Lawrence & Associates remains open during the coronavirus emergency declaration. Although all our personnel are working from home, we are able to do all client meetings, court hearings, depositions, and mediations by phone or videoconferencing. This includes free, confidential consultations for new clients. Click here to watch our video on how we help clients during the COVID-19 Pandemic.
The short answer is, “No, you’ll almost certainly get to keep the money if you have a good attorney.” After all, that’s what we do – find the loopholes and use them to your benefit. The long answer is a little more complex. First, the CARES Act makes it clear that the stimulus check can’t be counted toward income in a bankruptcy. Therefore, if you’re an existing Chapter 13 client, the Chapter 13 Trustee can’t demand that you turn the money over. The Eastern District of Kentucky Trustee says so in her blog. Because the CARES stimulus check is not a part of your income, it can’t prevent you from filing a Chapter 7. Further, it can’t increase your disposable monthly income (DMI), which is one of the factors that sets your Chapter 13 payment.
The bigger problem is that nothing in the CARES Act says the stimulus payment can’t be property of the bankruptcy estate. It doesn’t say it can be, either. Instead, it’s silent. The “bankruptcy estate” is made up of all your assets on the date you file, include payments you expect to get shortly after filing even if you haven’t gotten them yet. If you filed bankruptcy before March 27, 2020, you don’t have a problem. You can’t expect to get a payment because of a law that didn’t exist yet. But if you filed on that date or after, that’s where things get troubling. The U.S. Trustee Program has explicitly told Trustees that “Regardless of whether the rebate is property of the estate, the United States Trustee expects that it is highly unlikely that the trustee would administer the payment after consideration of all relevant circumstances….” The word “administer” in that sentence means “take the payment away from the person filing bankruptcy”. That’s a strong statement and the underlining is in the original document. But it doesn’t outright prohibit a Trustee from taking the cash and some Trustees are more aggressive than others. Therefore, your best bet to keep the money is to make sure you exempt it. In most states and for those in which federal exemptions apply, that means using your precious Wildcard Exemption, which is used for everything from the cash you have in the bank to your second car. Artfully using the rest of your exemptions to keep as much Wildcard available as possible is essential, and that’s often where great attorneys are separated from those that shouldn’t be dabbling in bankruptcy law.
If you’re a DIY bankruptcy filer – which I don’t recommend – the actual language of the portion of the CARES Act that lays the foundation for all this is printed below. If you have other questions or know someone that needs to file bankruptcy right now, our doors are (virtually) open and we’re getting things filed quickly using Zoom, Google Duo, and the old fashioned fax and telephone. Good luck out there!
SEC. 1113. BANKRUPTCY.
(a) Small Business Debtor Reorganization.—
(1) IN GENERAL.—Section 1182(1) of title 11, United States Code, is amended to read as follows:
“(1) DEBTOR.—The term ‘debtor’—
“(A) subject to subparagraph (B), means a person engaged in commercial or business activities (including any affiliate of such person that is also a debtor under this title and excluding a person whose primary activity is the business of owning single asset real estate) that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition or the date of the order for relief in an amount not more than $7,500,000 (excluding debts owed to 1 or more affiliates or insiders) not less than 50 percent of which arose from the commercial or business activities of the debtor; and
“(B) does not include—
“(i) any member of a group of affiliated debtors that has aggregate noncontingent liquidated secured and unsecured debts in an amount greater than $7,500,000 (excluding debt owed to 1 or more affiliates or insiders);
“(ii) any debtor that is a corporation subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)); or
“(iii) any debtor that is an affiliate of an issuer, as defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c).”.
Hiring a bankruptcy attorney can be expensive. Although Lawrence & Associates doesn’t charge any upfront fees for a Chapter 13 bankruptcy, many other Northern Kentucky* law firms charge up to two thousand dollars before the bankruptcy is filed. All law firms charge the court’s filing fees and any costs related to credit counseling or credit reports up front, and these expenses generally run in the range of $350, depending on the number of people filing bankruptcy. And Chapter 7 bankruptcies always have fees that must be paid up front, before the bankruptcy is filed. For Lawrence & Associates, a Chapter 7’s fees and costs are generally around $1,350 depending on the number of people filing bankruptcy. (This includes the court’s filing fee and the cost of pulling a credit report.) Again, other Greater Cincinnati law firms charge a wide range of fees that can go as high as $3,000. Other kinds of bankruptcy can be even more expensive.
So what does the bankruptcy attorney do to justify these fees? When you are shopping between local law firms and deciding who you should hire, how can you compare what services are being offered to know whether your hundreds or thousands of dollars are being wisely spent? We’ve recently written articles that give potential clients tips about how to choose an attorney based on reviews, history with the bar association, membership in attorney organizations, and the attorney’s actions at the consultation. This article will discuss the various, generally reoccurring parts of a bankruptcy attorney’s job to give some insight as to how attorneys earn their keep.
Pre-Filing Work – Gathering Documents and Filling out Schedules
I often tell my clients that 90% of bankruptcy work is preparing things to be filed correctly. If a bankruptcy is well prepared, it leads to far easier hearings and often a quicker resolution for the client. If a bankruptcy is poorly prepared, it can lead to seizure of the client’s assets, failure to discharge some debts, or even allegations of bankruptcy fraud. Attorneys earn their fee before the bankruptcy is even filed, even if that is not where the majority of their time is spent.
There is a long list of documents that Lawrence & Associates’ clients are asked to gather before the bankruptcy is filed. Many of these documents are inaccessible to anyone but the client, or getting a copy of the document would take far longer for the attorney than it would for the client. They include copies of:
Driver’s License and Social Security Card
Credit Counseling Course Certificate
List of Creditors Not on the Credit Report
Six Months’ Bank Statements
Six Months’ Proof of Income for the Household
Recorded Deed, Mortgage, and PVA Value for any Real Property
Certificate or Memorandum of Title for any Vehicles
Proof of Insurance for any Vehicles
Two Years’ Tax Returns
Life Insurance Policies
Divorce, Child Support, or Child Custody Orders/Agreements
Each of these documents plays an important role in preparing for the bankruptcy. Each must be provided to the Trustee within seven days after the bankruptcy is filed, so it is crucial that the attorney gather them ahead of time. It is important for the attorney to not only review these documents and use them to prepare the bankruptcy forms and schedules, but also to understand how the information within them can affect the bankruptcy filing. The bankruptcy rules are formed by Section 11 of the United States Code, and those rules fit together to form the best bankruptcy possible for our client. Knowing how to fit the rules together is often like trying to make a puzzle when you know you have all the pieces, but don’t know what the eventual picture should look like. Again, this is where the attorney earns his or her keep!
At Lawrence & Associates, we recently joined the 21st Century and set up a portal for our clients to use when submitting paperwork and other information about their bankruptcy. Many attorneys still have clients schedule one or more appointments during business hours to come into the office to provide this paperwork and information. We decided that, since most of our clients are working and struggling to make ends meet, it was harmful to ask them to take time out of their workday for a function that could be performed outside normal business hours if it was done online. For clients who are not comfortable using the online portal, we still schedule face-to-face appointments in the office. In addition, we are willing to do consultations either over-the-phone or face-to-face.
After the bankruptcy paperwork is prepared, all bankruptcy attorneys must have a face-to-face appointment to sign all the bankruptcy documents and file them with the court. This meeting is mandated by the bankruptcy rules. During this meeting, the bankruptcy attorney should fully explain what is in all the documents, what will happen after the bankruptcy is filed, and what effect they expect the bankruptcy to have on your assets, debts, and credit score. Expect this meeting to take from one to three hours, depending on the complexity of the bankruptcy.
The 341 Creditors’ Hearing, the Confirmation Hearing, and other Court Hearings
All bankruptcies have at least one hearing, called a 341 hearing or creditors’ hearing, and this is often the most nerve wracking part for the client. However, it is nothing to worry about if the bankruptcy has been well-prepared! These hearings are typically scheduled for a ten to fifteen minute period of time, and a month’s notice is given prior to the hearing so everyone can take off work. At the hearing, the client will be placed under oath, but all the questions are generally simple confirmations of the client’s asset and debt situation – “Is it true the 2013 Camry is the only car you own?” – or canned questions that are asked of everyone regardless of their situation – “Have you lived in Kentucky for the last two years?” It is common at these hearings for the Trustee to tell the attorney that he or she would like to see more documentation, or would like to see a change in the bankruptcy filing. Such requests are generally easy to accomplish, and have a minor effect (or even no effect) on the bankruptcy itself. It is the attorney’s job to comply with the Trustee’s requests.
Chapter 13 bankruptcies also have confirmation hearings, but it is very rare that a client would have to attend one of those. In fact, in Northern Kentucky it is very rare for the confirmation hearing to have to occur at all! Generally, good communication between the attorney and the Trustee eliminates the need for this hearing.
Finally, there may be many more hearings for a bankruptcy depending on whether additional issues arise. Such hearings are uncommon in Chapter 7 bankruptcies, but common in Chapter 13 bankruptcies. Such hearings may arise when creditors object to confirmation or discharge, when our client has to object to a creditor’s fraudulent proof of claim, or when our client needs to temporarily suspend plan payments. It is the bankruptcy attorney’s duty to represent the client at all such hearings, even if they occur months or years after the fee is paid. Particularly for Chapter 13 clients, several years may go by between hearings. Chapter 13 clients should never worry about being charged by their attorney for calling with simple questions about their bankruptcy payment.
In all hearings, it is wise to have an experienced bankruptcy attorney who files a lot of claims. Knowing the bankruptcy rules is one part of successfully navigating bankruptcy hearings, but knowing the Trustee is just as important! Chapter 7 and Chapter 13 Trustees have their own viewpoints on what is reasonable and what is not, on how laws should be interpreted, and on what is best practice in bankruptcy cases. By knowing the Trustee’s proclivities, the attorney can simplify and speed up the bankruptcy, and can often maximize the amount of income the client can keep (in a Chapter 13) or the number of assets the client can keep (in a Chapter 7).
If you have any other questions about what a bankruptcy attorney should be doing for you, please call our Fort Mitchell, Kentucky office at 859-371-5997. We are one of the largest bankruptcy filers in Northern Kentucky and we have helped over 3,000 clients. We’re Working Hard for the Working Class, and we want to help you!
*Northern Kentucky includes the following counties: Boone, Kenton, Campbell, Gallatin, Grant, Pendleton, Bracken, Mason, and Robertson. Each of these counties reports to the federal court in Covington.
The following post is part of our Law Student Blog Writing Project, and is authored by Jennifer Tressler, who is pursuing her Juris Doctorate at The Ohio State University Moritz College of Law.
Seeing medical bills pile up is one of the most stressful and overwhelming experiences a family can go through, particularly when being able to pay for them seems to be a far-off dream unable to be reached in this lifetime. Sometimes, the only thing that seems feasible is declaring bankruptcy. If this sounds like you, do not worry! You are not alone.
Although courts do not require individuals declaring bankruptcy to disclose their reasons for doing so, research shows us that medical bills are the single largest cause of personal bankruptcy, accounting for between fifty and sixty-two percent of all personal bankruptcy filings. This is unsurprising when considering that medical bills often come on suddenly, can be unexpected, and are often very large amounts of money that insurance does not always cover. [Ed. Note: In Northern Kentucky, most medical treatment is provided by St. Elizabeth hospital or one of its subsidiaries. The article below applies to St. Elizabeth and all its subsidiaries, regardless of whether St. Elizabeth has filed a lawsuit against you!]
When filing for bankruptcy, a consumer’s debt is separated into multiple categories. This is because only certain debts can be eliminated through bankruptcy. Fortunately, medical debt is one of them! During bankruptcy, medical debt is considered general, unsecured debt, just like credit cards. This means that medical bills receive no priority treatment during bankruptcy and are able to be wiped out during bankruptcy filing. Depending on what type of bankruptcy a consumer qualifies for and which type of bankruptcy is in his or her best interests, he or she may be able to eliminate financial obligations for medical bills through filing for either Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 bankruptcy is more common than Chapter 13. If a consumer qualifies for Chapter 7 bankruptcy, medical bills, along with all other general, unsecured debt, will be eliminated. There is no limit to the amount of medical debt that can be discharged in Chapter 7 bankruptcy. Any medical bills paid for by credit card will also be discharged. However, in order to qualify for a Chapter 7 bankruptcy, a consumer’s disposable income must be low enough to pass a means test.
The means test is intended to disqualify people with too high of income levels from filing for Chapter 7 bankruptcy. The test calculates whether or not a consumer has the means to pay back a portion of what is owed to creditors. It compares a consumer’s average monthly income for the six months prior to filing for bankruptcy against the median income of the state the consume is domiciled in while factoring in the consumer’s expenses as well as the national and local standards for living expenses. The test takes this information and determines whether a consumer has any disposable income left over with which to pay creditors.
A simple way to determine if you pass the means test is to figure out if your income is above or below your state’s median income for households which are the same size as your own. If your average income for the six months prior to filing for bankruptcy was below the median, you automatically pass the means test and qualify for Chapter 7 bankruptcy and do not need to fill out the rest of the means test. If your average income for the six months prior to filing for bankruptcy was above the median, you do not automatically pass the means test. However, this does not mean you have failed; it simply means you must complete the rest of the test, which requires more information about your expenses.
When filling out the means test, you are required to use IRS standard expense figures (which can be found here) for Northern Kentucky for certain living expenses, even if your actual expenses are higher than the allowed standards. However, actual expense figures are allowed for other expenses such as mortgage, car payments, taxes, health insurance, and child care. Speaking to an attorney can help you figure out the best way to determine if you can pass the means test.
If you do not pass the means test, you cannot file for Chapter 7 bankruptcy. You still may be able to file for a Chapter 13 bankruptcy, which is more complicated than a Chapter 7, but this means that you will likely have to pay back a portion of your debts.
In Chapter 13 bankruptcy, medical bills are categorized with other general, unsecured debts in a consumer’s repayment plan. The amount a consumer must pay general, unsecured creditors depends on income, expenses, and nonexempt assets. Each creditor receives a proportional (“pro rata”) portion of the total amount going towards the debts in the repayment plan. However, consumers can possibly have debt that is too high for a Chapter 13 bankruptcy.
Unsecured debt does not have property or other assets serving as collateral for its payment. Most consumer debt is unsecured. Chapter 13 bankruptcy is only available for consumers who have less than $394,725 total in unsecured debts, though this number changes periodically. Unfortunately, many of the people with debt higher than this cap are people with substantial medical bills. In addition to the unsecured debt limit, consumers must also not have secured debt (debt which has property attached to it as collateral) above $1,184,200 as of April 2016. This most commonly includes mortgages. More often, consumers do not meet the secured debt limit rather than the unsecured debt limit.
Chapter 13 bankruptcy is an option that allows consumers to retain property that they would otherwise lose in a Chapter 7 bankruptcy. What debts are repaid, how much is paid each month, and what happens to debts at the end of a three to five year period is all laid out in a Chapter 13 repayment plan. Though the process of filing for bankruptcy may seem overwhelming, it can help to relieve some of the debt that individuals are struggling to keep up with from harsh medical bills and lack of insurance.
If you are overwhelmed by mounting debt and tired of receiving harassing phone calls from creditors, contact Lawrence & Associates today. We’ve helped hundreds of people overwhelmed with mountains of medical bills, and we can help you obtain that fresh start that you deserve! Call today for a free consultation at (859)371.5997. We’re Working Hard for the Working Class, and we want to help you!
On December 1, 2017, a series of new Federal and EDKY bankruptcy rules went into effect. Most of these changes are procedural and will not have a direct impact on a clients’ eligibility or decision to file one chapter of bankruptcy over another. However, these changes must be carefully considered and implemented by counsel to ensure clients’ plans are confirmable and successful.
The changes will be applicable to all cases filed on or after December 1, 2017 but shall also be applied to pending cases where appropriate. While vague, the governing rule means that most likely, none of the amended rules regarding deadlines will apply to cases filed prior to December 1, 2017, but the use of new forms and service of process should be implemented into any case immediately.
The new rules that will have the largest impact on greatest number of debtors include:
Rule 3002: The Bar Date
The bar date for non-governmental units, including secured and unsecured creditors, is now reduced to 70 days from the date of the petition. Debtors’ counsel has a duty to ensure that secured proofs of claim are filed in order to protect their secured assets and therefore this much shorter deadline should be monitored closely.
Rule 3007: Objection of Claims
Under the new rules, Debtors’ counsel must follow substantially different guidelines in order to object to a filed claim. The Objection itself must be accompanied by a Notice of Objection to Claim which conforms to Official Form 420B. The objection must be mailed to the person and address listed on the proof of claim.
Rule 3012: Valuation of Claims
Requests for valuation of secured claims may be made by motion, in a claim objection, or in a Chapter 13 plan unless the creditor is a governmental unit. If the creditor is a governmental unit, the request for valuation can only be made by motion following the bar date or claim or through a claim objection. To comply with this Rule, Debtor’s counsel must careful monitor claims and the new, shorter bar date. If any claim is valued in the plan and the creditor fails to file an objection, confirmation will make such valuation binding. Most importantly, Rule 3012 now requires such creditors to be served in such a manner under Rule 7004; this applies to service of the Chapter 13 plan, a Motion for valuation, or a claim objection requesting valuation.
Form 3015-4(b): Adequate Protection
Previously, Adequate Protection payments could be established through the Chapter 13 Plan. Now, a Debtor must file and serve and order for adequate protection with the plan using Local Form 3015-4(b). However, filing an Agreed Order with a creditor after the initial filing can also serve this purpose.
New Local Forms:
There are now established Local Forms (Local Forms 4001-3-1 and 4001-3-2) for a motion and order to obtain credit to purchase a vehicle post-confirmation.
Additionally, avoidance of judicial and non-PMSI liens can now be accomplished through the Chapter 13 plan or by Motion. Local Forms 4003-2(a) and 4003-2(c) are orders that can be recorded with the county clerk to conveniently compel the release of such liens.
The December 1, 2017 changes to the Bankruptcy code, and specifically, Chapter 13 procedures, require debtors’ counsel to careful monitor filed claims and shorter timelines. With the correct routines and procedures put in place in everyday practice, these changes can be implemented easily and prove extremely beneficial to consumer debtors.
Posted on Tuesday, February 27th, 2018 at 11:13 am
The following post is part of our Law Student Blog Writing Project, and is authored by Thomas Rovito, who is pursuing his Juris Doctorate at the Ohio State University.
One of the few things more frightening than end of term finals for students is crushing loan debt after undertaking an educational degree. But fear not. There are several bankruptcy discharge options for federal student loans, which may be altered by the type of bankruptcy, such as Chapter 7 or Chapter 13, or if the student has a specific level of disability.
It is important at the forefront to look at the underlying statistics behind student loan debt discharge through bankruptcy for a realistic assessment. According to empirical research from the American Bankruptcy Law Journal, while “only 0.1 percent of student loan debtors who have filed for bankruptcy attempt to discharge their student loans,” the sample recorded in the journal also noted 39 percent discharged some of their student loan debt. But what legal mechanisms create these underlying statistics?
The first decision is whether to file bankruptcy under Chapter 7 (Liquidation) or Chapter 13 (Reorganization). As most government funded or guaranteed educational loans are non-dischargeable upon filing for bankruptcy, this status places an additional onus on the debtor to commence an adversary proceeding against the loan holder in bankruptcy court. See 11 U.S.C. § 523(a)(8).
The standard to discharge a debt is to display “undue hardship” before the bankruptcy court under the Brunner test. See Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987). This test, which has been accepted by most circuit courts, analyzes the facts of the case under the totality of the circumstances through three prongs: first, that payments on the student loan debt would cause the debtor to fall below a minimal standard of living, second, that persistent special circumstances prevent the debtor from paying off the loan, and third, that the debtor made good faith efforts to pay off the loan before filing for bankruptcy. As this test is relatively elastic, the outcome of the analysis will depend on the particular bankruptcy judge hearing the case and the underlying facts presented by debtor. If the bankruptcy court issues a discharge for the student loan debt, the discharge may be either partial or total; the court also has the authority to modify the interest rate for the student loan. If the bankruptcy court refuses to issue a discharge, the debtor may try to switch to a different repayment plan more consistent with the revenue and expenditures of the debtor.
One persistent special circumstance that materially impacts the bankruptcy discharge is a total and permanent disability discharge (TPD). TPD applies to William D. Ford Federal Direct Loans, Federal Family Education Loan Program Loans, and Federal Perkins Loan Program Loans. A debtor may prove disability to the U.S. Department of Education in one of three ways: veterans may submit paperwork from the U.S. Department of Veterans Affairs articulating unemployability from a service-related disability, recipients of Social Security Disability Insurance or Supplemental Security Income may submit paperwork from the Social Security Administration, or the debtor’s physician can submit paperwork that attests that the debtor is totally and permanently disabled. To view the TPD certification process, please consult https://www.disabilitydischarge.com/. If the U.S. Department of Education (through the Nelnet Total and Permanent Disability Servicer) finds a TPD, then they will instruct the loan collector to cease collection activities and return any payments after the finding of disability; on the other hand, if the U.S. Department of education does not find a TPD, then they will allow the loan collect to resume collection activities.
In the event a debtor obtains a TPD discharge, then they can no longer qualify for a Direct Loan, Perkins Loan, or TEACH Grant, unless the debtor “obtain[s] a certification from a physician that you are able to engage in substantial gainful activity,” and the debtor fills out a form “acknowledging that the new loan or TEACH Grant service obligation cannot be discharged in the future on the basis of any injury or illness present at the time the new loan or TEACH Grant is made, unless your condition substantially deteriorates so that you are again totally and permanently disabled.”
In addition, if the debtor was granted a TPD discharge through the filing of Social Security Administration paperwork or by the debtor’s physician (rather than through the U.S. Department of Veterans Affairs), the debtor will be subject to a three year monitoring period from the U.S. Department of Education, in which the former debtor must respond to inquiries from the U.S. Department of Education or provide notice to the U.S. Department of Education regarding earning thresholds, changes in address, and changes in status. If the former debtor fails to comply with these monitoring requirements, the debtor’s former student loan may be subject to reinstatement.
However, going through the TPD discharge process without also receiving a bankruptcy discharge on a student loan debt can raise tax implications. The U.S. Department of Education will send notice of any discharge of more than $600.00 to the Internal Revenue Service. The U.S. Department of Education will then send an IRS Form 1099-C to the former debtor recording the total amount of the discharge, which is considered as income for federal taxes (and for some states). However, the student loan bankruptcy process will not raise secondary taxation concerns, since a bankrupt debt cannot result in taxation for the forgiveness of a loan. By definition, bankrupt debts are not forgiven.
Thus, bankruptcy through Chapter 7 or Chapter 13 provides one possible avenue for discharging student loan debt through an adversary proceeding in which the bankruptcy court will likely apply the totality of the circumstances. In addition, a finding of Total and Permanent Disability also provides another avenue for student loan debt relief. It is also important to consider non-bankruptcy alternatives for student loan debt relief, such as repayment options, deferments, forbearance, forgiveness, cancellation, consolidation, or rehabilitation, which may preserve the debtor’s credit rating.
For more information, consult one of the experienced attorneys at Lawrence & Associates when choosing your path forward on discharging student loan debt. We’re Working Hard for the Working Class, and we want to help you!
Posted on Thursday, February 22nd, 2018 at 2:38 pm
Bankruptcy Trustees come in several flavors. The Covington Division of Kentucky’s federal bankruptcy courts alone have three Chapter 7 bankruptcy trustees, one Chapter 13 bankruptcy trustee, a United States Trustee, and occasional special trustees that might be appointed to oversee especially complex cases or cases in which other trustees might have a conflict of interest. Covington’s bankruptcy court covers all of Northern Kentucky*, but does not cover Cincinnati, Ohio, or the counties around Lexington or Louisville. There are a lot of bankruptcy trustees out there!
For this article’s purposes, we are concerned only with the Chapter 7 and Chapter 13 bankruptcy trustees in the Covington Division. Knowing how these trustees are paid, and how they are incentivized, can greatly affect whether you decide to file a Chapter 7 or a Chapter 13 bankruptcy.
Chapter 7 Trustees Get Paid Either Very Little, or a Whole Lot
When a Chapter 7 filed, the Covington Division charges a $335.00 fee as of January 2018. All Northern Kentucky based Chapter 7 Trustees make a flat fee of $75.00 from that filing fee. Chapter 7 bankruptcies are divided into two kinds of cases: “no asset” bankruptcies, and “asset” bankruptcies. In a no asset Chapter 7 bankruptcy, the debtor’s personal property is protected by property exemptions that protect those assets from seizure by the Trustee. This means the debtor’s property is safe, and the Trustee is stuck with only a $75.00 fee for all his or her work.
Chapter 7 bankruptcies with assets are where the question of fees gets interesting. While the filing fee and the flat fee described above remain the same, the Trustee can also get paid a percentage of any assets seized from the debtor. Hearing about assets getting seized sounds scary, but remember that a good bankruptcy attorney will be able to tell you before you file that no assets will get seized. The Trustee’s allowed compensation on seized assets is set forth in federal law, and the Trustee is paid in a stair step method as follows:
The Trustee is paid 25% up to the first $5,000;
The Trustee is then paid 10% on any amount in excess of $5,000 but not in excess of $50,000;
The Trustee is then paid 5% on any amount in excess of $50,000 but not in excess of $1,000,000, and;
The Trustee is then paid “reasonable compensation” not to exceed 3% on any amount in excess of $1,000,000.
Let’s assume the debtor in a Chapter 7 bankruptcy has two cars, but can only protect one using the property exemptions. The Trustee will take possession of the other car, and sell it. If the car sells for $20,000.00, the Trustee will get paid 25% of the first $5,000.00 (which is $1,250.00), and then 10% of the next $15,000.00 (which is $1,500.00). That adds up to $2,750.00 of fee for the Trustee, and the remainder of the car’s sale price goes to the bankruptcy’s unsecured creditors.
Notice that the fee schedule for Chapter 7 Trustees has no maximum on the amount that a Trustee can earn. Therefore, anyone with a large, seize-able asset might wind up paying a Chapter 7 Trustee very richly indeed. The types of things that can be considered a seize-able asset might surprise you. We’ve written before about how a personal injury lawsuit can be considered a bankruptcy’s asset, and how a large verdict or settlement designed to compensate a badly injured person can wind up being partially drained by the Trustee’s fee. Chapter 7 Trustees used to be held to a “reasonableness standard” – i.e. any fee they take had to be reasonable, even if the fee schedule mathematically produced a higher result. However, at least Covington based Chapter 7 Trustee has argued that he should no longer be required to take only reasonable fees. If that view holds out, a Trustee’s fees could run into the tens or hundreds of thousands of dollars.
For most people reading this article, a Chapter 7 bankruptcy will cost $335.00 in fees, and that is it. The Trustee will be paid out of that. But make sure – absolutely sure – that your attorney has confirmed no assets can be seized, or you could wind up paying the Trustee a lot of extra money out of your own pocket.
Chapter 13 Trustees Are Paid Out of the Monthly Payments into the Bankruptcy
Chapter 13 Trustees are also paid according to federal law, and unlike Chapter 7 Trustees, their fees are far more consistent. Every Chapter 13 bankruptcy is an “asset” bankruptcy, because the main reasons people file Chapter 13 bankruptcies is to stop foreclosures, stop repossessions, or because they have high income. Therefore, you don’t see the wide variation in fees earned that you see for Chapter 7 Trustees.
A Chapter 13 Trustee’s fee is a percentage on all payments made into the Chapter 13 plan, and that percentage is set by the U.S. Attorney General’s office. The Trustee cannot deviate from that percentage, and is therefore incentivized to make sure the payments into the plan are the maximum allowed by law. Conversely, a good Chapter 13 bankruptcy attorney will attempt to make a Chapter 13 plan payment the minimum required by law.
The Chapter 13 Trustee for the Covington division of Kentucky’s bankruptcy courts is the Chapter 13 Trustee for the entire eastern half of the state. As of January 2018, that Trustee is will only approve Chapter 13 plans if the plan payments calculate an 8% payment to the Trustee on all payments into the plan. While we cannot say for certain that the Trustee actually takes the 8% fee, that is the best guideline we have as to the percentage taken by the Trustee.
Therefore, if a Chapter 13 Plan requires 36 months of payments in the amount of $400.00 each month, that is a total of $14,400.00 in payments over three years. Of that $14,400.00, we can expect the Chapter 13 Trustee to take a fee of about $1,152.00, with the remainder going to various creditors. Again, the amount of the monthly plan payment is subject to a lot of factors, and a good attorney often finds it necessary to look at everything from your mortgages to your credit card statements to find the exact amount. But once that amount is set, so too is the Chapter 13 Trustee’s fee.
If you have any other questions about this topic, please call our Fort Mitchell, Kentucky office at 859-371-5997. We are one of the largest bankruptcy filers in Northern Kentucky and we have helped over 3,000 clients. We’re Working Hard for the Working Class, and we want to help you!
*Northern Kentucky includes the following counties: Boone, Kenton, Campbell, Gallatin, Grant, Pendleton, Bracken, Mason, and Robertson. Each of these counties reports to the federal court in Covington.
Posted on Tuesday, February 13th, 2018 at 11:48 am
The following post is part of our Law Student Blog Writing Project, and is authored by Thomas Rovito, who is pursuing his Juris Doctorate at the Ohio State University.
The bankruptcy process is designed to provide debtors with relief from their creditors through a structured legal process. As such, the law provides recourse for debtors from creditor harassment upon petitioning for bankruptcy. Some frequently asked questions regarding creditor harassment and the bankruptcy legal process, which this blog post will answer in turn, include:
Why do creditors have to stop harassing me?
What is an automatic stay?
What happens if a creditor does not obey automatic stay?
What is an adversary action?
When does a discharging junction kick in?
First, creditors may never illegally harass debtors. The Fair Debt Collection Practices Act (FDCPA), enforced by the Federal Trade Commission (FTC), the Consumer Financial Protection Bureau (CFPB) and the debtor’s State Attorney General’s Office, provides baseline protections for all debtors from illegal creditor harassment. The FDCPA defines illegal creditor harassment as “any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt,” such as threats of violence, obscene language, publishing a list of debtors, advertising the sale of a debt to coerce payment, engaging in repeated telephone conversations with the intent to annoy, abuse, or harass, and placing telephone calls without revealing the creditor’s identity under 15 U.S.C. § 1692d. In addition, creditors are prohibited from using “any false, deceptive, or misleading representation or means in connection with the collection of any debt” under 15 U.S.C. § 1692e, and from using “unfair or unconscionable means to collect or attempt to collect any debt” under 15 U.S.C. § 1692f. Therefore, the FDCPA provides a baseline of protections for debtors.
Second, once a debtor files for bankruptcy, the debtor is entitled to expanded protections from creditors through an automatic stay. An automatic stay is “[a]n injunction that automatically stops lawsuits, foreclosures, garnishments, and all collection activity against the debtor the moment a bankruptcy petition is filed.” See 11 U.S.C. § 362. This section specifically includes “any act to collect, assess, or recover a claim against the debtor” in 11 U.S.C. § 362(a)(6). Thus, the automatic stay provides a raised level of protection after a debtor files for bankruptcy.
Third, a creditor may face legal recourse if the creditor does not obey an automatic stay after receiving notice upon the filing of bankruptcy. If a creditor willfully violates a provision of a stay, then the creditor may be liable for actual damages, costs, attorney’s fees, and “in appropriate circumstances,” even large-sum punitive damages through 11 U.S.C. § 362(k)(1). In addition, the bankruptcy court is empowered to impose contempt sanctions against the creditor under 11 U.S.C. § 105(a). In the Covington division of the Eastern District of Kentucky Bankruptcy court system, creditors have been sanctioned (i.e. fined) steeply for violating the automatic stay. Ultimately, bankruptcy law provides potent legal recourses to deter creditors from violating an automatic stay.
Fourth, an adversary action, or proceeding, is a “lawsuit arising in or related to a bankruptcy case that is commenced by filing a complaint with the court.” An illustrative, but not exclusive, list of adversary proceedings is included in Fed. R. Bankr. P. 7001. An adversary proceeding is relevant here, because once a creditor obtains notice of the debtor’s bankruptcy petition, the creditor may file a complaint to object to the discharge of a debt, which triggers the adversary proceeding. A discharge may be denied under 11 U.S.C. 727(a) for a host of reasons, such as:
[A] failure to provide requested tax documents; failure to complete a course on personal financial management; transfer or concealment of property with intent to hinder, delay, or defraud creditors; destruction or concealment of books or records; perjury and other fraudulent acts; failure to account for the loss of assets; violation of a court order or an earlier discharge in an earlier case commenced within certain time frames . . . before the date the petition was filed.
If the adversary proceeding results in trial, the objecting party has the burden of proof. Thus, a creditor may challenge the discharge of a debt through an adversary action spun-off from the bankruptcy process.
Fifth, a discharging junction triggers differently for Chapter 7 (Liquidation) Bankruptcy or Chapter 13 (Adjustment of Debts of an Individual with Regular Income) Bankruptcy. In a Chapter 7 Bankruptcy case, “the court usually grants the discharge promptly on expiration of the time fixed for filing a complaint objecting to discharge and the time fixed for filing a motion to dismiss the case for substantial abuse (60 days following the first date set for the 341 meeting).” This often happens in about 120 days after the debtor files the initial petition for bankruptcy. On the other hand, a Chapter 13 Bankruptcy discharge occurs “as soon as practicable after the debtor completes all payments under the plan,” which may take three to five years. But what if a creditor pesters a debtor in a collection effort for a discharged debt? The debtor may “file a motion with the court, reporting the action and asking that the case be reopened to address the matter,” which courts “often” grant, because the discharge “constitutes a permanent statutory injunction prohibiting creditors from taking any action, including the filing of a lawsuit, designed to collect a discharged debt.” If the creditor violated this injunction, it may be subject to civil contempt resulting in a fine. Ultimately, the legal system provides recourse from creditor harassment after the close of bankruptcy proceedings.
Posted on Thursday, February 1st, 2018 at 10:05 am
Divorce can be an unfortunate situation for a married couple in endless ways and will almost always have a detrimental effect on the parties’ financial situations. Frequently, one or both individuals seeks relief from United States Bankruptcy Court for a Chapter 7 case after the conclusion of the divorce. Although the immediate stressors of the marriage and divorce lessen, the financial strain can be worse. By considering a joint Chapter 7 bankruptcy prior to the divorce, a couple can receive unexpected benefits that offer at least some small relief to an otherwise difficult situation.
The following pros and cons should be considered by individuals who find themselves facing financial hardships and potential divorce.
Cost and Time
With most attorneys, the cost of filing a bankruptcy is the same for an individual or married couple. By filing the bankruptcy jointly, a divorcing couple cuts the cost in half as well as the time and preparation involved. There will be one filing fee, one fee for attorney work time, one set of documents, one court hearing, etc.
Cooperation. Filing a joint Chapter 7 will require the divorcing couple to work together to ensure their attorney has all the necessary documents and will require that they attend at least a couple meetings and court hearings together.
Probably one of greatest benefits to filing a Chapter 7 case prior to divorcing is that all debt liability is wiped away for both Debtors on all applicable debts. Should the parties file after the conclusion of the divorce, the property settlement will typically trump a subsequent bankruptcy and could leave one of the individuals liable for the ex-spouse’s debts. For example, if the family court orders the husband to pay the wife’s credit card debt, he cannot avoid doing so by filing a Chapter 7 Bankruptcy after the fact. If the couple files a joint bankruptcy prior to the divorce, neither party has any such debt.
If one spouse chooses to file an individual bankruptcy prior to the divorce, the other spouse could be left liable for all the debt. This could be financially devastating and ultimately push that spouse to a bankruptcy anyway.
Filing a joint bankruptcy prior to divorce allows a couple to double the exemption limits. In a bankruptcy, a couple can have a certain amount of value in assets. Equity in a car or house can sometimes exceed the allowed exemption. By filing jointly and using a double exemption, the couple can better protect their assets through the bankruptcy.
The couple will ultimately still have to agree on the division of any such equity in their subsequent property settlement!
Filing a bankruptcy prior to the divorce will protect each individual’s divorce attorney from being listed as a creditor subject to discharge in a subsequent case. This is a pro for both attorneys and Debtors. Divorce attorneys are given the reassurance that they will be compensated for the work they do and Debtors will benefit from an attorney who is more willing to offer lower retainer fees and payment plans.
In applicable situations, family law attorneys would be wise to refer their clients to a local bankruptcy attorney for a consultation prior to the initiation of the divorce proceedings. Taking such action can offer tremendous benefits to the couple, can simplify the divorce case, and can provide protection for future legal work on the divorce case.
In contrast, individuals considering a Chapter 13 bankruptcy should seek to finalize their divorce first. A Chapter 13 typically lasts 3 – 5 years and is based heavily on household income, expenses, and secured debts that need to be paid. Couples who are in a Chapter 13 together prior to divorcing typically incur additional attorney fees to bifurcate the original case and put them in their own Chapter 13 cases.
Taxation is something few think about during most of the year, absent the occasional article in the paper or segment on the news concerning the potential for tax reform. However, during the latter portion of the year, particularly between the New Year Holiday and April 15, otherwise known as “Tax Day,” taxes are a topic that come to the forefront of most working Americans’ minds. Although most do not look forward to the prospect of “filing taxes,” many can expect a refund for the amount they have overpaid through the year. For those in the midst of bankruptcy, or considering filing for bankruptcy, a natural concern that arises is what may happen to their tax refund. Although everyone’s circumstances vary, and those that find themselves in this position should seek out legal counsel, this blog post aims to provide a general answer to that question.
Can One’s Tax Refund Be Protected During Bankruptcy, Or Is It Subject To Seizure?
When an individual files for bankruptcy in Northern Kentucky, the vast majority of that person’s assets (the “non-exempt” assets) become part of what is referred to as the “bankruptcy estate.” The “bankruptcy estate” is defined by the U.S. Bankruptcy Code in 11 U.S.C. § 541. Section 541 defines the estate in sweeping terms, and, under most circumstances, one’s tax refund will be considered part of the bankruptcy estate. Whether one’s tax refund becomes part of the bankruptcy estate depends on a variety of factors, including the timing of the filing of bankruptcy, the year in which the income for which the refund is given was earned, and under what Chapter of bankruptcy one files, as well as how one chooses to utilize their “exemptions.”
The best way by which to illustrate the above is by way of example. Hypothetically, if a “debtor” were to file Chapter 7 bankruptcy in January of 2017, and were to subsequently receive a refund for the 2016 tax year, then that money will become part of the bankruptcy estate. Many may find this result somewhat confusing, since the tax refund is received after filing for bankruptcy. The underlying reasoning is grounded upon the period of time in which the money was earned and paid to the IRS; since the money was earned, and taxes on that income were to paid to the IRS, prior to bankruptcy, then the money one receives in the form of a tax refund as the result of any overpayment in taxes is viewed as though it was received throughout the previous tax year, as opposed to after filing for bankruptcy. As one source puts it, the way in which the law views this scenario is somewhat analogous to a savings account – the money overpaid in taxes for the 2016 tax year is “saved” by the IRS, just as one would place funds in savings, and the subsequent tax refund is similar to a “withdrawal.” Thus, under this hypothetical situation, although the debtor does not, in reality, receive the funds until after filing for bankruptcy, the money was earned and taxes paid prior to the filing, and will therefore likely be swept into the bankruptcy estate.
Another example arises when one files for bankruptcy and receives a tax refund for the same year. The following facts are illustrious of this hypothetical scenario: debtor files for bankruptcy in June of 2017, and subsequently receives a tax refund for the 2017 tax year in April of 2018. The question arises: does the tax refund get swept into the bankruptcy estate, as was the result under the immediately preceding set of facts? The answer is “yes” and “no.”
Here, the tax refund will be divided into two separate and distinct groups, the first being that portion of the refund attributable to income earned prior to filing for bankruptcy, and the second being that portion attributable to money made after the filing. The first group (that portion of the tax refund that is based on income earned before filing) is subject to being swept into the bankruptcy estate, while the second group (that portion of the tax refund that is based on income earned subsequent to filing) will likely escape the clutches of the estate. In other words, the amount of the tax refund that is calculated based on income earned prior to June of 2017 will become part of the estate, while the amount attributable to income earned subsequent to June of 2017 may be protected.
Another example provides some clarity with respect to a third, commonly seen situation. Assume debtor files for bankruptcy in December of 2016, and later receives a tax refund for the 2017 tax year. The concern that immediately comes to mind is whether the 2017 tax refund will be protected, or whether it will be subject to seizure. Here, the debtor will most likely get to retain the full amount of the tax refund, because all the income upon which the taxes were assessed was earned subsequent to filing for bankruptcy. In other words, the entire amount of taxes overpaid for the 2017 tax year were paid after filing for bankruptcy, and would thus generally escape being swept into the bankruptcy estate.
A final wrinkle that may be a concern for some is what happens to their tax refund in the context of a Chapter 13, as opposed to a Chapter 7, bankruptcy. The answer is largely grounded in the legal ramifications associated with filing for one type of bankruptcy over the other. When a debtor files bankruptcy under Chapter 7, the bankruptcy trustee takes possession of all of the debtor’s non-exempt property and/or assets, liquidates them (hence the term often used to refer to Chapter 7 bankruptcies, “Chapter 7 Liquidation”), and distributes the cash to the debtor’s creditors. Generally speaking, after the liquidation and subsequent distribution occurs, the debtor is “discharged” of all debts incurred prior to the bankruptcy filing. Under Chapter 13, on the other hand, a debtor repays their debts through utilization of their income, and may retain some of their assets. The period of time in which a debtor makes payments toward their debts is often referred to as a “repayment plan,” and typically lasts three to five years. Once the repayment plan is completed, the debtor’s debts are “discharged.” However, the critical difference between Chapter 7 and Chapter 13 bankruptcies in the context of retention of one’s tax refunds is centered around what is called “disposable income.” To put it in very general, broad terms, under a Chapter 13 plan, one’s “necessary and reasonable” expenses (i.e., generally, those expenses required to live, including, but not necessarily limited to, food, clothing, shelter, etc.) are subtracted from their regular income, and the resulting figure is known as the debtor’s “disposable income.” Most often, when a debtor files a Chapter 13 bankruptcy, and files a repayment plan with the court, tax refunds are not considered in the debtor’s income, and is thus not utilized in calculating the debtor’s necessary and reasonable expenses and disposable income. Thus, when a Chapter 13 debtor receives a tax refund, the amount received is most often considered “disposable income,” since the repayment plan accounts for the debtor’s regular income, regular expenses, etc., but does not factor in the additional funds a debtor will receive when given a tax refund. To put it more simply, the tax refund is, in a way, considered “extra money,” money that the debtor does not need to pay for their “necessary and reasonable” expenses; therefore, it is considered “disposable income,” and will be used to pay the debtor’s debts during the course of the repayment plan. Generally speaking, unless there is some “necessary and reasonable” expense that has not been taken into account by the repayment plan, then the chances of a debtor retaining their tax refund throughout the repayment plan period in a Chapter 13 bankruptcy is slim.
Are There Other Ways One Can Protect Their Tax Refund In The Midst Of Bankruptcy? Can Tax Refunds Be Utilized For The Payment Of Legal Fees Rendered In Filing Bankruptcy?
Although options are varied, many facing bankruptcy may think of paying legal fees through utilization of one’s tax refund as a means of protecting their refund during bankruptcy. For those considering such an option, it should be noted that others have pursued the same means of protecting their tax refund in the past. To determine the feasibility of this option, the following case law will be discussed.
In In re Hunter, the United States Bankruptcy Court for the District of Kansas was faced with the question of whether the assignment of a debtor’s tax refunds to their attorney as a method by which to pay legal fees would be protected, or swept into the bankruptcy estate. The particular circumstances are as follows: the debtors executed an assignment, operation of which allowed for their attorney to receive the pre-petition portion of their tax refunds as a flat-fee retainer in exchange for legal services rendered in filing for Chapter 7 bankruptcy. The bankruptcy trustees moved the court for an order forcing the pre-petition portion of the debtors’ tax refunds into the bankruptcy estate.
In support of their motion, the trustees made three primary arguments. The first argument the trustees set forth was predicated on 11 U.S.C. § 544(a), which, generally, provides for the avoidance of “any transfer of property of the debtor or any obligation incurred” under certain circumstances. Those particular circumstances in this case, and from the point of view of the trustees, was that the debtors could not “assign what [was] an essentially undivided and unliquidated expectant interest based upon a notional ‘accrual’ date.” Secondly, the trustees argued that the “debtors [were] required to marshal away from that part of the refund to which the estate [was] entitled.” Finally, the trustees were of the view that assign that portion of their tax refund attributable to pre-petition earnings “‘burden[ed]’ the creditors by effectively forcing them to pay the debtor’s attorneys’ fees and that this burdensome effect render[ed] the assignments fraudulent transfers done for the purpose of hindering or delaying the debtors’ creditors.” The debtors, on the other hand, made one simple argument: “an assignment of pre-petition tax refunds for payment of a flat fee is no different than a debtor paying an attorney a flat fee in cash; the result in either event is that the payment does not become property of the estate,” they argued.
The court largely agreed with the debtors. The court looked to statutory and case law in reaching its conclusion, drawing upon 11 U.S.C. § 330(a)(1), United States Trustee v. Lamie, In re Wagers, and In re Carson. Drawing upon all the previously identified law, the court determined that a “flat-fee retainer assigned for work done incident to filing a chapter 7 does not become property of the estate”; rather, “the assignment of an anticipated tax refund as part of or all of a flat-fee retainer is enforceable against the estate, at least to the extent of the amount of the flat fee.” The court finally concluded: “the benefits . . . to the debtors and to their creditors of having chapter 7 debtors well represented to outweigh the relatively small detriment that these assignments may work on the creditors. The assignments of these debtors’ expectancy interests in their tax refunds, limited as they are by the amount of the flat fees owed and by the amount of the refund that would be determined attributable to the estate are valid and enforceable. They do not significantly differ from a cash retainer payment that depletes the debtor’s resources before she files a case. So long as the fees are not fraudulent or excessive, there is no basis for the Trustees to recover them.”
It is important to keep in mind that different courts are held and bound to differing rules of law, depending on the jurisdiction. Although the results reached in In re Hunter may seem encouraging, the results reached there are not necessarily applicable in other jurisdictions. As always, it is important to speak to counsel regarding one’s own personal circumstances before coming to any determinations on how best to proceed.
Editor’s note: In the Covington Division of the Eastern District of Kentucky Federal Court, where all Northern Kentucky bankruptcies are heard, the Court and Trustees regularly allow debtors to use their tax refunds to pay for the bankruptcy attorney’s fees.
Depending on a variety of factors, some of which have been discussed above, a debtor facing the possibility of filing bankruptcy may have some options when it comes to possible retention of their anticipated tax refunds. However, there are a wide array of considerations that must be kept in mind when discussing bankruptcy. Although this post has focused primarily on what many consider to be the most common types of individual, consumer bankruptcies (that is, Chapter 7 and Chapter 13), one may consider Chapter 11 under certain circumstances, as well. Another consideration that was not addressed here involves whether one even qualifies for Chapter 7, or would be pushed into a Chapter 13. Such a determination is based on many factors, one of which is referred to in the bankruptcy arena as the “Means Test.” These considerations are briefly mentioned here to illustrate that the general overview provided above is by no means exhaustive or authoritative, to simply demonstrate that everyone’s circumstances vary, and, depending upon those circumstances, one option may be more appealing than another. Ultimately, however, certain debtors may feel somewhat more comfortable traversing the obstacles of bankruptcy with the knowledge that they may be able to, in one way or another, protect an anticipated tax refund.
If you’re considering using your tax refund to file a bankruptcy, call Lawrence & Associates! We’ve been helping people in Northern Kentucky keep their tax refunds for more than a decade. We’re Working Hard for the Working Class, and we want to help you!
The following post is part of our Law Student Blog Writing Project, and is authored by Thomas Rovito, who is pursuing his Juris Doctorate at the Ohio State University.
How Holiday Credit Card Debt Could Impact Your Kentucky Bankruptcy
The consumer advocate news outlet NerdWallet estimates that the average American will spend $660 for holiday gift transactions. Two other statistics to note include that the number of Americans in credit card debt after the holiday season has been increasing, from 48% of shoppers in 2015 to 56% of shoppers in 2016, and that 27% of Americans did not have a holiday shopping budget in 2016; of those who did have a budget, 24% exceeded it. These statistics beg the question on what would happen if a shopper stocks up on Christmas presents using his credit card, and then subsequently files for bankruptcy. Will those retail store creditors turn into the Grinch and seek the return of gifts from family and friends, or would something else happen?
The answer is in the Bankruptcy Code. But before jumping headlong into the primary source material, secondary sources can provide guidance on this topic. For instance, the Administrative Office of the United States Courts has provided an overview of Bankruptcy Basics to introduce lay people to the topic. The Ohio State Bar Association and the Kentucky Bar Association both have pamphlets on bankruptcy. In addition, third-party sites, such as Findlaw and Nolo, have easy-to-use resources.
While the Bankruptcy Code is full of legal terms of art and abstract legal concepts, they can be broken down to individual and applicable ideas. For instance, there are six different forms of bankruptcy, but in most cases only Chapter 7Liquidation or Chapter 13Adjustment of Debts of an Individual with Regular Income would apply to individual consumers with credit card debt. In Chapter 7 bankruptcy, which is means-tested to prevent abuse, a trustee liquidates the debtor’s assets for cash to pay creditors, unless the specific piece of property is exempt, to give the debtor a fresh start. In Chapter 13 bankruptcy, a debtor may retain valuable assets, such as his home or vehicle, and structure payments to creditors in accordance with his income. Chapter 7 bankruptcy is typically quicker, taking about four months to obtain discharge, to Chapter 13’s duration of three to five years. All Northern Kentucky bankruptcies are filed in federal court in Covington, Kentucky.
The objective of the debtor should be to obtain a discharge, which “releases the debtor from personal liability for certain specified types of debts.” But not all debts are created equal. There is also a material difference between secured debt (“[d]ebt backed by a mortgage, pledge of collateral, or other lien; debt for which the creditor has the right to pursue specific pledged property upon default,”) and unsecured debt (“debt for which a creditor holds no special assurance of payment, such as a mortgage or lien; a debt for which credit was extended based solely upon the creditor’s assessment of the debtor’s future ability to pay”). For more information on this distinction, please refer to 11 U.S.C. § 506. While most credit card debt is unsecured, it is important to note that some credit card companies and department store cards retain a security interest, or purchase money security interest, within their contracting agreement with the consumer, often in the fine print of the bottom of the credit card agreement. This security interest would act like collateral on outstanding transactions, and would give the credit card company or department store the right to repossess the property if it was not paid in full. While most credit card debt is unsecured, larger luxury purchases such as televisions, are likely covered by a security interest, and can be repossessed.
So how do these concepts apply to a consumer who builds up debt during the holidays? First, the consumer should look at the distinction between secured and unsecured debt. If the consumer has secured debt, or debt with collateral, then potential creditors could attach the property (like a home, car, or improvements on a vehicle) in the event of default. On the other hand, If the consumer has unsecured debt, which is the category of most consumer credit card purchases, then the creditor cannot attach the assets in event of default; however, the creditor may use a debt collector to compel payment, report the failure to credit agencies–reducing the debtor’s credit score and increasing the cost of future loans, or go to court to garnish the wages of the debtor. In addition, the ultimate disposition of the debtor’s credit card issues would also depend on whether the credit card company or department store retained a security interest in the property; if so, there is the possibility the property could be repossessed.
There is a matter of timing for debts to be considered dischargeable. Under 11 U.S.C. § 523(a)(2)(C), “debts owed to a single creditor and aggregating more than $675 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable.” In plain English, this means that debts to a single company that add up to more than $675 for goods not necessary for the support of the debtor (for example, food, water, shelter), are presumed to allow the creditor to collect against the debtor. Thus, if you exceed more than $675 in holiday credit card debt on luxuries, and not essentials, it may impact future bankruptcy proceedings.
In addition, it is important to note that the bankruptcy court may deny discharge in a case if there are fraudulent conveyances, or an attempt to shift assets from the debtor to third-parties for the purpose of avoiding paying creditors. To learn more about this topic, please see 11 U.S.C. § 727; Fed. R. Bankr. P. 4005. In addition, the trustee of the estate or a creditor may petition the bankruptcy court to revoke a discharge “if the discharge was obtained through fraud by the debtor.” See 11 U.S.C. § 727(d).
Ultimately, a decision to file for bankruptcy is serious, as it may place your assets in jeopardy and drastically impact your credit rating. On the other hand, if it is structured correctly, bankruptcy can provide you with relief from creditors, especially after the holidays with consumer credit card debt, while preserving your most precious assets, such as your home or car. It is important to note the distinction between secured debt (secured by collateral) and unsecured debt (that is not secured by collateral) before engaging in holiday transactions, in addition to determining whether your credit card company retains any security interest in your transactions by reading the fine print of the credit card agreement. This information, when coupled with sound budgeting, fiscal discipline, and adequate financial disclosure, can make the difference between jingle bells or jingle blues this holiday season.
Lawrence & Associates has offices in West Chester, Ohio and Fort Mitchell, Kentucky. We’re Working Hard for the Working Class, and we want to help you!
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“I went to Lawrence & Associates with a problem and within 1 week Justin Lawrence had some money coming to me that was rightfully mine. And soon after that he...”