Kentucky Bankruptcy Law

Counsel with Care

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

Things to be aware of if facing bankruptcy 4

To continue my line of posts on pre-bankruptcy caveats, do NOT take credit card cash advances near a filing date. This is covered by 11 U.S.C. Sect. 523(a)(2)(C)(ii), a provision that lists exceptions to discharge.  This provision carves out an exception of debt from discharge of any credit card cash advances in excess of $925.00 in the seventy (70) days prior to filing. The exact language of the statute still says $750.00, but like most of the numbers in the bankruptcy code, it gets adjusted upward for inflation each year.

If you have done this and already filed, do not get too concerned right away. The credit card company would need to file an action in the bankruptcy to determine that the particular charge is not to be discharged. If you have done this, but you have not yet filed, then wait the seventy days before filing if at all possible. If you have not done this, don’t! No reason to invite scrutiny.

October 4, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Planning, Pre-filing planning | , , , , , , , | Leave a comment

Making a Second Mortgage Disappear

Well, I cannot actually make a second mortgage disappear, but I might be able to strip it off of your house and make it an unsecured debt instead of a secured debt. I mentioned this in my last post which you may want to look at if you are considering trying to save your house or let it go through foreclosure.

In a Chapter 13, one can “value” the amount of a secured debt under 11 USC Sect. 506. Essentially, when one files a Chapter 13 a secured debt is only secured up to the value of the property it is secured against. There are some exceptions which I will not go into. If you own a home and have a second mortgage, then that second mortgage might be completely underwater. That is, there is no equity left in order to secure the debt. If that is the case, it can be “stripped” off of the property and treated as an unsecured debt in its entirety.

However, if the lender can prove that there is even $1.00 worth of equity, the courts in the Sixth Circuit (such as Kentucky) will not strip the loan off; it has to be paid in full just like the primary loan. The rationale is that as one pays down the principal on the primary loan, more and more equity is realized to which that second loan can attach. So, they have made it an all or nothing sort of scenario.

July 23, 2013 Posted by | Bankruptcy, Chapter 13, Foreclosure, Plan, Security interests | , , , , , , , , , , | Leave a comment

Tax debt information from the Judge Joe Lee Bankruptcy Institute

Here are a few more insights gleaned from the 16th Bicentennial Judge Joe Lee Bankruptcy Institute I attended last week. Professor Jack Williams gave an informative talk on the intersection between tax law and the bankruptcy code. Here are a few bullet points pulled from that talk:

  • The tax law, contained in Title 26 of the United States Code contains a key provision related directly to bankruptcy. 26 USC Sect 1398 is a must see when a debtor comes into bankruptcy with significant tax liabilities. One thing this law does is allow a debtor to bifurcate (split) their tax year into two short tax years. One reason this matters is that it would make it clear that tax liability arising from assets of the estate post-bankruptcy remain the liability of the estate rather than the debtor. Another way it may come into play is to insure that priority tax debt derived from pre-filing income will get pulled into and paid in full through the plan in a Chapter 13.
  • When looking at tax liability, look at the nature of the taxes. For example, trust fund tax liability that an employer debtor should have paid on behalf of their employees will be imputed as the debtor’s personal liability if the employer owned a pass through single member LLC. This debt never becomes stale – that is, it will never become non-collectable or get discharged. However, personal income tax liability will become non-collectable or get discharged at some point.
  • With tax debt, time is usually the debtor’s friend. If a tax return was filed, the IRS has only three years in which to challenge it. And, once a tax is assessed, the IRS only has ten years to collect it unless a bankruptcy, installment agreement, or offer in compromise tolls that time. So, if a debtor can wait it out, they may be better off.
  • If, though, a bankruptcy is necessary, the timing of filing still matters greatly. The overly simplified timeline is that when three years have passed from when a tax became due, unless it has been tolled for some reason, then those taxes will be discharged in a bankruptcy. If it has been more than 240 days from when the IRS assesses a tax, then that tax may be discharged in a bankruptcy. So, one must look carefully at these and try to time the filing of a bankruptcy to discharge most or all of the tax obligation.
  • It is ALWAYS better to file a tax return even if the debtor cannot pay the tax. Failure to file a return does not stop the obligation from arising. But, filing the return starts the time limitations running on the IRS and stops the IRS from assessing their own version of tax liability, absent deductions, against the debtor.
  • The worst tax scenario is the tax debt is non-priority debt but it is not discharged because of some kind of bad act such as fraud. This is because if it is priority tax, then it would get paid first and in full in a Chapter 13 or at least paid first in an asset Chapter 7. But, if it is not priority, then it only gets the same pro-rata share as general unsecured creditors and still hangs around after discharge.

The ringing wisdom of this presentation confirmed the approach I adopt when tax debt is at issue and that is to be patient, thorough, and wait when possible.

June 10, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Plan, Planning, Pre-filing planning, Tax Debts | , , , , , , , , , | 1 Comment

The Chapter 13 helped, but I think 7 is the ticket

This is the next installment in a series that began looking at the timing between subsequent Chapter 7s. There really is not a prohibition against filing; the prohibition is on receiving a discharge if filing within certain time frames.

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 six (6) years or less 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.

May 27, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Discharge, Planning, Pre-filing planning, Tax Debts | , , , , , , , , , , | Leave a 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

Well, I am here again – what are my options?

I began looking a the time between Chapter 7s if one wishes to receive a discharge. The time frame is different when the subsequent case is a Chapter 13 showing the favored status of Chapter 13 bankruptcy. If the preceding bankruptcy was a Chapter 7 (or Chapter 11 or 12), then you cannot receive a discharge in a subsequent Chapter 13 if is filed four (4) years or less of when the Chapter 7 was filed. See 11 USC Sect. 1328(f)(1).

If  one gets a discharge of unsecured debt in a Chapter 7 but still has some non-dischargeable priority debt in income taxes, they may want to turn right around and file a Chapter 13 without waiting the four years because they will be paying the debt in full over the length of the plan. So, there is no need for the discharge. This is a strategy discussion to have with your attorney.

May 22, 2013 Posted by | Automatic Stay, Bankruptcy, Chapter 13, Chapter 7, Discharge, Planning, Pre-filing planning, Priority debt, Student loans, Tax Debts | , , , , , , , , , , , , , | Leave a comment

Say it, claim it – Chapter 13

Claims play a major role in Chapter 13 bankruptcies. They are essentially superfluous in a “no-asset” Chapter 7 so they are often not filed in such cases except for certain secured creditors. If there are non-exempt assets that will be liquidated (reduced to a monetary value by being sold) in a Chapter 7, then it is an “asset” Chapter 7 and claims serve a similar function as I’ll describe for the Chapter 13.

In a Chapter 13, a plan is proposed by the Debtor that spells out what the Debtor will pay in over time. The plan also describes how various creditors will be treated.  The categories of creditors typically include unsecured, priority unsecured (such as recent tax debt), administrative costs (such as attorney fees), and secured debt. Each category receives different treatment.

For a creditor to actually receive what is owed to them per the plan’s provisions, they must file a claim. There is a form available just for this purpose and the creditor can either send it in to the court clerk to be electronically filed or, if they have set up an account, they can file it electronically. The claims for most creditors (other than governmental agencies) must be filed by a deadline specified in the Notice that is sent out to all creditors when a bankruptcy is filed. If they miss the deadline, their claim will likely be denied and the full debt discharged (depending on the category of debt) as to the Debtor.

The claim also puts the Debtor on notice of any additional fees and penalties that the creditor may be entitled to receive under the loan contract or by law. It is up to the Debtor to review the claims and object to anything that is erroneous or to excessive fees. If a plan proposes to pay even unsecured debts at 100% of the claim, then it is even more important to scrutinize the claims and object to them if they are wrong. This could reduce the overall plan payment. However, there are hefty penalties to filing false claims so most of the ones I review are accurate.

May 2, 2013 Posted by | attorney fees, Bankruptcy, Chapter 13, Discharge, Proof of Claim | , , , , , , , , , , , | Leave a comment

The Untouchable Debts

A couple of days ago I wrote about how you might lose your driver’s license as a result of non-payment of a judgment debt arising from owning or operating a car involved in an accident. Today I want to elaborate on that by pointing out two categories of such debt that may NOT get discharged in a Chapter 7 bankruptcy:

First, a debt that is  “for willful and malicious injury by the debtor to another entity or to the property of another entity” may be objected to and not discharged. 11 USC Sect. 523(a)(6). So, if you ended up causing a car wreck by purposely driving an extremely reckless manner or with intent to cause harm to another, the debt may not be discharged.

Second, and far more common (too common) if a debt is for “or death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance” then it may be objected to and not discharged. 11 USC Sect. 523(a)(9).

If either of these circumstances apply, then it is crucial to let your bankruptcy attorney know so they can help you plan appropriately.

January 30, 2013 Posted by | Bankruptcy, Chapter 7, Discharge, Planning, Pre-filing planning | , , , , , , | Leave a comment

Chapter 13: What to do with new, unexpected debts

The basic rule in bankruptcy is that debts incurred prior to the filing of a bankruptcy petition, either Chapter 7 or Chapter 13, are included in the bankruptcy, but debts incurred after filing remain unaffected by the case. In Chapter 7, that is a hard and fast rule, so if you file a Chapter 7 on January 14th, 2013 and then have an accident and get rushed to the emergency room for really expensive tests on January 15th, 2013, those thousands in new medical bills are yours to keep (at least for four years). There is an exception in Chapter 13.

Turn with me to the very fun provision of 11 U.S.C. Sect. 1305 and look at subsection (c). This means that if a creditor lends money to someone in a Chapter 13 without making sure the court approved it, then they cannot get paid through the Chapter 13. The converse of this is that creditors who had no way of getting such approval can file their claim and hope to get paid.

There are two terms that bear some explanation. First, “should have known” basically means creditors can check credit reports prior to loaning money and that would clue them in to a Chapter 13 having been filed. Second, “practicable” does not mean practical, it means if there is any way possible. So, those terms together set a very high bar to reach before a new debt can be added in.

One scenario that meets this bar would be an urgent, unexpected health crisis that had to be treated soon. I can only speak for practices of the Eastern District of Kentucky Bankruptcy Court, but I have seen new debts such as these to be added in to a Chapter 13 plan and their claims allowed by the Chapter 13 trustee. I am at a loss, though, to think of other examples that would pass.

January 14, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Discharge, Plan | , , , , , , , , , , , | 2 Comments