Kentucky Bankruptcy Law

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Bankruptcy: Just the beginning

Well, I am not being terribly original today because I just wrote a post on my family law blog entitled “Divorce: Just the beginning”, but it occurred to me that there are similarities that are worth comment. People sometimes look to divorce to end their interpersonal pain and conflict and, similarly, people sometimes turn to bankruptcy to end their financial stress and conflict. However, in both situations, it is really important to recognize that the legal process involved is merely a beginning. Rather than an end, both processes really just begin the process of working out whatever issues led to the problem. And, just as important, it may be that those issues can and should be worked out without going through the bankruptcy or the divorce.

I spoke about how this plays out in a divorce situation in that other post, so I want to focus on bankruptcy. When people come to me, I take a comprehensive look at their finances and give them one of three opinions: 1) you can work this out without bankruptcy, 2) you might be able to work this out without bankruptcy, but here are the dangers and where to draw the line, or 3) bankruptcy is inevitable short of a miracle. My hope when I take someone through the bankruptcy process is that they will have a fresh start and never, ever have need of my services again.

However, if the debtor sees bankruptcy only as an end to their financial struggles, chances of repeat business for me remains high. Instead, if the debtor recognizes that they must make major changes to how they deal with money in their life, then I may never see them again. Now, there are some folks facing bankruptcy purely due to circumstances beyond their control such as being laid off or the economic downturn. The majority, though, have a mix of misadventure coupled with poor financial management skills.

One red flag for me is when a potential client asks about how fast their credit score will go up. There is a legitimate reason to ask this and that is if there is a plan to buy a house in the near future. Sometimes, though, the question really turns more on when they can reestablish credit worthiness for credit cards. So, a second red flag is when a client asks if they can hold one credit card out of the bankruptcy (the answer, by the way, is “no”).

Here is what I hope my clients will realize: that credit scores should have no meaning in your life and credit cards should be the incredibly rare exception rather than a rule. If one wishes to really seize upon a financial fresh start from bankruptcy, then I highly recommend a cash system for their ongoing purchases. A cash system means if you do not have the cash, then you do not make the purchase.

There are two exceptions to the cash system: purchasing a house and purchasing an education. Even when purchasing either of these items, it is still important to use discretion. For a home purchase, one should not purchase a house where you do not have in hand 20% of the purchase price to put as a down-payment. This is a good rule of thumb and it will also lessen the monthly payments because you typically will not have to pay for PMI insurance (private mortgage insurance). A second rule is to never buy as much of a house as you can afford. I know this flies in the face of conventional wisdom and your realtor’s recommendation, but figure the most expensive house you can afford on your budget and then subtract AT LEAST 10% from that figure. Actually, subtracting 20% would be even better.

The rules for purchasing an education involves some research. Before going to school be sure to find out the trends in employment for the degree you are seeking. Find out the most common pay range in the geographic area where you hope to live. Find out the price tag (tuition, books, fees, etcetera) for the degree. After you find out all these things, take a look at how long it will take you to repay the debt you will owe from that degree. If you are still feeling called to this particular vocation, then by all means proceed.

There are many other financial habits that one can develop post-bankruptcy to insure a true fresh start. Some are really basic such as balancing one’s checkbook instead of using the ATM’s balance. Perhaps learning what exactly compound interest is and how it works (both for debt and savings). Another is developing a monthly budget and sticking to it. Two excellent resources for learning to be financially free are Dave Ramsey and the ever reliable Crown Ministry. These resources may even allow you to avoid bankruptcy in the first place. However, if you cannot avoid bankruptcy, be sure to realize that filing the petition is really just the beginning of a process of reforming your relationship to money.

February 20, 2012 Posted by | Uncategorized | , , , , , , , , , , | 1 Comment

Another reason to consider a Chapter 13 instead of a Chapter 7

Let me just be clear that I want people who must file bankruptcy to find their way into the best fitting chapter; I do not have a clear preference between a Chapter 13 and a Chapter 7. If I had to pick one that I tend to lean towards, it would be a Chapter 13 because they are a little more complicated and I enjoy that. While they are more work and thus more expensive, they can also be more affordable for many debtors because the fees can often be paid post-petition (See this post on C 13 plans for more of an explanation). However, I also really like that Chapter 7 bankruptcies are focused on a narrow timeframe and get folks a great fresh start relatively quickly.

I recently met with a great couple whose situation illustrated yet another reason for looking at a Chapter 13. This was an older couple and the wife had some significant health issues that were hopefully in the past, but which raised concerns about how much longer she might be walking with us on the earth. This person was understanbably concerned about how her husband would fair financially with his passing. Both hoped to keep the house which was neither in default nor had equity in excess of their exemptions. The couple’s income was such that filing a Chapter 7 would be no problem and they would most likely be able to reaffirm on the house and keep it. However, a reaffirmation would mean keeping their personal obligation on the house.

If one keeps their personal obligation on a home loan through a Chapter 7 and then falls on harder times, they could be stuck with the deficiency debt even after their house is foreclosed on. This is because once you receive a discharge in a Chapter 7, you cannot obtain a discharge through a 13 unless you wait four years to file or eight years to get a discharge in another Chapter 7 (see this post for a little more detail on this subject). So, if they reaffirm on that debt in a Chapter 7 and either of the couple passed on before four years had passed, the surviving spouse could really be in a bind on the deficiency debt because the fixed income would not be enought to keep the house current.

So, the options were doing the Chapter 7 and hoping the lendor on the home loan would just let them keep paying and remain in the house or filing a Chapter 13. Well, the first option is a bit like rolling the dice and it is hard to gamble at on such things at that stage of life with a fixed income, so the Chapter 13 presented the best alternative. The rational for this is that if they get into the Chapter 13 and circumstances change, they can convert to a Chapter 7. In other words, a Chapter 13 gave them a second layer of protection or a safety net that would not be there in a Chapter 7.

November 1, 2010 Posted by | Bankruptcy, Chapter 13, Chapter 7, Plan | , , , , , , , | Leave a comment