Kentucky Bankruptcy Law

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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

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

Forget Foreclosure: Save your home

Chapter 13 is an extremely effective legal mechanism for saving one’s house if it is being threatened with foreclosure. The trend these days is for home loan lenders to refuse to accept payments while “modifications” are being “reviewed”. This means arrears mount higher and higher. I have known of an extremely few home loan modifications actually coming to fruition. However, I have heard person after person recount to me how the lenders “lost” paperwork submitted for modifications multiple times, countless delays, requests for more information, and ultimately refusal to modify. This whole process can destroy the chances of a Chapter 13 to save your home.

In a Chapter 13, the entire arrears on a house have to be paid in full during the 60 months of the plan duration. The arrears can include certain fees, penalties, and other costs prior to the filing, but gets zero (0%) percent interest in the plan in the Eastern District of Kentucky.  So, if the arrears mount too high prior to filing the Chapter 13, then the plan payment can end up being so high that the plan is not feasible. On top of the plan payments, one has to resume making the ongoing regular monthly payment.

I strongly recommend that you consult a bankruptcy attorney about a Chapter 13 early in the process because modification efforts are usually unsuccessful. I do not know why lenders are taking the approach they are to home owners because it does not seem economically logical, but then we are talking about huge, mindless organizations. But, in a Chapter 13, the lenders HAVE to play by the rules.

Debtors also must play by the rules and they MUST make those monthly payment to the lender and their Chapter 13 plan payments for the whole thing to work. So, their budget must support both payments. This means taking action early.

September 16, 2013 Posted by | Bankruptcy, Chapter 13, Foreclosure, Home Loan Modification, Home loan modifications, Pre-filing planning | , , , , , , , , , | Leave a comment

Foreclosure versus Chapter 7 versus Chapter 13

Last week I responded to a quest as to which was better, “Bankruptcy versus Foreclosure”. And in typical lawyer fashion, I said it was the wrong question. Actually, one must decide between a Chapter 7 and a Chapter 13. You can see that last post for the explanation of why. A Chapter 7 would be preferable if you either do not want to keep the house or if you cannot afford to keep the house. A Chapter 13 is preferable if you want to keep the house and can afford it with help.

In a Chapter 13, you can ‘force’ your home lender to let you catch up the arrears (past due amounts plus certain pre-petition fees) over the course of up to 60 months. The lender has to let you start paying the regular loan payments during the bankruptcy so long as the plan payments you propose are feasible and cover all the arrears. They cannot charge interest on those arrears (at least not in the Eastern District of Kentucky) and only certain other post-petition fees are allowed.

For a plan to be feasible, you have to show in your Schedule I and Schedule J (income and expenses or “budget”) that you can pay a large enough plan payment that all those arrears will be satisfied. In considering your budget, you exclude any unsecured debt you are currently trying to pay, such as credit cards or old doctor bills.

So, if you want to keep your house and you can engage in sufficient belt-tightening to pay the arrears over 60 months so long as all your unsecured debts essentially go away, then you should consider a Chapter 13. An added benefit for a few home owners is that a second mortgage might get stripped off entirely. I will write more about that in the next post.

July 18, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Disposable Income, Foreclosure, Plan | , , , , , , , , , , | Leave a comment

Bankruptcy versus Foreclosure

I was asked a question today by someone who had fallen behind on their house payments. They asked if it would be better for them to file bankruptcy or to go through a foreclosure proceeding. Unfortunately, this is the wrong question. It really is not a choice between one or the other unless a bankruptcy will allow you to keep the house. If you go through a foreclosure and the house is auctioned, there will certainly be a deficiency debt remaining.

A deficiency debt is when a house (or car for that matter) is auctioned off for less than what is owed. Many people think there debt is satisfied by the foreclosure on their house (or repossession of a car), but it is not. That deficiency debt can lay there for years. Often it is sold to a credit collection company. Eventually, though, they will come to collect. They will file a lawsuit at some point.

So, if you go through a foreclosure then you will also end up going through a bankruptcy. The actual question is whether you should go through a Chapter 7 or through a Chapter 13. The answer to this comes by deciding two things: 1) do I want to keep the house, and if I do, 2) can I afford to keep the house. I will take this question up in my next post.

July 12, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Foreclosure, Planning, Pre-filing planning | , , , , , , , , , | Leave a comment

Letting go is hard to do (or Home loan arrears)

We grow very attached to our homes. There is such a long heritage of home ownership being part of the American dream. Many who immigrated here long ago could have never attained to being a land owner and the new life in America created the opportunity and hunger for this hallmark of the gentry in the old country. This latest recession took a huge swipe at that American dream and one of the hardest parts of my job is helping a debtor realize when they just cannot hang onto their land.

The most common way this plays out is when a home owner has done all they can to stay on top of debts in the face of dwindling resources. They seek out a home loan modification to stave off financial devastation. Most lenders, though they are not required to do so, insist that the home owner stop making payments while they “process” the paperwork. This creates a bind, though, because almost no one sets that money aside to cure the arrears in the event the modification fails. And, once that payment is missed, then lender has the right to accelerate the mortgage and foreclose.

Chapter 13 is a great tool to save a home because it forces the lender to allow arrears to be paid, without additional interest, over 60 months. But, they home owner debtor must show they can afford the payments needed to pay the ongoing loan obligation PLUS pay enough plan payments to cure the arrears. There comes a point for each debtor where the arrears simply surpass their ability to catch them up in that 5 year window. When this point is reached, I am forced to give them the news that they cannot revive their home; it is too late. Some receive the news and surrender to the inevitable and others refuse to believe they are out of options.

The important thing to do if you have arrears mounting on your home loan debt, is to get solid bankruptcy counsel early on. When you allow time for planning, the chances of saving the home are maximized.

June 26, 2013 Posted by | Bankruptcy, Chapter 13, Foreclosure, Home Loan Modification, Property (exempt | , , , , , , , , , | 1 Comment

Timing between consecutive Chapter 13s

I am doing a series on timing between filings of bankruptcies and began looking at the time between two Chapter 7 filings. Today is looking at the time between Chapter 13s. As I stated previously, the issue is not when one can file, but when one can receive a discharge in the subsequent case. The time issue for a 13 to a 13, unlike other scenarios, is open to litigation.

If the preceding bankruptcy was a Chapter 13, then you cannot receive a discharge in a subsequent Chapter 13 if it is filed  two (2) years or less from the prior Chapter 13. However, it remains unclear in the Sixth Circuit (including Kentucky) if this means two years from the discharge of the prior Chapter 13 or the date the first Chapter 13 was filed. See 11 USC Sect. 1328(f)(2). I believe the most likely reading is from filing date to filing date due to the similarity in language of the statute. However, one should be aware that this has not been squarely decided in the Sixth Circuit and there are arguments on the other side. The main argument on the other side is that it really makes no sense to have a two-year period when Chapter 13s run three to five years, but that really only makes this statute cover a rare situation, not an impossible one.

4) If the preceding bankruptcy was a Chapter 13 (or Chapter 12), then you cannot receive a discharge in a subsequent Chapter 7 if the Chapter 7 was filed within six (6) years of when the preceding bankruptcy was filed. See 11 USC Sect. 727(a)(9). There are two exceptions: if there was 100% payment to unsecured claims in the Chapter 13 or if there was 70% repayment AND it was the Debtors’ best effort.

5) If there was no discharge in a preceding Chapter 7  or Chapter 13, then there is no time limit on filing with regard to receiving a discharge. However, there is an impact on the automatic stay which is not covered here.

When I say “within” I advise to wait that period of years and then one can file the day after that period has run.

May 24, 2013 Posted by | Bankruptcy, Chapter 13, Discharge, Planning, Pre-filing planning, Priority debt, Student loans, Tax Debts | , , , , , , , , , , , | Leave a comment

Quick Note: Income, expenses and; Chapter 13 plan

The major driving force in determining what your Chapter 13 bankruptcy plan payment will be are your household income minus reasonable and necessary expenses, at least in the Eastern District of Kentucky. I encounter two general situations when looking at household income and expenses to determine what a debtor’s plan payment will likely be in a Chapter 13: 1) people who have constrained their expenses to an unsustainable point in order to try to stave off bankruptcy, and 2) people who find it very challenging to tighten their belt.

The first scenario can show up different ways. They may have stopped paying into voluntary retirement plans in hopes to make things work. Or, perhaps they went against personal convictions and stopped tithing to their church believing it would be a short-term constraint. With these two approaches, they are essentially locking themselves in to being unable to go back to tithing or retirement funding for the three to five-year duration of their Chapter 13. This is because the Chapter 13 trustee will expect documentation of consistent and ongoing tithing or payments into retirement. This is to preclude people who suddenly decide to do these things just to help their own bottom line as opposed to a conviction or long-held practice. The remedy for this requires very early bankruptcy planning and is not easily fixed; it often must be lived with for the term of the bankruptcy.

The second scenario is easier to fix, but tougher for debtor’s to swallow. Those who most often find themselves in this situation have had a healthy income for a long time and unforeseen circumstances, like job loss, drop them into a very constrained income. Most people expand their spending to fill up their income. This is not wise, but it is terribly common. Once certain “luxuries” become routine expenses, it is incredibly hard to reverse them. I see this with higher food expenses for top-of the line organics and fresh food, health supplements, or personal training expenses. Other ways it manifests are in high-end clothing or nice (“dependable”) cars. The remedy is simple: cut expenses. However, it is tough to swallow the idea of trading in the expensive SUV for an old economy car. It is hard to cut food costs without buying processed food. Hard won fitness is hard through personal training is hard to exchange for a modest gym membership and self-training.

However, to get the discharge of debt and relief from foreclosure that Chapter 13 offers, tough decisions and sacrifices must be made.

May 8, 2013 Posted by | Bankruptcy, Chapter 13, Discharge, Documentation, Plan, Plan payments, Planning, Pre-filing planning, Secured loan arrears | , , , , , , , , , , , , | Leave a comment