Kentucky Bankruptcy Law

Counsel with Care

Getting the Whole Picture

For the second time in as many days a person I was speaking to highlighted the importance of getting the whole picture when looking at a bankruptcy matter. I accepted the compliment today when the potential client said that, after over a decade of trying to resolve certain debt issues and getting help from various professionals, I was the first person to sit and listen to the whole story. Actually, this is also true of family law cases such as custody or divorce. That may be why I am involved in both of these kinds of cases – because I naturally want to look at the whole picture to find a global resolution when possible.

Yesterday the issue was being served with a foreclosure notice on a house where the person was never named of the deed to the house. After a few more inquiries, it became clear that the person had a potential dower or curtesy (yes, that is spelled correctly) interest in the property as a result of being married to the owner at the time it was purchased. However, that was not the end of the story. I explained that we needed to look closer at the underlying documents. If the foreclosure was only extinguishing a dower or curtesy interest, then the person had nothing to lose. But, if they had ever signed a promissory note, even without ownership in the house, they could be hit with a deficiency debt. It is dangerous in law to stop at the simplest or most obvious answer; you gotta look at the whole picture.

Actually, that was more of a slice of the whole picture, but today’s story was more compelling on looking at the everything. To minimize wordiness, I will not explain the whole picture. This tale involved going back to 2003 and recounting several key events, tragedies, and attempts at resolving debt. What I learned was that nearly $100k of tax debt might be discharged except that there was a time they would have been “tolled”. I knew I had to get tax account transcripts to determine this. Also, there were events and circumstances that might actually allow for the rare discharge of student loan debt. However, it was clear that if I could help with the tax debt, then there might be enough relief that the student loans would not be so onerous. If I had not taken the hour plus to hear all the ins and outs of this families circumstances, I may have missed a key piece of the puzzle and blundered ahead making things worse rather than better.

The end result was that by looking at the whole picture, rather than just the immediate concern of the student loan debt, the potential client left with a sense of hope. I could not promise that the student loans could be discharged, but by coming at it from a different angle, relief was still at hand.

 

Advertisements

January 9, 2014 Posted by | Assets, Bankruptcy, Chapter 13, Discharge, Disposable Income / Budget, Priority debt, Property (exempt | , , , , , , , , | Leave a comment

Taxes & Bankruptcy

I write about this every year because it is a recurring issue for people facing bankruptcy. Taxes have a bearing on bankruptcy whether you are owed a refund or whether you owe the IRS. Therefore, they must always be taken into account, but it is especially important during this first handful of months each year.

The first thing to remember is that if you are owed a refund at the time of filing, that refund is an asset of the estate and must be reported in Schedule B and hopefully exempted in Schedule C. If you owe taxes, they are reported on either Schedule F or E depending on whether they are priority debts or not. Your attorney can help sort that out. Tax debt and tax refunds arise on December 31st each year. So, if you file a bankruptcy on January 1st, then you must account for the tax situation that arose from just the day before. So, even if you do not file your tax return until April 15th (or October if you file an extension) you either owe taxes for the year that just ended or you are getting a refund (rare indeed is the person who lands right at zero, but I suppose it happens).

If you owe taxes for the preceding year, they will be considered a “priority” debt and a debt that cannot be discharged. In a Chapter 7, the IRS and any state agency you owe taxes to will begin collection activity after your Chapter 7 is closed. In a Chapter 13, you will have to make sure you pay enough into the plan for those taxes to be paid in full over the life of the Chapter 13 along with 4% interest for federal income taxes and 5% interest on Kentucky income taxes.

If you are owed a refund, you need to report the refund as accurately as possible in your schedules of assets. This means you will likely have to run at least a rough draft of your tax return to get a good faith estimate of what is due back to you. Then, you will attempt to cover the entire amount in “wild card” exemptions. If you cannot exempt the entire amount, you will need to make a determination with help from your attorney as to whether you should wait until you receive the refund or press on.

If you decide to wait until you receive the refund, then the smart thing to do would be to pay for the bankruptcy and spend the money on necessities, such as food or needed repairs to you car. Do NOT use it to pay unsecured debt, especially not to relatives. Your attorney can help you know how much you can hold onto and exempt.

Your attorney can also help you determine if older income tax debts, such as those that arose a few years prior to the bankruptcy, will be discharged in your Chapter 7 or 13. All of this is acceptable pre-petition planning to make the most of the fresh start bankruptcy allows.

December 27, 2013 Posted by | attorney fees, Bankruptcy, Chapter 13, Chapter 7, Plan, Tax Debts, Tax refund, The estate | , , , , , , , , , , | 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

No need to fear 13 (Chapter 13 that is)

Many people in debt feel overwhelmed when looking a filing a chapter 13. As much as five years of plan payments seem daunting and having to seek approval of incurring new debt seems intrusive. However, a Chapter 13 bankruptcy can often accomplish goals for people who a Chapter 7 cannot. One of the most frequent of these goals is for the debtor to keep their home even though they are behind on payments. To take some of the mystery and fear out of Chapter 13 plans, let’s look at what it takes for a Chapter 13 plan to be confirmed (approved) by the court.

There are four tests that a Chapter 13 plan has to pass in order to be confirmed. First, since debtors often turn to a 13 to save a house with past due payments, the Chapter 13 plan has to account for full repayment on these arrears. In the Eastern District of Kentucky, past due amounts of any secured debt, such as house payment arrears, must be paid through the plan. Your ongoing house payment can usually continue to be paid directly (outside the plan) to the creditor so that you are not also paying the trustee commission on top of the interest. So, if your regular house payment is $1000.00 per month and your loan won’t be paid off for five (5) plus years, you keep paying the creditor directly. But, if you owe $12,000.00 in past due payments on that same house, you will have to pay $12,000.00 into the plan over the course of those sixty (60) months (or $200.00 per month plus trustee’s commission).

Now, lets say you own a car and only have twenty-four (24) months left on the debt. Since this will be paid in full during the duration of the plan, you will either have to pay the entire amount through the plan or make a step up in your plan payment when it is paid off outside the plan. Since you will have to make that step up in payment anyway, you might as well look at paying the entire thing through the plan UNLESS your current interest rate is less than around 6%. So, the first test is that all secured debt is accounted for by the plan with all arrears paid through the plan. I am calling this the “first” test not because there is any particular order, but because most people’s highest priority is keeping their house.

The second test is the “disposable income” (a.k.a. “projected disposable income”) test. Basically, the debtor accounts for their average income (current monthly income) each month and subtracts out their reasonable living expenses. This takes the debtor looking back in time and seeing what they spend on food, clothing, recreation, and various other items. Determining reasonable expenses is probably the place where there are the most challenges by trustees to the plan. If you report expenses that are substantially over the norm for most people living in your region with the same household size and similar income, then your plan will draw challenges. However, if your expenses are in the realm of reasonable, whatever is left over after you subtract these expenses from your income is the disposable income.

The debtor is expected to pay their disposable income into the plan. If your proposed plan payment is substantially less than your disposable income, your plan will not get confirmed. If it is higher than your income minus expenses, then it might also be challenged because the plan has to be feasible that you can actually pay it.

The third test is very straightforward: If you owe priority income tax debt (some tax debt cannot be discharged – this is priority tax debt), then the plan payment must be sufficient to pay all the priority taxes in full through the plan. Federal income tax debt can still accrue 4% interest through the plan and Kentucky tax debt 5%. However, penalties are halted.

Fourth, unsecured creditors in the Chapter 13 must get paid at least as much through the plan as they would have gotten had you filed a Chapter 7. If in a hypothetical Chapter 7 all of your assets were covered by exemptions creating a “no asset” bankruptcy, then your Chapter 13 does not have to pay anything to unsecured creditors (some districts expect at least a small percentage of unsecured debt to be paid, but zero (0%) percent plans have been approved occasionally in Kentucky). Alternatively, if your home (or other asset) that you are wanting to keep has equity that could not be covered by exemptions, then the amount of equity left “exposed” has to be paid to unsecured creditors over the life of the plan.

Let us use the same example as above where a $12,000.00 arrears existed and add that $6,000.00 of equity in the home was left exposed (not covered by exemptions). In this scenario the debtor would have to pay $100.00 more than the $200.00 per month. The $200.00 covers the arrears and the $100.00 takes care of the “liquidation test” and pays the exposed $6,000.00 equity. Now, we have a $300.00 per month payment plus the trustee’s commission.

One has to look at all four tests in concert because if the disposable income is only $150.00 per month but the plan demands $300.00 per month, the Debtor needs to come up with a way to make that $300 payment feasible or make a tough choice of surrendering the home. If, though, the disposable income is actually $400.00 per month but the other tests demand only a $300.00 plan payment, then $400.00 will be the plan payment.

One of the good things about Chapter 13 is that through looking at these tests, the debtor is often faced with making decisions about what expenses can be reduced in order to come up with a plan that can be confirmed. The result of that process is that they sometimes realize there is no way to hang on to an asset, such as a home, with their income. Sometimes, though, they learn how to live within a budget which is feasible and which lets them keep important assets. Either way, Chapter 13 pushes debtors to live within their means far better than a Chapter 7.

April 17, 2013 Posted by | Bankruptcy, Chapter 13, Foreclosure, Plan, Plan payments, Planning, Pre-filing planning, Secured loan arrears | , , , , , , , , , , , , , | Leave a comment

April 15 TAX DAY: A final word on tax debt

It may seem impossible to pay the taxes owed and when faced with that impossibility, some people decide to not file their tax returns at all. I am not talking about filing an extension – I mean ignoring the whole issue. While there may be reasons to do this that are legitimate (though I cannot think of one) I am not a lawyer who is an expert in tax law or criminal law related to taxes. So, what I am writing is from a bankruptcy standpoint.

When looking at taxes from a bankruptcy standpoint, the best advice is to file your returns timely whether or not you can make payment at that time. Timely filing of your tax debt starts the running of certain time frames that can allow that tax debt to be discharged at a subsequent date. Failing to file would prevent that tax debt from being discharged.

If you have filed a bankruptcy during this current calendar year, then the filing of the return is essential to your bankruptcy moving forward. Most Chapter 7 trustees will insist on seeing the prior years return before they will “abandon” their interest in the estate in case there is a refund coming back in excess of exemptions. Chapter 13 trustees will insist on it because it is required by law and to see if you are withholding too much in taxes instead of paying enough into the Chapter 13 plan.

Finally, the return being filed only defines the exact amount refunded or owed. On 12/31 of last year, you either owed a tax debt or had a refund owed to you. Subsequently filing a bankruptcy does not change either of those circumstances. So, you might as well file the return to give definition to where you are at. If you are in a Chapter 13 and owe taxes from last year, they will be filed as a claim in the Chapter 13 and paid through the plan so you should NOT make payment with your return.

April 15, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Discharge, Exemptions, Tax Debts, Tax refund, The estate | , , , , , , , , , , | Leave a comment

Tax debts can be discharged! – sometimes

A common misconception floating about is that income tax debts can never be discharged. This myth arises from the reality that income tax debts have a favored position in the bankruptcy code. Also, trying to figure out which tax debts are discharged can be mind boggling even for attorneys. Frankly the entire bankruptcy code can be mind boggling since most provisions relate back to other provisions that one must read before the original provisional can be understood.

Plain English is a foreign concept to drafters of legislation. All that aside, to determine if your income tax debt can be discharged, start at 11 U.S.C. Section 523(1). Section 523(1) immediately directs you to to two other provisions. The pertinent one here being 11 U.S.C. Section 507(a)(8). Section 507(a)(8) then circles you back into Section 523 making for a dizzying ride. You are welcome to go to these statutes and read them for yourself. If you understand them, you are either a bankruptcy attorney or you missed your calling.

Let me break it down for you with a plain English translation. In order for an income tax debt to be discharged, all these requirements must be satisfied:
1) The tax return filing must have been due more than three years before you file your bankruptcy petition. If an extension was filed, then that moved the due date for your filing out so extension periods do not count towards that three years.
2) The taxes were either officially assessed more than 240 days prior to the bankruptcy petition or were not yet assessed but were assessable. I know, that last part does not seem to be in the statute but that is because of how this statute is worded. It is listing what tax debts are excluded from discharge as those assessed within 240 days of filing, so those not assessed or assessed (but assessable) outside of the 240 days are not excluded. Offers in compromise and stays in other proceedings toll this time period plus add on 30 or 90 days respectively.
3) A tax return had to have been filed.
4) If it was filed after the final due date, including extensions (filed late), it had to have been filed at least two years before the bankruptcy petition is filed.
5) There can be no fraud or attempts at evasion of the tax at any time.

In order to know calculate these items precisely, one must obtain a tax Account Transcript from the IRS. This can be obtained by filing a Form 4506T from your friendly Internal Revenue Service agency.

March 29, 2013 Posted by | Bankruptcy, Discharge, Tax Debts | , , , , , , | 1 Comment

Will I get to keep my tax refund?

The answer to this question, as with so many bankruptcy questions, comes down to timing. The set-off provision of the bankruptcy code, 11 U.S.C. 553, basically says that the bankruptcy code does NOT change the rights of the IRS (and certain other creditors/debts) to retain your tax refund. However, not only does the debt owed to the IRS need to already exist prior to the date your filed your bankruptcy petition, but your right to receive the refund had to arise before your filed the petition also.

This gets a little tricky because most people think their refund came about (or arose) when they filed their tax return. Actually, the right to receive that tax refund arises at the end of the taxable period. See 11 U.S.C. 362(b)(26). So, if you are filing a tax return on 4/15/2013, the right to receive the refund arose on 12/31/2012 because that was the end of the taxable period of 2012. The return on 4/15/2013 only quantifies (liquidate) how much is owed.

How this plays out is that if you owed taxes for the 2011 tax year and expect a refund for the 2012 tax year and you filed your bankruptcy petition on or after 1/1/2013, then the IRS will keep enough of your tax refund from 2012 to cover the debt owed from 2011. Any extra would be refunded to you. If there are still taxes owed from 2011, then they will either need to be paid in full in your Chapter 13 (because they would be priority debts – another post explains this) or they will still be there for you after a Chapter 7. Older tax debts may be discharged, but in this example they would not.

This is where advanced bankruptcy planning can help. If you already know you are likely to receive a sizable tax refund for the tax year you are currently in and you owe tax debt from a prior year, your best chance at keeping those funds is to file the bankruptcy before December 31.

March 1, 2013 Posted by | Automatic Stay, Bankruptcy, Chapter 13, Chapter 7, Planning, Pre-filing planning | , , , , , , , , , , , , , | Leave a comment

I got a discharge in a Chapter 7, when can I file a Chapter 13?

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 attorne.

October 18, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Discharge, Planning, Pre-filing planning | , , , , , , , | 3 Comments