Kentucky Bankruptcy Law

Counsel with Care

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

Things to be aware of when facing bankruptcy 8

This post can be found on my family law website here. It addresses issues connected to post-divorce debt and distribution of assets and is a must read.

November 1, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, child support, Discharge, dissipation of assets, Divorce, Family Law | , , , , , , | 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

Things to be aware of if facing bankruptcy 7

A temptation that many people have when facing a bankruptcy is hiding assets. Often this arises from the mistaken notion that a debtor cannot get relief from debt unless they give up most of what they own. The bankruptcy code is not intended to be a punitive mechanism to harass people who do not pay their debt; it is intended to be a tool to give people a fresh start when they cannot reasonably cover all their debts. As part of this “fresh start’ intent, the federal bankruptcy exemptions are fairly generous. Some state law exemptions are more generous, but most are far less expansive.

One must first determine if their state law allows a debtor to utilize the federal exemptions. Kentucky does allow a debtor to opt for either the state exemption or federal exemptions. I have only found two cases where the Kentucky state exemptions were more favorable than the federal ones: 1) a case where a joint-bankruptcy was filed but one of the debtors passed away while the bankruptcy was pending, and 2) a case where the debtor was due a substantial worker’s compensation package. In each of those circumstances, the state exemptions were 100% of those assets being exempt where the federal ones were limited to “reasonably necessary”.

In all my other bankruptcies, the federal exemptions were the best choice. And, in nearly all consumer Chapter 7 bankruptcies, the federal exemptions will allow debtors to keep all their property. Since most debtors have enough exemption to keep all their properties, then there is no reason to try to hide those same assets. The attempt to hide assets, creates a real risk that could sabotage the entire bankruptcy and lead to the trustee giving tremendous scrutiny to your whole situation. It can also lead to loss of the relief of a discharge of debt.

October 28, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Discharge, Exemptions, Fraud | , , , , , , | 1 Comment

Things to be aware of if facing bankruptcy 6

As a follow-up to my last warning post  where I talked about preferential payments including to insiders (friends and family members). I ended that post saying that after your bankruptcy is completed (discharge order, case closed) then you can repay anyone you like. This post is a caveat to that statement. Do not promise a creditor, whether friend or foe, that you will repay them afterwards. Simply let it be a nice surprise. T

You see, if you end up not paying them in full after the bankruptcy is over, your promise to pay could give them a legal argument to try to overcome the discharge of the debt. Basically, they would say that they relied upon your promise to their detriment and thus you defrauded them.  This could lead to that particular debt suddenly becoming non-discharged. This is an unlikely eventuality, but attorneys deal with such things all the time. So, it is best just to stay silent and pay if you can.

October 25, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Fraud, Fraud | , , , , , , , , , | Leave a comment

Things to be aware of if facing bankruptcy 5

For the next installment of my warnings of things to avoid pre-bankruptcy, I want to speak to a big temptation. Many people, by the time they make their way to me, have already exhausted not only their own resources to stay fiscally afloat, but also the resources of friends and family. So, these same people who were responsible enough to do all they could to pay their debts, feel beholden to their friends and family to pay them back. I understand that. I would feel the same way. However, this can be hurtful to those same friends and family.

To pay any single creditor more than $600.00 in the ninety (90) days preceding bankruptcy is a preference. The trustee in your bankruptcy has the right to pursue recovery of those payments. When the payments were made to a friend or family member (an insider), that 90 day time-frame gets extended out a LONG way. In fact, you are required to self-report any such transfers occurring in the last year prior to the bankruptcy. However, the bankruptcy code actually allows the trustee to use state law in determining a preference to an insider. That means that in Kentucky, the trustee could pursue transfers to insiders made in the five (5) years preceding bankruptcy.

Now, do not panic. The transfer would have to be pretty substantial for a trustee to want to go after one really old. The point, though, is that you are not really doing your friends or family a favor by trying to pay them prior to the bankruptcy. This is because the trustee could go yank those funds right back from them. Then neither of your are helped. Rest assured, after the bankruptcy is completely over, you can pay whomever you like. They just cannot force your to pay them.

October 23, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Planning, Pre-filing planning, Preference / Preferential payments | , , , , , , , , , , , , , | Leave a comment

More Regarding Making Bankruptcy Affordable

It is a real dilemma: many people with more expenses and debt than income need the relief of bankruptcy and yet filing bankruptcy costs money. People are allowed to file bankruptcy without an attorney. Every form you need is available at the official US Courts website. However, the Bankruptcy Code is a convoluted mess that many learned attorneys steer clear of – so, if you file on your own, be careful. You will not be helped, though, by buying the forms from someone since they are free and paying a petition preparation person who is not an attorney can be dangerous.

From what my clients have told me, I charge a little less (couple hundred dollars or so) than many bankruptcy attorneys in my are and a little more than many lawyers in the area. So, my fees are in the mid-range. However, I currently do all the work myself. That means I am the one who answers to you and to the court. I am the one who takes care to make sure the petition and other pleadings are done correctly and in a manner that will give you the smoothest ride through the bankruptcy process. Furthermore, some lawyers do not do all that I do in the process.

Now, I have said all those other things in prior posts. But, what I wanted to write about is that I have been experimenting with splitting my fees similar to the way it works in Chapter 13. The bulk of the Chapter 7 fees would clearly be spelled out as pre-filing fees. Some of the fees would be specified as for post-filing services, such as attending the meeting of creditors. This is essentially the “un-bundling” of legal fees to make the harder parts of legal access more affordable. You see, any unpaid pre-petition fees for services not collected prior to a Chapter 7 are subject to being discharged debt. That is why previously I have insisted on getting all fees paid up front. However, it seems like times are increasingly tough for a certain sector of clients. I cannot afford to perform the same level of work for lower fees and stay in business, so this is the resolution that makes the most sense.

The down side to this is that the current bankruptcy court for the Eastern District of Kentucky has expressed disfavor of un-bundling of services. So, part of the reason for this post is to advocate for a fresh look at this approach. I am, though, reserving the right to determine which potential clients to which I am willing to extend this offer. I need a certain degree of assurance that my client will indeed pay the post-filing service fees in a timely manner. So, if you contact me, please do not be offended if I am unable to offer this arrangement. I will not be able to offer it to everyone at the same time or, like I said, I will be not be able to offer it at all.  Part of my analysis of this will include the extent of need for this lesser pre-filing fee arrangement and part of it will involve likelihood of paying the post-petition services fees.

October 21, 2013 Posted by | attorney fees, Chapter 7, Discharge, Planning, Pre-filing planning | , , , , , , , , , , | 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

Chapter 13 Planning: Purchasing a car prior to filing part 1

Often, when approaching a Chapter 13, a legitimate concern that the potential debtor faces is having reliable transportation during the Chapter 13. The debtor may have fallen behind and had a car repossessed just prior to the bankruptcy filing. Or, more commonly, they are driving a junker of a car that is on its last legs (or wheels). Considering that most Chapter 13 bankruptcies are for five years (some people qualify for a three-year Chapter 13), having a junker car at the start is problematic.

First, it is very hard to predict how much one will have to expend to keep a junker car running for five years. Second, although debtors can apply to the court to incur additional debt during a Chapter 13, it is a tad more complicated to buy a car during the Chapter 13. So, it is entirely legitimate planning to buy a car prior to filing the Chapter 13. If there is sufficient disposable income, buying a dependable car before a Chapter 13 can direct some of that income away from paying unsecured debts towards paying for a legitimate need of reliable transportation. After all, transportation allows for employment and having regular income is necessary for a Chapter 13.

If, after talking to your lawyer about it prior to Chapter 13, you decide to buy a car then there are some things to be careful about. Foremost, you want to buy a car that is reasonable. Forget the Rolls Royce or Jaguar and look for the Corolla or Focus. In other words, do not get a luxury vehicle but get one that is functional. Now, it does not have to literally be a Corolla or a Focus, but the idea is to minimize fuel and repair costs while having enough car to meet your families needs.

Second, you need to be aware of the timing of the purchase. Under 11 USC Sect. 546(c)(1), the seller of goods appears to be allowed to have a right to reclaim the car within 45 days (or 20 days of the petition date if within that 45 days). There appear to be no cases in the Sixth Circuit addressing this issue, but it has come up elsewhere. In one case from Alabama I reviewed, the seller of the car claimed 546(c)(1) gave them the right to take the car back and moved the court to lift the stay to do so. Ultimately the court ruled in favor of the debtor because they found no exception for reclamation in the automatic stay of bankruptcy for the seller, but who wants to go through the hassle of unnecessary litigation.  So, if possible, it is best to make the purchase 45 days prior to filing the bankruptcy.

September 27, 2013 Posted by | Bankruptcy, Chapter 13, Disposable Income, Disposable Income / Budget, Fraud, Plan, Plan payments, Planning, Pre-filing planning | , , , , , , , | Leave a comment

Things to be aware of if facing bankruptcy 3

Next in my series of posts on “don’ts” to avoid when looking at the possibility of bankruptcy is one that either with get a “of course” from you or a “seriously?”.  Do not use your credit cards.

Again, this needs some fleshing out. You may not be able to both file the bankruptcy AND avoid use of credit cards. However, you need to be very judicious in use of credit. You do not want to make any large or luxury type purchases on credit in the months or weeks just before filing a bankruptcy. A luxury purchase does not have to be luxurious – just unnecessary.

Use of credit cards on the eve of a bankruptcy may trigger the credit lender to review your account and look for large or luxury type purchases. It could result in a motion to dismiss or at least a motion to deem those purchases as non-discharged. So, it just is not worth it.

Now, if you must use your credit cards coming up on a bankruptcy, be sure you use it only for necessities. Groceries are the perfect example. First, they are necessities and second they are consumed. This does not mean stock piling as if World War 3 was about to occur, but just meeting your families needs. Purchasing gas for your car is another example.

Furthermore, you may, IF NECESSARY, look at purchasing groceries and gas on credit instead of using your credit card to directly pay for your bankruptcy.

September 23, 2013 Posted by | Additional Debt, attorney fees, Bankruptcy, Cash Advances, Chapter 13, Chapter 7, Discharge, Planning, Pre-filing planning | , , , , , , , , , , , | Leave a comment