Kentucky Bankruptcy Lawyers Blog

Bankruptcy cases are known for the amount of paperwork involved. And it is essential that this paperwork be completed accurately in order for you to be able to declare bankruptcy. At Schwartz Bankruptcy Law Center we have the experienced Kentucky bankruptcy attorneys and staff to help you in your Kentucky bankruptcy.

Morris v. Quigley is a Fourth Circuit court case that arose out of a bankruptcy filing in West Virginia. Although Kentucky is in the Sixth Circuit, bankruptcy law is based on the federal bankruptcy laws and is somewhat uniform across the country.

The main issue addressed in this case is whether in filing for bankruptcy a debtor can declare future monthly payments in calculating their disposable income, where they will not in fact be held responsible for those payments in the future. The amount of income available for spending or saving after taxes is considered disposable income.

Morris ("Debtor") was preparing for her Chapter 13 bankruptcy. This Chapter 13 bankruptcy is only available to individuals who have regular income and have a certain fixed amount of unsecured and secured debts. As the court explains, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") requires debtors who are filing for bankruptcy with above-median income to file under Chapter 13 rather than Chapter 7. The difference between these two types of bankruptcy is that Chapter 13 is a provision that provides for re-organization where Chapter 7 is for liquidation.

However, it is only after a thorough investigation of your financial records by a practicing bankruptcy attorney, that you can decipher which form of relief is more appropriate for you.

While completing the requisite documents, Morris listed all of her personal property on her Schedule B form. Included in her personal property were two all terrain vehicles ("ATV's") as well as another vehicle co-owned with her ex-boyfriend. On her Schedule D form, Morris listed all three vehicles as collateral for secured debts for which she was responsible for making payments on monthly.

Additionally, Debtor created a plan that indicated the future payments Debtor would make to the trustee in order to pay back her creditors. These payments are calculated by a formula that takes into account future earnings and future liabilities.

In Chapter 13 bankruptcy, the court appoints a representative called a trustee to administer to the estate during and after the bankruptcy proceedings. This trustee must distribute the future earnings received from the debtor proportionally to the debtor's creditors. Also, this trustee is responsible for ensuring that the Debtor accurately represents the financial figures involved and is in compliance with the law.

Through a thorough investigation, the Trustee in this case found that there were misrepresentations as to the three vehicles involved. First, the two ATV's Debtor owned were being surrendered because they were the collateral for the liability. In surrendering these two vehicles, debtor was released from the liability of future payments.

Additionally, the vehicle Debtor owner with her ex-boyfriend was actually in the possession of the ex-boyfriend, and he was making monthly payments on it. Therefore, Debtor would not actually be making future payments on this vehicle although she declared this as one of her liabilities.

Because Debtor listed these three vehicles in her Schedule D and deducted monthly payments for these vehicles from her projected future earnings, there was substantially less money available to pay the creditors back with.

The trustee in this case found that the Debtor was misrepresenting her projected disposable income, which led her to file this case. Debtor argued that this was simply a minor mistake in her reporting that would not lead to a "senseless result."

This Fourth Circuit court disagreed with the Debtor, and held that the phrase "projected disposable income" takes into account the past events but allows for future adjustments in Debtor's income or expenses that will affect to the final determination of this future income.

Debtor is required to accurately report all payments declared on the schedule B form. The court in Morris instructs that in the Fourth Circuit a debtor cannot deduct monthly payments from projected disposable income when, regardless how minor the payments may seem, Debtor will not be held responsible for these future payments.

This misrepresentation could very easily have been a mistake; however, the risks are too high in a bankruptcy proceeding to make mistakes on your paperwork.

Times certainly could be better. There has been some good news in recent weeks, as manufacturers are again hiring in the United States, including in Louisville, where GM has recently shifted some operations, The New York Times reports.

But for many others -- more than 9 percent to be exact -- finding a job hasn't gotten any easier. For some families, a potential solution is to consider Louisville bankruptcy.

Our Louisville bankruptcy lawyers know that job loss is a terrible thing. It hits us in our pride and can cause emotional problems. More practically, it brings financial instability.

Some families can't make payments on bills, they may miss a house payment, credit cards become much more of an everyday tool, and they may even opt to take out a loan. In the meantime, lenders are contacting these families by phone, e-mail and other means. They've probably hired collection agencies, attempting to get any kind of payment possible.

The good news according to Business Journal is that unemployment rates dropped in November in 351 of 372 metropolitan areas, including Louisville, according to recently released statistics. In October, the unemployment rate was 9.8 percent and a month later it was 8.8 percent.

Another report states that Kentucky's unemployment rate overall dipped from 9.6 percent to 9.4 percent from October to November. Both of these are encouraging pieces of news.

The New York Times wrote a piece that looks at manufacturing jobs and the fact that while more American businesses are hiring again, they are bringing in people at much lower rates than in years past, even those represented by powerful unions. The guarantee of work these days has become more important than fighting for big raises or large benefits packages.

The article hits on the fact that General Electric's factory in Louisville is now being used to create new water heaters, a process that previously was being done in China.

These are all encouraging bits of news for our state and local economy, but the bottom line is that more than 9 percent of people are still without work. At 9.4 percent unemployment, that means nearly 408,000 Kentucky residents are out of work, according to 2010 census numbers. So, where does that leave most people?

The bottom line is that filing for bankruptcy in Louisville can be an appealing prospect for some people who are out of work. The process is designed to help people get rid of debt that is making life difficult. Rather than continue struggling with minimum payments and constant reminders of the situation you're in, bankruptcy can solve those issues.

After completing the process, those who file for bankruptcy typically get all or most of their debt cleared away. That means credit card debt, medical bills, other types of loans and other debt can be gone and the process of restoring credit scores and savings accounts can begin.

Continue reading "Although Louisville Jobs Increase, Unemployment is High and Bankruptcy Could Help" »

The Star-Ledger in New Jersey reports that "Real Housewives" star Joe Giudice has withdrawn a bankruptcy petition after taking the Fifth Amendment in consultation with a criminal lawyer. E! Entertainment reports the petition was withdrawn after the filer became uncomfortable answering questions from a bankruptcy trustee.

The media does not say whether Giudice was filing for Chapter 7 or Chapter 13 bankruptcy but a withdrawn petition is not at all uncommon in Chapter 13 filings. Typically, in a Chapter 7, few creditors bother to show up at the hearing or contest the discharge.

In other words, this is most common when assets are at stake. In most Chapter 7 bankruptcies, the petitioner seeks debt forgiveness with few assets. An upside down mortgage or car loan, are not considered assets, after all. And retirement funds are protected.

Questions more often arise in Chapter 13 filings. In Chapter 13, a debtor discloses assets and sources of income and establishes a repayment plan in an attempt to satisfy most debts presented to the court. The plan lasts 3-5 years. In an increasing number of cases -- particularly those involving bad real estate debt -- a Louisville bankruptcy attorney may suggest filing for Chapter 13 to see who shows up with their hand out.

For instance, say a homeowner who lost several properties in foreclosure is being chased for $50,000 on a second mortgage. By filing Chapter 13, you force the banks and collection agencies to stop hounding you, and you see who shows up in court. If you get tagged for the $50,000 and two other banks show up with $500,000 in deficiency judgments, you dismiss the Chapter 13 to avoid establishing the payment plan.

If no one shows up, or if you are prepared to make payments to those who do, you enter into the plan.

Chapter 13 bankruptcy -- bankruptcy protection -- is a court action brought by the consumer. The consumer is not obligated to go through with the filing. There can be many legitimate reasons to dismiss a bankruptcy case. Perhaps the debtor has obtained employment or his or her financial picture has changed substantially. Perhaps he or she received an inheritance.

At the same time, good legal advice is critical. Lying to trustees or misrepresenting assets can result in serious legal trouble -- even when done unintentionally. As the case of former major league baseball player Lenny Dykstra illustrates, not properly disclosing assets can lead to disaster. Dykstra is facing federal charges after being investigated for grand theft. The bankruptcy trustee in his case accused him of improperly hiding and selling assets. He faces 80 years in prison if convicted of charges related to bankruptcy fraud, embezzlement and obstruction of justice.

Continue reading ""Real Housewives" Bankruptcy Highlights Chapter 13 Issues in Louisville" »

The Chicago Sun-Times and other major media outlets are reporting this week that household income has dropped faster since the end of the recession.

Louisville bankruptcy attorneys continue to help consumers deal with the fallout of the middle-class squeeze. Really, it's no wonder protestors have taken to Wall Street. The AFL-CIO recently reported the average annual CEO pay at a S&P 500 company is $11.4 million. The pay of these few hundred executives totaled $3.4 billion and would have paid the median salaries of more than 100,000 workers.

During the recession, the median household income fell by 3.2 percent to $53,518. From June 2009 to June 2010, it fell by 6.7 percent to $49,909. Self employed households suffered an 8.4 percent decline. African-American household income fell nearly 10 percent to $31,784. The youngest (25 to 34) and the oldest (62 to 64) fell by the largest percentage, 9.8 percent and 10.7 percent, respectively.

Too often, consumers don't know where to turn when medical bills, bad mortgage debt and credit card debt have them backed into a financial corner. Chapter 7 or Chapter 13 bankruptcy in Kentucky can offer a fresh start. Bankruptcy remains the most powerful consumer protection law on the books; families that have been squeezed to the breaking point should seek the advice of an experienced bankruptcy law firm.

Bankruptcy will stop foreclosure and collection efforts, including garnishment of wages. It will immediately stop creditors from harassing you. Together with your attorney you can review your financial situation and decide upon the best course of action. For about three-quarters of those who file, Chapter 7 is the best option. This filing will eliminate most unsecured debt. Consumers may even be able to keep their home or car if it makes financial sense. Retirement accounts are protected.

For those who need a financial breather and time to regroup, Chapter 13 will establish a payment plan over 3-5 years. It will keep creditors off your back and permit you to prioritize your debt. It may also be used by consumers who do not qualify for Chapter 7. Those filing for Chapter 13 can keep large assets while making arrangements to satisfy debts.

In either case, filing for bankruptcy has become a primary weapon in the middle-class fight to stay afloat. We encourage you to be proactive. If bad debts are preventing you from saving for college or retirement, of if bill collectors are impacting your quality of life, please pick up the phone and get the legal help you need to secure a brighter financial future.

Continue reading "Median Household Income Plummets; Bankruptcy a Powerful Weapon for Kentucky Families" »

With many people struggling to make ends meet in today's uncertain economy, mortgage payments are becoming increasingly difficult to manage. As a result, many individuals face the prospect of having to give up their home. Oftentimes, the immediate reaction of someone who can no longer afford their home is, "I need to file bankruptcy."Although bankruptcy may ultimately turn out to be necessary, if giving up your Kentucky home is the only reason for the bankruptcy filing, you may be jumping the gun.

In order to understand why bankruptcy may not be immediately necessary in order to get out from under a mortgage, one needs to understand how the foreclosure process works. In most states, including Kentucky and Indiana, creditors are required to utilize a process called judicial foreclosure. The way it works is this. Once there has been a default, the creditor initiates the foreclosure process by filing a Complaint in the Circuit Court of the county where the property is located. The creditor must then obtain service of the Complaint on the debtor in a manner permitted by law. Once service has been obtained, the debtor then has 20 days to answer the Complaint. The purpose of this is to allow the debtor to assert any defenses that he may have. If the debtor fails to file an Answer to the Complaint, then the creditor gets a default judgment.

After obtaining a default judgment against the debtor, the creditor may then proceed to obtain a sale date. Normally it takes at least 4 months or longer from the time of service of the Complaint until the sale date. On the sale date, the property is auctioned off at the courthouse to the highest bidder. The proceeds of the sale are then credited to the loan, and what is left over, referred to as the deficiency balance, is what the debtor owes the creditor.

If the property sells for enough to cover the balance of the loan, then there is no debt that is owed by the debtor. So until such time that the property actually sells at foreclosure, it is impossible to know for sure how much the debtor will actually get stuck with. So if you owe $150,000 on your mortgage, this does not mean that you personally are on the hook for that amount. If the house sells for $140,000, then you only owe the $10,000 difference.

So before you decide that you need to file bankruptcy solely because your home is going into foreclosure, you may want to wait and see what the outcome is from the foreclosure sale. You may owe less than you think. Now if you have other reasons for filing bankruptcy, such as credit card or medical debt that you can't pay, then it makes sense to go ahead with the filing. But if it is all about your mortgage, you may want to wait and see what the damages are before pulling the trigger on a bankruptcy filing.

How long one must wait in between bankruptcy filings depends upon the type of bankruptcy and the outcome of the previous bankruptcy.

1. Chapter 7: In order to be eligible to file Chapter 7 Bankruptcy in Kentucky and receive a discharge, the bankruptcy filing must occur more than 8 years after the filing of a previous Chapter 7 or Chapter 11 case in which the debtor received a discharge. Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which was adopted on October 17, 2005, the time period was 6 years. Keep in mind that the 8 years runs from the date of the filing of the previous Chapter 7 bankruptcy case, not the date of discharge. Furthermore, the rule does not apply if the prior case was dismissed rather than discharged.

In the case where the debtor files a Chapter 7 case and had a previous Chapter 13 case in which a discharge was received, the rule is slightly different. In that case, in order to receive a discharge, the prior Chapter 13 case must have been commenced more than 6 years before the filing of the current Chapter 7 case, unless payments under the plan in the prior Chapter 13 case totaled at lease: (A) 100 percent of the allowed unsecured claims in such case; or (B) 70% of such claims; and the plan was proposed by the debtor in good faith and was the debtor's best effort. This last requirement seems somewhat redundant because in order for the Chapter 13 plan to have been approved in the first place, the court would have had to find it to be filed in good and and the debtor's best effort. For this is a requirement for confirming any Chapter 13 plan.

2. Chapter 13: In order to be eligible to file Chapter 13 Bankruptcy and receive a discharge, the bankruptcy filing must be commenced more than 4 years following the filing of a prior Chapter 7 Bankruptcy case in which the debtor received a discharge. It is important to note, however, that this rule does not prevent the filing itself, but merely the obtaining of a discharge, and unlike Chapter 7, where the lack of a discharge makes the filing pointless, there may be reasons to file Chapter 13 where one is not eligible for a discharge. For example, if one is filing Chapter 13 Bankruptcy to cure his mortgage default and save his Kentucky home, then a discharge may not be that important. For in that case one doesn't need a discharge to achieve his goals since he is merely reinstating and paying, rather than discharging, his mortgage loan. The same may be true where the Chapter 13 bankruptcy is being used to reorganize tax debt or student loan debt that is not dischargeable anyway. Since the debtor still gets the benefit of the automatic stay, the Chapter 13 filing will still provide the benefit that the debtor needs.

These discharge rules can be rather tricky. If you have questions, consult with a competent Kentucky or Indiana Bankruptcy Attorney.

One of the questions that people frequently have who file bankruptcy in Kentucky or Indiana is whether they will have to return items that were purchased on credit. Will they have to return the refrigerator to Sears, or the camera to Best Buy?

In order to answer that question, it must first be determined whether the creditor from whom the credit was obtained is a secured creditor or an unsecured creditor. An unsecured creditor is a creditor that is owed money but does not have a lien on any of the debtor's property. Examples of unsecured debts are medical bills and credit cards. With respect to those types of debts, the creditor may have a legally binding claim, but there is no specific property of the debtor that has been pledged to secure the debt and therefore, nothing that the creditor can repossess. For example, when someone charges a purchase on his or her Visa or Mastercard, there is generally no security interest created in the merchandise purchased. Rather, there is simply a contractual obligation on the part of the debtor to pay the bill, but no claim by the creditor against the merchandise itself.

In order for a creditor to become a secured creditor, there must be a written security agreement that specifically provides that the creditor has a security interest in some property of the debtor. In the absence of such a document signed by the debtor, there is no right to repossess anything by the creditor.

There are two different types of security interests that can be created. The first is what is called a "purchase money security interest". This is where the creditor obtains a security interest in the property that is being purchased with the funds being loaned. A typical example of this type of security interest is the purchase of an automobile. An individual borrows money for the specific purpose of financing the purchase of an automobile. The second type of security interest is what is called a "non-purchase money security interest". This is where one borrows money and pledges as collateral some property that he already owns. For example, suppose the debtor needs to borrow money to pay for a new transmission in a car that he owns. Because the creditor doesn't feel secure enough about repayment based on the debtor's signature alone, the creditor asks that the debtor's car be used as collateral. Since the debtor is not using the loan to purchase the car, this type of security interest is called a non-purchase money security interest. This is an important distinction, because what type of security interest the creditor has may effect that creditor's rights in the event of bankruptcy.

Once it has been established that a creditor has a secured claim, as opposed to an unsecured claim, it becomes more complicated to deal with that creditor in bankruptcy. If the debtor does not address the creditor's security interest in some manner in the bankruptcy case, then that creditor will have the right to repossess the collateral after the bankruptcy is over. For the discharge that the debtor receives does not discharge the lien but only the underlying debt. So even though the secured creditor cannot take legal action against the debtor to collect the debt after discharge, its rights in the property pledged survive the bankruptcy discharge, and the creditor is entitled to take action to recover the property to satisfy its debt.

So how does one deal with his secured creditors when filing Chapter 7 Bankruptcy in Kentucky or Indiana?

The Bankruptcy Code offers several methods for dealing with secured creditors.

The first and simplest way to deal with a secured creditor in bankruptcy is to surrender the property, i.e. just hand over the keys to the car. If one elects to do so, he is completely off the hook. The creditor's sole remedy to get paid back is to sell the collateral and apply the proceeds to the loan.

The second option is to reaffirm the debt. This means that one signs a legally binding document during the course of the bankruptcy that waives the debtor's right to a discharge of that debt. So in other words, it becomes the same as if the debtor never filed bankruptcy with respect to that debt, because the creditor retains all of its rights against the debtor that it would have had in the absence of bankruptcy.

The third option is to redeem the property. This is accomplished by paying the secured creditor the value of the property in a lump sum. Suppose for example that the debtor owes the creditor $5,000.00 and the car that serves as collateral for the loan is worth only $500.00. The debtor can force the creditor to release its security interest in the car upon payment of the $500.00 rather than the full balance. To exercise this option, the debtor must file a motion with the Kentucky or Indiana Bankruptcy Court and obtain an Order. If the creditor disputes the value, it can object to the motion and the judge will then have to hold a hearing to determine the value. This option is only available for consumer debts that are secured by personal property.

The fourth option is to avoid the lien. This option may be available available where the security interest is a non-purchase money security interest that is secured by exempt household goods. This is also accomplished by the filing of a motion with the Bankruptcy Court. However, not all household goods are subject to this type of lien avoidance. The Bankruptcy Code provides a list of which household goods are subject to lien avoidance. So make sure you consult with your Kentucky or Indiana Bankruptcy lawyer.

The final option is to simply continue to pay the secured creditor without signing anything new. This is sometimes referred to as "ride through". When Congress amended the Bankruptcy Code in 2005, it eliminated this option for debts secured by personal property, unless the creditor consents. However, the option is still available for debts secured by real estate.

Dealing with secured creditors in Bankruptcy is a complex undertaking so make sure that you employ a competent Kentucky or Indiana Bankruptcy attorney to assist you.

When one files Chapter 7 bankruptcy in Kentucky or Indiana, a discharge is received by the debtor at the conclusion of the case. This discharge releases the debtor from all dischargeable debts that were incurred prior to the filing of the bankruptcy case. Certain debts survive bankruptcy, such as child support and alimony, most student loans and certain taxes.

A reaffirmation agreement is a legally binding document that the debtor enters into with a creditor, pursuant to which the debtor agrees that an otherwise dischargeable debt will not be discharged and therefore, will survive the bankruptcy filing. This means that this particular creditor with whom the debtor entered into such an agreement can take legal action to collect the debt after bankruptcy if the debtor defaults, even though the debtor may have received a discharge of all of his other debts.

Why would someone want to reaffirm a debt? The most common situation is where the creditor has a lien or mortgage on something that the debtor owns and wishes to retain, such as an automobile. In that case, if the debtor wishes to retain the automobile, he must sign a reaffirmation agreement if the creditor requires it. If he refuses to sign it, then the creditor has the right to repossess the automobile even if the debtor is current with his payments. In deciding whether to reaffirm a debt, the debtor should always take into account the value of the property that he is retaining by signing the reaffirmation agreement versus the amount owed on the loan. If the amount owed on the loan far exceeds the value of the property being retained, then it does not make any economic sense to reaffirm because it would be the equivalent of re-buying the property at an inflated price.

What about a debt that is completely unsecured? Generally, if the creditor does not have a lien on anything that could be repossessed, then there is no need to reaffirm the debt. All you are doing is obligating yourself to pay something that the law makes clear you don't have to pay. Since the primary purpose of filing bankruptcy is to obtain a fresh start by coming out of the bankruptcy as debt free as possible, then reaffirming debts when there is no benefit to be obtained undermines that goal.

When it comes to real estate, the law is a little different than it is with regard to personal property such as automobiles. While reaffirming on an automobile loan is mandatory under the bankruptcy code, unless the creditor doesn't require it, it is optional when it comes to real estate. With regard to real estate mortgages, the debtor can simply maintain payments and keep the property without signing a reaffirmation agreement. However, if one chooses to go that route, he will not obtain the benefit to his credit from making future payments on his mortgage because those future payments will not be reported to the credit reporting agencies. The reason for that is that there is no "debt" to report since the underlying obligation has been discharged. The mortgage holder may also terminate certain services such as automatic bill paying and paying online. The mortgage holder may also be unwilling to modify the loan in the future if there is no reaffirmation agreement signed. Finally, when it comes time to refinance or buy another house, there will not be a trade line of payments on the credit report that helps build up a credit score.

The decision on whether to reaffirm a home mortgage or not when filing bankruptcy in Kentucky or Indiana is really a judgment call. On the one hand, reaffirming the debt provides certain advantage in terms of credit standing, but also exposes the debtor to substantial risk in the event of default. For if the mortgage debt is not reaffirmed, then the creditor's only recourse in the event of default is to sell the property, whereas if the debt is reaffirmed, then the creditor can also pursue the debtor for a deficiency balance (the difference between the amount the property sold for at foreclosure and the balance owed on the debt).

Before deciding whether to reaffirm a debt, consider all of the factors and seek the advice of your Kentucky or Indiana bankruptcy lawyer.

It is commonly believed that filing bankruptcy will not eliminate one's tax debts. This is not necessarily the case. Income tax liabilities can in fact be discharged in bankruptcy if certain conditions are met.

There are five basic rules that must be satisfied in order for income taxes to be wiped out in bankruptcy:

1. The taxes in question must be more than three years old. The three years is measured from the date that the tax return for the year is question was due, including extensions. For example, if one owes income taxes for tax year 2007 and files bankruptcy in May of 2011, this rule will be satisfied provided the taxpayer did not receive an extension. If the taxpayer received an extension, then the taxpayer would have to wait until 3 years after the extension date, regardless of whether the person actually used the entire extension.

2. The tax return for the taxes in question must have either been filed on time or if not filed on time, been filed for at least two years prior to the filing of the bankruptcy. So let's say that one owes taxes from 20 years ago, but just now got around to filing the returns. Those tax obligations would not be able to be discharged in bankruptcy. That person would have to wait at least two years before filing the bankruptcy in order to be able to discharge those taxes.

3. The taxes must have been assessed at least 240 days prior to the bankruptcy. Ordinarily, when one files a tax return and owes taxes, the IRS assesses the tax on that date. So in most cases, the filing of the tax return and the assessment date are the same. However, sometimes the IRS will assess additional taxes after the return is filed. This can be caused by either the IRS receiving a W-2 that was not included with the tax return, or as the result of an audit.

4. The taxpayer's return was not fraudulent.

5. The taxpayer did not attempt to evade or defeat the tax.

if all five of these rules have been satisfied, the the taxes are probably going to be able to be eliminated in bankruptcy.

If you owe income taxes that appear to meet these requirement, speak with a Kentucky or Indiana bankruptcy attorney in order to determine your rights.

When you borrow money from someone, be it a bank, a credit union or an individual, you have a legal obligation to repay that money. But suppose that after borrowing the money something happens in your life, such as a reduction of income, that makes it impossible to repay that debt. What can that creditor legally do to you?

For starters, the creditor has the right to report that delinquency on your credit report. This will cause damage to your credit score. This is also an effective collection technique, because such delinquency will often show up when you are attempting to obtain credit, and in order to obtain such credit you may be forced to pay it off or "settle up" with the creditor.

Creditors also have the legal right to call you and write you nasty letters. They can even call you at work. Some might call this harassment but there are very few restriction on a creditor's right to collect its own debt. Now if the creditor has turned the debt over to a third party debt collector, then that debt collector is subject to certain restrictions in how it may go about collecting that debt. These restrictions are set forth in a federal law called the Fair Debt Collection Practices Act. But once again, keep in mind that this law only protects you from defined "Debt Collectors", which does not include the creditor or its employee attempting to collect its own debt.

If the above mentioned tactics don't succeed, the creditor then has the right to file a lawsuit against you in state court. When this happens, you will be served with a Summons and will be given 20 days to file what is called an Answer to the lawsuit asserting any defenses you might have. Failure to do so in the time allowed will result in a Judgment being entered against you for the amount for which you were sued. Most people think that if they are sued, there will be a court date scheduled before any Judgment is entered against them. Not true. Only in Small Claims Court is a hearing or trial scheduled. In all other courts, no hearing or trail will be scheduled unless the defendant files a written Answer to the Complaint asserting defenses.

Once the creditor has a Judgment again you, it may seek to collect that Judgment through various means. One of those methods is by garnishing your wages. Most states, including Kentucky and Indiana allow a creditor to garnish up to 25% of your wages. This is done by sending an order from the court that granted the Judgment to your employer, who is then legally required to withhold the required amount from your paycheck and send it to the creditor.

Another remedy that creditors who hold judgments against you in Kentucky and Indiana have is the ability to "attach" your bank account. What this means is that the creditor can take all the money out of your bank account. Obviously, this can produce devastating results, especially if you have written checks on that account and the money is taken before those checks have cleared, causing them to bounce.

So if you have received a Summons and Complaint from a court, it is imperative that you speak with an attorney immediately. A Kentucky or Indiana bankruptcy attorney will be able to stop that action dead in its tracks by filing a bankruptcy petition.

Means Test and Car Ownership

The United Supreme Court has ruled, in a case called Ransom vs. FIA Card Services, that above median income debtors are not entitled. to deduct the so called "ownership allowance" on the means test if the automobile they own is not subject to a lien.

What this means for individuals in Kentucky and Indiana contemplating filing bankruptcy is that in some very limited situations they may be required to file a Chapter 13 bankruptcy rather than Chapter 7 bankruptcy or they may be required pay a higher percentage of their debt back in Chapter 13. In order to fully comprehend the impact of this decision, a discussion of the means test is required.

The means test was added to the Bankruptcy Code as part of the Bankruptcy Reform Act of 2005. The stated purpose of the means test is to disqualify higher income debtors from filing Chapter 7 bankruptcy and require them instead to file Chapter 13 bankruptcy, where they are required to pay at least some of their unsecured debt back. The means test can also partially determine how much someone is required to pay his creditors in Chapter 13.

The starting point, and often the ending point, for the means test is one's gross income. If one's gross income is below the state median income for the state in which the debtor resides, the means test has been passed and the debtor is free to file Chapter 7 bankruptcy if he otherwise qualifies. Keep in mind that there are other factors besides the means test that determine eligibility for Chapter 7 bankruptcy, but below median income debtors need not concern themselves with any other aspects of the means test, such as the ownership allowance, which was the subject of the recent Supreme Court case.

To understand the limited impact of this decision, it should first be noted that over 80% of those filing for bankruptcy are below the median income, for whom this decision will have absolutely no impact. It will also not affect those above median debtors who own an automobile that has a lien on it, because those debtors will still be entitled to the deduction in question. Finally, the decision will also not affect those who have enough other allowable expenses so that their disposable income will have been reduced to a figure acceptable for them to file Chapter 7. So the number of individuals for whom this ruling will create a problem should be rather few.

Continue reading "Automobile Ownership Expense on Bankruptcy Means Test Disallowed by Supreme Court" »

A frequent issue that arises in bankruptcy is what to do about second (or third) mortgages in bankruptcy. Oftentimes the client can afford to pay his first mortgage, but it's that pesky second mortgage that makes the house unaffordable. "If only I could get rid of that second mortgage." Does bankruptcy provide any relief?

Once again, this is a situation where Chapter 13 might provide some relief that Chapter 7 does not. If you file Chapter 7, most courts will not allow you to get rid of (i.e. strip off) your second mortgage even if the property has no value in excess of the balance owed on the first mortgage. This means that in order to keep the house, you must reaffirm (agree to pay) both the first and second mortgages in full. On the other hand, if you file Chapter 13, you will be able to strip off the second mortgage if the balance owed on the first mortgage exceeds the value of the property.

For example, let's say your house is worth 100,000 and you owes 105,000 on your first mortgage (not uncommon in today's market). You also have a 30,000 second mortgage. If you file Chapter 13, you will be able to strip off the second mortgage. This means that the second mortgage will be treated as an unsecured debt and be paid whatever percentage your plan provides for payment of unsecured creditors. Therefore, if you complete the plan, you will come out of bankruptcy with only one mortgage on your house rather than two.

One of the least understood benefits of Chapter 13 is the superior manner in which secured creditors are handled compared with Chapter 7. In a Chapter 7, if you want to keep your car that you owe money on, you are required by the bankruptcy code to sign what is called a "Reaffirmation Agreement." By signing this document, you are essentially giving up your right to discharge this debt in the bankruptcy or in any subsequent bankruptcy.

That may not seem like a big deal. You may be thinking, "I didn't file bankruptcy to get out of paying my car loan anyway". It was to get out from under my credit cards or other debts. But what happens if 6 months after you complete the bankruptcy, you lose your job and can no longer afford the car payment? Or what happens if the car breaks down? Well if you had filed a Chapter 7 and "Reaffirmed" the debit, you are stuck. Not only can the creditor repossess the car, but they can sue you for the balance still owed on the car.

On the other hand, if you file Chapter 13, you do not have to sign a Reaffirmation Agreement. In fact, there is no such thing as a Reaffirmation Agreement in Chapter 13. In Chapter 13, you simply pay for the car as long as you can afford it. If at some point you were to lose you job or otherwise become unable to afford the car payment, you could simply give it back and then convert your case to Chapter 7 and discharge the debt on it. Also, if the car was purchased more than two and a half years before the filing of the bankruptcy, you only have to pay the value of it in full, with the balance becoming an unsecured debt.

THE BENEFITS OF CHAPTER 13

Part I

So you are considering filing bankruptcy and one thing you know for certain is that you are not going to file Chapter 13. After all, that's the type of bankruptcy people file who can pay their debts and that's not me. I can barely pay my electric bill, much less make payments on my credit cards.

Well not so fast. There are many individuals who file Chapter 13 who are just as bad off financially, if not more so, than those who file Chapter 7. The first thing you need to understand is that if you file Chapter 13, the Court will only make you pay as much of your unsecured debt, like credit cards and medical bills, as you are able pay. If all you can afford to pay is 10 cents on the dollar, then that is all you will have to pay and the balance will discharged at the end of your plan.

Where the real benefit of Chapter 13 comes in is how you can deal with your secured creditors, like your mortgage or your car payments. If you have a car loan and are considerably "upside down" on it, in other words you owe more than it is worth, then you may be able to get away with paying only the value in full, whereas the rest of the debt on it gets treated as an unsecured creditor. Let's say for example you have a car that is worth $10,000.00 and the loan against it is $15,000.00, with an interest rate of 18%. Let's also assume that your plan provides for payment of 20 cents on the dollar to your unsecured creditors. You would only have to pay the $10,000.00 "secured claim" back in full with an interest rate of about 5% and $1,000.00 with no interest on the remaining $5,000.00. This is referred to by bankruptcy lawyers as "cram down".

On the other hand, if you had filed a Chapter 7, you would probably have been required by the creditor to "Reaffirm" (agree to pay) the entire balance on the car loan. Not only that, but you would be required to either be current or get current right away on the loan. If you file Chapter 13, you do not have to be up to date with your secured creditors and you have 30 days from the date you file your case to begin making your plan payments.

(Please note that the full benefit of "cram-down" is not available for automobiles purchased within 910 days of filing bankruptcy).

Although Chapter 13 does not allow you to change the terms of your home mortgage, such as your payment, balance or interest rate, it does allow you to make up your missed payments over a period as long as 5 years.

Another benefit of Chapter 13 is that you can usually get a case started for far less money up front than is required for Chapter 7. Since most individuals contemplating bankruptcy usually don't have a lot of money lying around, that can be a big factor. Whereas, a Chapter 7 bankruptcy generally requires a substantial up front payment of legal fees and court costs, in Chapter 13, as a general rule, the legal fees are paid through the plan.

So you are behind on your house and car and have no money. If you think that Chapter 7 is your answer you may want to think again. How are you going to come up with the money to catch up your house and car and pay those legal fees? You may want to consider Chapter 13, where you may only have to come up with the court costs to get started and will have 30 days to start making payments, with no large catch up payments required.

In my next post, I will discuss some more of the benefits of Chapter 13.

MY CAR HAS BEEN REPOSSESSED. HOW CAN I GET IT BACK?

Everyone knows that if you do not make your car or truck payments, the creditor will send someone out to repossess the vehicle. In most states, including Kentucky and Indiana, the creditor can exercise what is called "self-help." This means that the creditor need not file any type of legal proceeding with a court, but rather, can simply hire some thug to sneak over to your house in the middle of the night, hot wire your car and drive it off. So you could get up in the morning for work and find your car gone. They can even come to your place of employment and swipe your car. The worst part is they don't even have to let you know they're going to do it.

One way to avoid this is to keep your car locked in a garage or keep your eye on it 24 hours a day. The repo guy is forbidden by law from breaking into a locked garage or "breaching the peace." So if you are with your car when he comes to repo it, you can simply tell him to leave, for it is illegal for him to provoke a physical confrontation or take it against your will while you are there trying to prevent it.

Once the creditor has repod your car, it then has the right to sell it at an auction. If the auction doesn't bring enough to cover the debt owed on the auto, which is usually the case, then the creditor can sue you for the difference (the "deficiency balance"). So you may find yourself in the rather unenviable position of having no car but still owing a debt on it. Making it even worse, the damage that the repossession has caused to your credit may make it impossible to finance another car, at least under any reasonable terms.

So, how can bankruptcy help?

If you file a Chapter 7 Bankruptcy, you will not get the vehicle back. What you will accomplish, however, is that you will be able to eliminate the balance still owed on the auto. So whatever the creditor gets at auction will be it. They will not be able to pursue you for that "deficiency balance." That balance will also be erased from your credit report, making it easier for you to finance another vehicle in the future.

If you want the repossessed vehicle back, you will need to file a Chapter 13 Bankruptcy and you will need to file before the auto is sold at auction. If you wait until after it is sold, then it will be too late. In most cases, filing a Chapter 13 Bankruptcy after the repossession but before the re-sale of the auto will allow you to get it back. The reason for this is that by law, until your auto is re-sold you still have an ownership interest in it and the Bankruptcy Code provides that property of yours that has been seized by a creditor prior to Bankruptcy must be returned to you if you file Chapter 13. If the creditor refuses to return the property voluntarily after you have filed, then your attorney can file a Complaint for turnover of the property against the creditor. If the creditor contests the turnover, you may have to convince the Judge that you now have the ability to pay for the automobile through your Chapter 13 plan. You will also have to prove that the vehicle is fully insured.

So, if your automobile has been repossessed, make sure that you immediately contact a qualified, experienced bankruptcy attorney to help you review your options. Remember, time is of the essence in these situations, so you need to act quickly.