Kentucky Bankruptcy Law

Counsel with Care

How can I go five years with no new debt?

A common concern of clients who are contemplating a Chapter 13 bankruptcy is the expectation that they will live within a budget for three to five years with NO new debt. I have two responses to this: 1) it can be done and 2) it does not have to be done. Okay, that is confusing so let me unpack it a little. I know that it runs very counter-cultural to suggest living without debt. The commonality of people I help expressing shock at living without credit is evidence of how our culture has bought into the idea of credit being necessary. It is almost universal that my clients ask about what the bankruptcy will do to their credit score. Again, this is evidence of the pervasive lie that credit is necessary; that one must borrow money to make it in this world.

I know that living without the use of credit is achievable. I am not entirely sure how long it has been, but it has been more than five years since I used a credit card for anything. The only loans my family carries are student loans and home loans and there are plans in place actively eliminating those. I have no idea what my credit score is because I have no need to know. I have a friend who has never incurred debt in their entire life and they are fifty years old. Also, I have a number of Chapter 13 debtor clients who are successfully living within their budgets. So, living without credit is entirely feasible. That is my first explanation and the default position I recommend: live debt free.

The second response is that a debtor in a Chapter 13 can apply to take on additional debt. Despite my best laid plans to be debt free, I am also entirely aware that there could be circumstances that would necessitate borrowing money: sudden illness, excess damage to a vehicle, a major appliance failing, and so on. These things can come about during those three to five years of a Chapter 13 bankruptcy because life goes on, bankruptcy or no. The difference is that the bankruptcy court plays a gatekeeper role in obtaining credit. This benefits both potential creditors and the debtors as well. The court’s oversight helps insure that a debtor does indeed receive and enjoy a fresh start financially by allowing only reasonably necessary new debt.

The process of obtaining additional debt requires some advance planning when possible. There is an application that must be completed and submitted to the court showing what the debt is for and why it is needed. The trustee has a chance to weigh in on the matter. Usually, a new income and expense schedule must be filed and sometimes the plan must be modified. But, if the new debt is reasonably necessary and can be managed within the budget, the court nearly always grants it, even if it may cause some reduction in the pro-rata distribution to unsecured creditors.

February 20, 2013 Posted by | Additional Debt, Bankruptcy, Chapter 13, Plan, Plan payments | , , , , , , , , , | 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

Issues with surrendering real estate

Reality has set in. The home loan modification you so desperately hoped for fell through after they strung you along for months (“Just keep making the payments during the trial period” or “Your application is being processed, just keep paying”). Your budget is so tight that even in a Chapter 13 your would not be able to pay off the arrearage on the loan for the house and you can take Chapter 7 according to the means test. It is now unavoidable that you will not be able to keep the house and so you tell your attorney to check the “Surrender” button for your intentions on your principal residence. It feels like surrender too, but not entirely in a bad way. Surrender also means the fight is over and the fresh start of debt free living can begin. But, what do you do with the house now?

Some people feel compelled to get out of the house as quickly as possible. It is a desire to get going on that fresh start by getting the old out of the picture and finding a new place; renting an apartment where they will not be reminded of the lost home. Sometimes it is because of a fear that someone will show up unexpectedly and toss you and all your stuff out on the lawn (which won’t happen unless you have some in-laws that are also outlaws and mad at you). Lastly, sometimes it is just a sense of guilt for staying someplace and not paying for it. I understand those driving emotions, but I caution you to sit tight for as long as possible.

Before I explain why you should sit tight, I need to revisit a core principle of Chapter 7. This type of bankruptcy establishes a single point in time where everything you owe and eveything you own goes into a fictional pot called an estate. Then, you use exemptions and reaffirmations to pull assets back out of that pot that you want to keep while leaving most debts behind. Once that point in time is created, everything you earn and every debt you create after that moment remains yours; new assets and new debts do not go into the estate. So, what does that have to do with a house I have surrendered? Aren’t my debts on that house going to be discharged?

Well, yes, those loans you had that were secured against the house will likely be discharged (barring any kind of pre-filing fraud or other bad acts that can prevent a discharge). However, you have a nice, tempting, empty piece of property just sitting there inviting neighborhood kids, hoodlums and other roustabouts to come in and have at it. However, your name remains on the deed for the house until after the Master Commissioner sale is confirmed or your provide them a quitclaim deed. Because this is all AFTER you filed your petition, you are liable for potential debts that could arise as the titled owner of the house.

If someone were to be injured on your property after the filing of the Chapter 7, you could get hit with damages from the injury. Additionally, the mortgage holder of the property could make a case for damages done to the property itself that decreases its value or for the insurance policy they obtain (I’m not saying they would be successful, but who wants the aggravation and expense of finding out if they would be?). You could propably afford to pay the insurance premium on the property if you are not paying the house payment, but home owner’s policies usually become void or voidable if no one resides in the house for over a certain period of time. So, there are several reasons to remain in the house until either the Master Commissioner’s sale is confirmed or a quitclaim deed is filed transferring ownership of the house.

Here is a recap of those reasons:
1) You are potentially liable for injuries that occur on property you still have title to after the Chapter 7 is filed.
2) You will have a hard time getting insurance coverage on an empty house (though there are specialty companies that do this for a high premium).
3) An empty home is an open invitation to high risk behavior that can lead to injury.
4) You are in financial dire straits and living there while not paying the house payment can help you get ahead and find a nice place to move to once the ownership is transferred. Yes, it may feel uncomfortable, but not as uncomfortable as having a post filing debt and not being able to get another discharge for a number of years.

So, plan on staying in your surrendered home for several months even after filing Chapter 7. If you must move, negotiate transferring title to the mortgagee while the bankruptcy is pending.

October 26, 2010 Posted by | Bankruptcy, Chapter 7, Property (exempt, reaffirm or surrender) | , , , , , | Leave a comment