Kentucky Bankruptcy Law

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The scoop on the $71.00 bankruptcy ad

I posted awhile ago about a neighboring high-volume bankruptcy firms TV advertisements to “get your bankruptcy started for just $71.00”. I speculated on how they did that, but I have since learned what the deal is from a client who went to them first. She clearly was a candidate for a Chapter 7: below median income, no secured debt arrears, no priority debt, and nothing else that would lend itself to Chapter 13. However, she could not come up with the attorney fees to do the Chapter 7 right then. So, they offered to put her into a Chapter 13 with just $71.00 up front.

This seems like an acceptable approach. Basically the attorney is using the ability to have their fees paid through the Chapter 13 as administrative expenses. The up side for the debtor is that they get the relief from creditors including garnishment right away. The downside is that this is a much more expensive and involved process than the Chapter 7. Debtors need to be made aware of how much more they would pay in the long run for the Chapter 13 as compared to the Chapter 7 – sort of fair credit act kind of disclosure. Perhaps my colleague is giving that kind of disclosure – I have no reason to doubt that they are. If so, then I give them props for giving another option for debtors that needs relief from debt right away, but whom cannot afford the attorney fees.

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May 28, 2014 Posted by | attorney fees, Bankruptcy, Chapter 13, Plan | , , , , , , , , , , | Leave a comment

Trending in Chapter 13 in the Eastern District of Kentucky

The trustee’s office appears to be taking a closer look at expenses in Schedule J of Chapter 13 cases. Specifically, they appear to be pushing for decreasing recreational/entertainment expenses and miscellaneous expenses. Previously, this trustee’s office tended to utilize the standardized amounts provided for in the means test as a gauge. As a result, if a debtor reported a particular expense in excess of those amounts, I would encourage them to engage in “belt-tightening” in that area.

The interesting thing about those standardized expenses is people who make less money have lower expenses while people who make more money have higher expenses even when the family size is the same. In the prior approach, the trustee’s made some allowance for this dynamic. The trustee’s current approach seems to be to cram those relatively higher income families into the expense structure of the lower-income Chapter 13 families. Now, even if expenses fall within the standard allowance of the means test, the trustee is looking for deeper cuts.

On the surface, this seems fair – after all, why should richer people get to have higher expenses and still discharge their debts at the end? The problem comes down to human nature. Once people develop a set point of expenses, then it is extremely hard for them to do substantial cuts in those expenses. When one is talking about the extended timeframe of five years in a bankruptcy, well the likelihood of successfully maintaining extensive cuts drops dramatically.

So, what is the goal of Chapter 13? I suggest that we are best served when people successfully complete Chapter 13 plans. This will not happen when budgets are made so tight as to be unwieldy over time. Debtors will get into a tight spot with unexpected expenses and be unable to make their payments. This is not to suggest that people should get to engage in lavish lifestyles in a Chapter 13; rather, I suggest a balance between belt-tightening and sustainable budgets. Clothing makes for a good analogy: a really tight dress may look really trim and neat, but no one can wear it day in and day out. Rather, one needs slightly roomy clothes to go about their day-to-day business. Such an approach will increase Chapter 13 successful outcomes and, thus, increase the overall return to unsecured creditors.

May 28, 2014 Posted by | Bankruptcy, Chapter 13, Disposable Income / Budget, Plan, Plan payments | , , , , , , , , , , , , , | Leave a comment

The Ramifications of Paying Off a Chapter 13 Early

I am often asked by Chapter 13 debtors if they can pay their Chapter 13 off early. This is a problematic question with no one clear answer. It is problematic because certain property of the debtor continues to come into the Chapter 13 estate while the bankruptcy is pending. This is different from a Chapter 7 where the property of the estate is established and remains static at the moment the bankruptcy is filed. The clearest example of this ongoing inclusion in a Chapter 13 are wages and other earned income of the debtor.

Since ongoing wages and earned income of the debtor comes into the estate of the Chapter 13 so long as the case is pending, then one cannot use those wages to pay your plan off early IF you were not below the median income on the means test OR you are paying 100% of unsecured debts in the Chapter 13. This makes sense because the idea with a Chapter 13 is that you repay creditors to the extent that you reasonably can. So, if you end up getting promotions or a better paying job during the bankruptcy, then you could reasonably pay a higher percentage of your unsecured debts.

Some Chapter 13 trustees require a new budget (Schedules I & J) to be submitted each year. If they see a substantial bump up in disposable income, they then require the plan to be modified to pay a higher percentage of the unsecured debts. In the Eastern District of Kentucky, the trustee does not automatically require this. However, if you begin to pay ahead on your Chapter 13 plan, they well may pay attention and decide you must be making more money. This can trigger a demand from the trustee for a new budget and probably a higher plan payment.

There are some things that clearly and unquestionably CAN be used to pay off a Chapter 13 plan early. If you use property of the estate that was exempt at the inception of the bankruptcy, such as a 401k account, then there should be no issue if you fell below the median on the means test. However, there are other things that need to be investigated and carefully considered by your attorney. Therefore, I must abstain from listing those things that are in the grey area here lest I miss some peculiarity of your situation.

January 27, 2014 Posted by | Bankruptcy, Chapter 13, Chapter 7, Discharge, Plan, Planning, Property (exempt | , , , , , , , , , , , , | 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

Cars and Chapter 13

I have written in the past about the ability to “force” down interest high interest rates on car loans in a Chapter 13 and even to decrease the principal mount due on cars purchased over two and a half years prior to the bankruptcy. These are tremendous benefits to a Chapter 13, but there is a downside to including your vehicle to be paid through the plan. That is, at least in the Sixth Circuit which includes Kentucky.

The case, In re Nolan, 232 F.3d 528 (6th Cir. 2000) is the prevailing law in Kentucky on surrendering a car after a Chapter 13 plan has been confirmed. Whereas some other courts have adopted only a “good faith on the totality of the circumstances test” as to whether surrendering a car post-confirmation allows the claimed debt to become an unsecured debt, the Nolan case precludes such judicial discretion.

Nolan dictates that if a debtor seeks to surrender a car that is being paid through a confirmed Chapter 13 plan, the creditor still gets paid in full through the plan. The creditor gets to seize the car and auction it, applying the sale price to the debt owed. However, cars rarely auction for much and so most of the debt remains. Since that debt, which outside of bankruptcy would become an unsecured deficiency debt, must be paid in full, then debtor will likely not be able to decrease their plan payment much if at all. All the other unsecured creditors realize no benefit, nor any noticeable harm.

The debtor’s position is harmed even though they will be making the same plan payment as before. This is because they are likely having to purchase a new vehicle which will NOT be paid through the plan. This makes the debtor budget all the tighter and possibly untenable.

October 30, 2013 Posted by | Additional Debt, Bankruptcy, Chapter 13, Disposable Income, Financing, Plan, Planning, Pre-filing planning, reaffirm or surrender), Security interests | , , , , , , , , , | Leave a comment

Chapter 13 and Tax Debt: The surprise at the end of the rainbow

I have often written about Chapter 13 and how it is a great mechanism for resolving tax debt. And it is! When looking at income tax debt, there are basically two kinds: that which can be discharged and that which cannot be discharged. Simple enough.

The basic rules of figuring out which tax debts can be discharged are also simple, but the various times and ways the time-frames of these rules get “tolled” gets tricky:

  1. The most recent date (remember extensions) the filing was due is over three years ago.
  2. The tax was assessed at least 240 days ago.
  3. The tax return was actually filed more than two years ago.
  4. The tax return was not fraudulent.
  5. The taxpayer was not willfully trying to evade the taxes.

So, in a Chapter 7 or 13, the income tax debts that meet these rules get discharged. If there are tax debts that are not discharged, then in a Chapter 7 they keep on accruing interest and penalties and must get paid. In a Chapter 13, these non-dischargeable tax debts must be paid in full. So, if you have enough disposable income to accomplish it, then in three to five years the tax debt PRINCIPAL is paid in full on tax debt that cannot be discharged.

Ahhh, the rainbow is at hand! Oh, but wait, Federal tax debt can still accumulate 4% interest while in bankruptcy and Kentucky income tax can accumulate 5% interest. You see, 11 USC Sect. 1322(b)(10) has a little catch. A debtor in Chapter 13 can ONLY pay the accruing interest on these income tax debts IF AND ONLY IF all the claims filed by creditors are paid at 100%.

There is nothing for it other than to give plenty of advance notice to Chapter 13 debtors. There is no way to change the fact that the interest can accumulate and there is no way to make it get discharged. So, unless you have a 100% Chapter 13 plan, be prepared to have to pay the accumulated interest on your income tax debt EVEN after the Chapter 13 is closed out. Don’t fret too much though. When you have gotten that far, you are going to be much more freed up financially to take care of that last issue.

September 25, 2013 Posted by | Additional Debt, Bankruptcy, Chapter 13, Chapter 7, Discharge, Disposable Income, Plan, Priority debt, Tax Debts | , , , , , , , , , , , , , | 2 Comments

Paying off a Chapter 13 plan early

One of my clients recently asked about selling a vehicle and using the proceeds to pay off the plan early. Because they had been paying the car off through the plan, they had reduced the principal considerably. However, it just was not that simple. The only funds that can be used to pay off a Chapter 13 earlier are exempt funds. The car did have some equity at the start of the case so there was approximately $600.00 exempt equity in the vehicle. But, from there it gets tricky.

First of all, during the Chapter 13, all the property the Debtors had at the start of the bankruptcy remain assets of the estate. The Chapter 13 trustee does not routinely “abandon” property of the estate the way that Chapter 7 trustees do. So, one must file a motion with the court to sell property. My clients could have done this easily enough, but they would also have to successfully amend the exemptions to cover all the equity that now existed, which is problematic in and of itself.

The most common way Chapter 13s get paid off early are from withdrawals from retirement accounts that were exempted at the beginning of the bankruptcy.

 

August 20, 2013 Posted by | Bankruptcy, Chapter 13, Exemptions, Plan, Plan payments | , , , , , | 1 Comment

Refinancing during Chapter 13: Do not shoot yourself in the foot!

A couple of days ago I wrote a post about refinancing your home loan during an active Chapter 13. In that post I addressed the issue of how such refinancing impacts your budget and plan payment. You need to think long-term in refinancing, because your will not be able to hold onto the savings from the lower mortgage payments. This is aggravating, but benign.

There is a much more sinister trap that refinancing can land you in. You need to be careful when looking at refinancing within an active Chapter 13 as to how to any existing arrears on the original loan are treated. If you are paying substantial arrears through the plan, but refinance, then those pre-petition arrears are most likely to be paid off with the new loan. Essentially, a lender with arrears is not going to release their lien to allow a new lien to take priority over theirs until all sums due are paid. This includes those arrears.

If that happens, then your plan payment is still going to be just as high or higher depending on your new loan payment. But, where a certain amount of those payments were going to pay off the arrears at zero (0%) percent interest, now you will be paying interest on the same arrears in the new loan. Not only that, but the percentage of your plan going to unsecured creditors will likely increase significantly. This may all be fine with you if your heart’s desire is to pay as much of your debts as possible. However, it needs to be a conscious decision rather than one your stumble into.

So, if you are paying $10,000 in arrears at 0% interest in the plan on the original loan and then refinance, the $10,000 arrears gets “paid” from the proceeds of the new loan. Your principal is now $10,000 higher than on the original loan, but your plan payment stays the same or higher. You essentially just cost yourself $10,000 plus interest. Your may not feel it, though, because the actual month to month cost remains relatively stagnant.

When looking at refinancing, it is best to look at all factors to make a wise decision: new interest rate and savings from that, length of time left on mortgage, amount of arrears in the plan, and how much additional interest you will pay if the arrears are then out of the plan and in the new note.

August 8, 2013 Posted by | Additional Debt, Bankruptcy, Chapter 13, Home Loan Modification, Home loan modifications, Plan, Plan payments, Planning, Secured loan arrears, Uncategorized | , , , , , , , , , | 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

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