most common way this plays out is that a creditor has filed suit, obtained a judgment, and then filed a lien on that judgment against your real property. This lien can sit dormant against your home for fifteen years, but it must be satisfied if the property is ever sold. Or, the creditor may pursue foreclosure but they rarely do that unless they believe there is enough equity in the property.

In order to strip off the judgment lien, your bankruptcy attorney must file a motion within the bankruptcy as a contested matter. In other words, if your attorney does nothing else, then the lien will survive the discharge. Previously, this was done within the plan of a Chapter 13, but the local rules have changed so that it must be done by motion in both Chapter 7 and Chapter 13 bankruptcies.

If your attorney was unaware or the judgment lien or otherwise failed to file that motion to strip the lien, not all is lost. A decision in the Eastern District of Kentucky Bankruptcy CourtIn re Cross, Case No. 93-50547, the Debtors failed to strip the lien off their real property while the bankruptcy remained open. Twenty months after the case closed, the Cross’ reopened the bankruptcy and moved to have the lien stripped. Despite the passage of time and the creditor arguing that the Debtors waived the right to strip the lien based on so much time passing, the court still granted their motion.

November 6, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Exemptions, Foreclosure, Planning, Pre-filing planning, Property (exempt | , , , , , , , , , , | Leave a comment

Things to be aware of when facing bankruptcy 9

If you have made it to an attorney and are preparing to file bankruptcy, then you have received a packet requesting a lot of information including a list of assets. Be sure to be complete in listing your assets. Now, I do not mean you need to count your skivvies or socks, but you do NOT want to exclude items of value (yes, do give an estimate of the number of outfits and wearing apparel in your household but no need for an exact inventory unless they are fancy designer clothes).

A few things that tend to get left off that list: life insurance policies (even term policies that have no cash value need to be listed), burial plots, and tax refunds. These are all out of sight and out of mind things that, nevertheless, are assets of your estate. Most people have enough exemptions to cover them, and so there is no down side to listing them. The up-side to listing them is a smooth bankruptcy.

November 4, 2013 Posted by | Assets, Bankruptcy, Chapter 7, Discharge, Exemptions, Planning | , , , , , , , , , , , | Leave a comment

Things to be aware of if facing bankruptcy 7

A temptation that many people have when facing a bankruptcy is hiding assets. Often this arises from the mistaken notion that a debtor cannot get relief from debt unless they give up most of what they own. The bankruptcy code is not intended to be a punitive mechanism to harass people who do not pay their debt; it is intended to be a tool to give people a fresh start when they cannot reasonably cover all their debts. As part of this “fresh start’ intent, the federal bankruptcy exemptions are fairly generous. Some state law exemptions are more generous, but most are far less expansive.

One must first determine if their state law allows a debtor to utilize the federal exemptions. Kentucky does allow a debtor to opt for either the state exemption or federal exemptions. I have only found two cases where the Kentucky state exemptions were more favorable than the federal ones: 1) a case where a joint-bankruptcy was filed but one of the debtors passed away while the bankruptcy was pending, and 2) a case where the debtor was due a substantial worker’s compensation package. In each of those circumstances, the state exemptions were 100% of those assets being exempt where the federal ones were limited to “reasonably necessary”.

In all my other bankruptcies, the federal exemptions were the best choice. And, in nearly all consumer Chapter 7 bankruptcies, the federal exemptions will allow debtors to keep all their property. Since most debtors have enough exemption to keep all their properties, then there is no reason to try to hide those same assets. The attempt to hide assets, creates a real risk that could sabotage the entire bankruptcy and lead to the trustee giving tremendous scrutiny to your whole situation. It can also lead to loss of the relief of a discharge of debt.

October 28, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Discharge, Exemptions, Fraud | , , , , , , | 1 Comment

Chapter 7 Planning: Purchasing a car prior to filing

I spent two posts recently talking about purchasing a car prior to Chapter 13.  I want to touch briefly on the issue of purchasing a car just prior to filing a Chapter 7. I will not go into this with much depth because it is a fairly rare event. However, the main concern to keep in mind the timing of the purchase. If the lien is perfected within the ninety (90) days of filing the Chapter 7, you are running the risk of the trustee attempting to avoid the transfer (the perfecting of a lien is arguably a transfer) of the lien and thus have a potentially non-exempt asset that they can liquidate. Defenses come to mind as I write this, but few people filing a Chapter 7 can afford to also have litigation happen within the Chapter 7. So, the smartest course of action is to make sure all secured debts are perfected more than 90 days prior to filing Chapter 7.

October 2, 2013 Posted by | Bankruptcy, Chapter 7, Exemptions | , , , , , | Leave a comment

Chapter 13 Planning: Purchasing a car prior to filing part 2

Last post explained some of the issues the debtor had to be aware of in purchasing a car prior to filing a Chapter 13. Today I want to complete that discussion with two other considerations. The first is really a concern for the creditor who sells the car. Timing matters in the perfection of the lien on the title of the car to make the car debt a secured one.  Under 11 USC Sect. 547(e)(2)(C)(ii), the seller of the car has up to 30 days after the filing of the bankruptcy to perfect their lien. Perfecting a lien means that they get notice of the lien on the title of the car. A lien must be perfected to be enforceable or not avoided. The reason this matters mainly for the creditor is that if the creditor fails to perfect the lien within 30 days of filing the bankruptcy then they cannot get paid in full AND yet they cannot repossess the car. Essentially, they become unsecured creditors only and they only get pennies on the dollar.

Although that impairs the creditor, the of ways this impacts the debtor, though, is that extra litigation is practically guaranteed to get the lien removed from the title later on. Despite this extra work, the debtor would still have to pay the same plan payment whether that car debt is secured or not. So, it is just cleaner to allow plenty of time (at least 30 days) for the creditor to get that lien perfected.

The second way it impacts debtors for a lien to go past this deadline to be perfected has to do with exemptions. Suddenly, if the lien is not properly perfected, then the whole value of the car must either be exempted or the non-exempt part may increase what has to be paid into the Chapter 13 plan. A Chapter 13 plan must propose at least an equal amount of payments that go to unsecured creditors exists in non-exempt assets. So, when “wild car” exemption plus the vehicle exemption fall short, the plan payment might have to be increased.

September 30, 2013 Posted by | Bankruptcy, Chapter 13, Disposable Income / Budget, Plan payments, Planning, Pre-filing planning, Security interests | , , , , , , , , | Leave a comment

Things to be aware of if facing bankruptcy 1

Over the next weeks, I plan to write many short posts giving a large number of “don’ts” to be aware of if you are contemplating bankruptcy. This first one really is for folks who have already decided they have to file bankruptcy. Be sure to provide your attorney with EVERY bank account with you name on it; don’t leave out any bank accounts.

Sometimes they get left out because the balance is so small that people think that account does not matter. Other times, rarely I think, they are left out because the debtor is worried about keeping a little bit of money tucked away that they won’t lose.

The danger in leaving accounts out is that if a trustee gets wind of it, you could get kicked out of bankruptcy without hope of getting a discharge. The reason it is not worth doing this is because Federal exemptions are pretty generous. I have rarely come across a debtor that could not exempt all their assets including cash on hand in bank accounts; nearly everyone I have helped through bankruptcy has ended the case with all the assets they started it with.

Furthermore, if you have so much in an account that it cannot be exempted, your attorney should know about it up front so that they can help you with legitimate pre-bankruptcy planning.

September 18, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Exemptions, Planning, Pre-filing planning | , , , , , , , , , , , , | Leave a comment

Making bankruptcy more affordable part 2

I gave one suggestion a couple of days ago about how to make Chapter 7 bankruptcy more affordable by paying court filing fees post-petition. The dilemma still remains that attorney fees in the typical Chapter 7 must be paid in advance. For folks whose wages are being garnished this creates a real conundrum. You are bringing home less money because a huge chunk of your pay is being seized, but you cannot stop the garnishment without filing the bankruptcy. 

One option to explore arises if you are garnished more than $600.00 by any one creditor in the 90 days prior to filing. This creates a preference. If your attorney properly exempts those funds, then you can pursue recovering the money. If the expected return is sufficient, you might be able to assign the right to recover those garnished funds to someone else who, in exchange, covers your attorney fees. Your attorney may even be willing to do this, though not likely for the entire fee because there is some risk that the funds will not be readily surrendered.

September 13, 2013 Posted by | attorney fees, Bankruptcy, Chapter 7, Exemptions, Planning, Pre-filing planning | , , , , , , , , , , , | Leave a comment