Kentucky Bankruptcy Law

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Keeping the Homestead Safe in Bankruptcy: Chapter 7

This post will only apply to a narrow segment of people forced to consider bankruptcy – those who have a bunch of equity in their house along with a hefty debt in which their spouse does not have liability. Most often, this would be an entrepreneur whose business venture took a downturn.

I have discussed previously how Chapter 13 is a great mechanism for preserving one’s house if there are arrears to be dealt with or if there is excess equity beyond what can be covered by a homestead exemption. However, Chapter 13 is not for everyone. There are debt ceilings in a Chapter 13 that can operate to knock out business people who have personally guaranteed large amounts of unsecured business debt or even larger levels of secured debt. There also needs to be a somewhat predictable income upon which to base the budget and plan payment. This makes Chapter 13 difficult for people who may go months at a time without income due to the way their employment is structured, such as an entrepreneur.

Going into a Chapter 7, though, with excess equity in one’s house can be dangerous. Excess equity exists if there is a substantial value to the house even after subtracting the secured debt on it and the exemptions available. You see, a Chapter 7 trustee only makes about $60.00 per case unless they find non-exempt assets they can liquidate and distribute to unsecured creditors. The trustee gets a percentage of all such assets.

This brings us to the strategy that relies on a number of “ifs” being true. This strategy can be helpful (though certainly not a panacea): 1) If the Debtor is married and their spouse is NOT also indebted on the majority of debt so that they do not have to file also, 2) If the husband and wife share the home as tenants in the entirety (the deed gives then ownership “for their joint lifetimes with the remainder in fee simple to the survivor of them”), and 3) the Debtor has some exempt or non-estate resource to make a lump-sum offer to the trustee. The strategy is simply to go into Chapter 7 bankruptcy as an individual and then hope your spouse outlives you or you can make a deal with the Trustee.

The Trustee can seize non-exempt assets of the Debtor and liquidate them in a Chapter 7, but they must do this liquidating under state law. Kentucky law only allows a creditor (or Trustee) to sell the expectancy interest of a Debtor in real estate that they own as tenants in the entirety with a non-debtor spouse. The expectancy interest is that if they outlive their non-debtor spouse, then they have the entire undivided homestead as their own, but if their spouse outlives them then there is nothing – the entire undivided homestead goes to the surviving non-debtor spouse. So, the question becomes: “How much would someone pay for a chance that the non-debtor spouse dies first?” That amount, whatever it may be, is the actual value that the trustee would receive in selling the Debtor’s interest in the house.

In other words, a home owned in the way I described by a husband and wife cannot be stripped away from the non-debtor spouse. He or she is entitled to all of that home concurrently with the Debtor; it cannot be divided. A creditor cannot even get half the rents, if there were any. They can only obtain that expectancy – that chance that they may get it all. Because of that, many Trustee’s would be open to a reasonable lump-sum payment from the Debtor to retain their expectancy interest rather than risk coming up with a goose-egg by trying to sell what essentially amounts to a lottery ticket on the court house steps.

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December 22, 2014 Posted by | Alternate Debt Relief, Assets, Bankruptcy, Business debt, Chapter 13, Chapter 7 | , , , , , , , , , | Leave a comment

Keeping the Homestead Safe in Bankruptcy: Chapter 13

Bankruptcy continues to evoke this notion of getting something for nothing. For some,that results in feeling a bit of judgment or disdain towards the whole idea of filing bankruptcy or the people who end up there. To that I say, “There, only by the grace of God go I”. Others see it with a bit of a glimmer in their eye as a great way to get free stuff. Both views are askew. Bankruptcy is a tough process to go through that is humbling and often anxiety provoking which is why people prefer to hire a lawyer than attempt it pro se. Few people actually abuse the system; most who file have tried everything they could think of to avoid it, but life’s curve balls and the accumulation of mistakes here and there just prove too daunting without assistance. For those hard working folks who end up in a bad spot, I do what I can to make the process smooth and effective so they can get on rebuilding their lives financially.

One of the things I do to ease the way is to stress the imperative in Chapter 13 bankruptcies that if you want to keep it, you must pay for it. This applies to bigger ticket items with a loan secured against it like a house or a car. Many people opt for a Chapter 13 because they fell behind in their house payments or their car payments but they do not want to lose that property. Well, a Chapter 13 can certainly make that happen, but they must still pay for the house or the car. There are NO free houses out there – and the only free cars are ones your would not want to drive.

Chapter 13 only halts the secured lenders collection process (and helps reduce interest costs in certain ways). That means that foreclosure proceedings for a house are stopped and repossession of a car is nixed. Then, the arrears that had accumulated must still be paid through the Chapter 13 plan payments as well as each ongoing payment as it comes due. Unfortunately, many home owners had the pre-bankruptcy experience of months going by without making house payments before the bank took legal action. That will NOT be the experience in the bankruptcy. The secured lenders are much quicker to file a Motion for Relief from the Stay (the automatic collection halting part of a bankruptcy). This motion allows them to then resume the foreclosure in state court if it is granted.

Often, this motion is filed by the lender quickly after a payment or two is missed as a wake-up call to the debtor. They really just want the debtor to get caught up on their payments and so they typically will enter into an agreed order with the debtor to do just that over the next few months rather than force their motion through. However, this is an exceedingly expensive process. The lenders insist on getting reimbursed for the hundreds of dollars they spent on an attorney and filing fees for that motion. So, you may have used that $1,000.00 house payment or two to buy Christmas gifts or cover an unexpected medical bill, but you will end up eating around $600 or $700 on top of catching up those missed payments.

To make it through your Chapter 13 smoothly and retain your house and car, those payment simply have to be a non-negotiable. There is no wiggle room on secured debt payments in a Chapter 13. If you want to keep it, you must pay for it.

December 19, 2014 Posted by | Additional Debt, attorney fees, Automatic Stay, Bankruptcy, Chapter 13, consumer debt | , , , , , , , , , , , , | 1 Comment

Tips for Tough Times #1

It is human nature: we often wait until the last possible moment (or later) to seek help we need. This goes for medical issues, retirement planning, home repair, etc. It is doubly true for legal matters. This is unfortunate because lawyers can be so much more effective (and less expensive) acting preemptively rather than reacting to a crisis. Consulting an attorney practicing in bankruptcy law can benefit one whether filing is imminent or a distant possibility.

One example of the benefit of a proactive use of an attorney is evident during tough financial times. Many people are still experiencing layoffs in our present economy even though the employment numbers show improvement. During these times, it is tempting to dip into retirement savings despite tax penalties or deplete one’s home of any remaining equity. While these offer lower initial costs compared to higher interest credit cards, they may be incredibly costly in the long run.

An individual in Kentucky can claim up a little over $22,600 in a homestead exemption and a married couple can claim double that in a Chapter 7  or Chapter 13 bankruptcy. So, if you have considerably more than that exempt amount in equity in your home, it is smart to obtain a loan secured on your property to make ends meet while searching for work. However, if possible, you do not want to borrow past that exemption threshold so that you can maximize post-bankruptcy resources to re-bound if it comes to that course of action.

To make sure this is kept in perspective though, you must be able to afford the payments on the loans secured by your house subsequent to a Chapter 7 filing for this to work. You also do not want to run up debts on luxury or fluff items – this strategy is for the necessities of food, clothing, shelter, and medical care.

Of course, this is a strategy for temporary events beyond your control, such as being laid off or suffering a major injury, where you expect things to turn around in a matter of several months. Because of all these complexities, the general suggestions I am offering need to be applied to your specific situation. The facts in your situation may call for a very different strategy so it is worthwhile to invest in preventive legal counsel.

All of this comes together for my point: when economic difficulties begin, seek the counsel of an attorney early to plan well.

March 11, 2013 Posted by | Bankruptcy, Exemptions, Planning, Pre-filing planning | , , , , , | 1 Comment

Family Law Planning and Bankruptcy

As I have suggested in other posts, there is a significant intersection between family law and bankruptcy law. One example of this link comes in the form of the homestead exemption. Kentucky now allows for debtors seeking bankruptcy to use the Federal exemptions. This greatly increased the homestead exemption from the low and static Kentucky exemption of $5,000.00 to the Federal exemption that is tied to inflation. Currently, an individual can claim over $21,625.00 of the equity of their residence as exempt property. For a married couple, that means they can claim over $43,250.00 equity in their residence as exempt. In other words, if you are married, have a home that is valued at $200,000.00 dollars and you owe $160,000.00 on the home that is secured by a mortgage, then you can reaffirm the debt of $160,00.00 and still keep your home in a Chapter 7 bankruptcy.

This knowledge is priceless if you are either contemplating divorce or in the midst of a divorce action. Saving a home in the face of a bankruptcy can benefit your family regardless of whether the divorce occurs or not (though hopefully, as I stated in my last post, the divorce could be avoided). Knowing the exemption and interplay of bankruptcy and family law can allow for wise planning on the timing of the filing or bankruptcy, how marital assets are divided, and where monies might come from to satisfy domestic obligations.

February 25, 2013 Posted by | Bankruptcy, Divorce, Family Law, Marital Assets, property allocation | , , , , , | 1 Comment