There are a few basics everyone needs to know if you are considering a bankruptcy filing under Chapter 7 or 13 in Kentucky. First, plan on taking credit counseling before you file and a debtor education course after you file. Next, learn about the means test which allows you to qualify for Chapter 7. Then, you must design a budget whether you file Chapter 7 or 13.
Some debt situations such as a foreclosure require a Chapter 13 bankruptcy. If your situation needs a Chapter 13 bankruptcy make sure your payments are affordable or it will fail. Sometimes we file a Chapter 7 bankruptcy before a Chapter 13 to ensure you don’t have to repay unsecured debts in a Chapter 13. If you must file a Chapter 7 your budget needs to show that after your reasonable and necessary expenses nothing is left over for a Chapter 13 payment. You may automatically qualify for a Chapter 7 if your income is below average, the majority of your debt was business debt or your debt was incurred while you were in service.
You qualify for a Chapter 7 if your reasonable and necessary expenses leave little or nothing to repay creditors in a 13. Often-overlooked expenses, such as your medical, child support payments and daycare expenses often allow you to file a Chapter 7 instead. Over about 95% of debtors qualify for a Chapter 7 which will normally pay unsecured creditors zero.
Also, learn what documents are required for bankruptcy. Exemptions are available that allow you to keep property in Chapter 7 bankruptcy or 13.
Filing Chapter 7 & Chapter 13 Bankruptcy • A Step by Step Review
⎆ Credit counseling and debtor education.
Since the 2005 Bankruptcy Act, every individual is required to take an approved credit counseling course within six months before filing a Chapter 7 or Chapter 13 bankruptcy. Then, to obtain a discharge at the end of the case, you must take the second financial management course. The discharge is the permanent court order forbidding collections, which requires the second debtor education course. Not everyone needs a discharge.
⎆ The Means Test • qualifying for Chapter 7.
The means test looks at your family gross income and then looks at your income and expenses to qualify you for filing a Chapter 7. The means test evaluates your current monthly income against the state median income levels to determine eligibility for Chapter 7 bankruptcy. If a Debtor has enough disposable income to make a meaningful repayment then you must file a Chapter 13. Most people who want a Chapter 7 don’t need the extra tools of a Chapter 13. They don’t need to rescue a home from foreclosure, protect a cosigner or manage difficult debts such as income taxes or student loans which can be modified or managed by Chapter 13. If you don’t need the benefits of Chapter 13 then you probably want to file a Chapter 7.
About 95% of Debtors qualify for Chapter 7. About 70% of Debtors need a Chapter 7 about 30% need a Chapter 13. Some people are concerned with the possibility of losing property. The safest way to file is to file as a Chapter 13 which can always be dismissed.
A Chapter 7 cannot be dismissed if you end up finding out by surprise you mother put you on the deed to her home. In a case like that the trustee may sell the home to pay your creditors. A Chapter 13 is more expensive and takes 3-5 years to complete.
⎆ The two parts of the means test
Some law offices try to pressure clients into a Chapter 13 because the attorney fees are about three times the Chapter 7 fee. The Means Test has two parts. First, the means test uses the average income for your family size. If you make less than the average income you automatically pass.
In the second part, it deducts your reasonable and necessary expenses from your income. If there is not enough disposable income left over to make a meaningful repayment you still pass the means test. The means test uses your prior six months of income to determine your annual income. Sometimes waiting an additional month matters if your income drops.
⎆ Chapter 7 or Chapter 13 • which is better?
Just because you can file Chapter 7 does not mean Chapter 7 is the best choice. Chapter 7 is often referred to as bankruptcy liquidation, while Chapter 13 is known as bankruptcy reorganization. Chapter 13 is used most often to catch up on mortgage payments and stop a foreclosure. Both Chapter 7 and Chapter 13 offer different forms of debt relief, catering to various financial situations. Chapter 13 can protect a co-signer, strip off second mortgages, allow you to manage taxes and especially private student loans. But a Chapter 13 must be affordable to be feasible. Here is a video on the reasonable and necessary expenses.
Fine a bankruptcy attorney with experience for your case. Many offices use advertising to gather the maximum amount of clients and then hand you off to a paralegal or junior attorney to prepare the petition. They then pay a bonus to office staff to put people into a Chapter 13 to increase profits. In cases like that, you are not getting the quality advice you needed and paid for.
⎆ Supplying documents in Chapter 7 and 13 cases.
⎆ Supplying documents in Chapter 7 and 13 cases.Our judges, panel trustees, and the US Trustee review your required documents and Chapter 7 for accuracy. They look over these documents to find a property that can be sold to repay creditors, for preferential transfers, and whether a Chapter 13 is possible. They review your car title and mortgage to ensure the mortgage and any car lien were properly filed. In very rare cases, trustees can take the home or car when the lien is not properly filed. They review taxes and bank statements to ensure your income qualifies you for Chapter 13. They also look for whether assets are hidden or fraudulent transfers are made.
People often pay one creditor instead of treating all of them equally. This is a preferential transfer. Sometimes they sell a property for less than its real value to the family just before filing. That is a fraudulent transfer. The trustees check for these payments or transfers by looking and the documentation you are required to supply to the court and other records. The documentation they require also checks for your income. It is very rare that the minor payments most people gift to their children become problems unless it is over 600 dollars.
⎆ Exemptions that allow you to keep your property.
Exemptions allow you to keep your property. In fact, people rarely lose property because the exemptions are so large. Here are the Kentucky exemptions and the Indiana exemptions. If you want to ensure you can keep the property you may want to file as a Chapter 13. You cannot dismiss Chapter 7 without the approval of the trustee and judge. A Chapter 7 trustee earns up to 25% of anything he can sell but there is rarely any non-exempt property in Chapter 7. After all, we check for that when we prepare every petition. Of course, if you go to an office that allows the secretary, paralegal, or their children to prepare your petition you may have problems.
The fee the trustee earns is about 70 dollars for reviewing each petition. It is rare but sometimes a client has too much equity in their property. Their house or brand new Mercedes may be paid for. He may be willing to sacrifice a 10,000 dollar auto he can’t exempt to get rid of 25,000,000 dollars of debt. Yes, I had that case.
In less than one of a hundred cases the trustee will sell the asset and receive up to 25% of the amount turned over to creditors. It is OK to sacrifice property to get out of a huge debt load and increase net worth. However, it is not OK to be surprised by it because you use the wrong attorney. Remember Chapter 13 is always the safe way to file if you think this may be a problem.
⎆ Chapter 13 requirements and suggestions.
Chapter 13 cases have a repayment plan which must be confirmed by a judge. In the Western District of Kentucky, confirmation is normally done the same day as the 341 meetings. In the Eastern District of Kentucky and Indiana, it may be done months after the 341 meetings. Be sure to include all your reasonable and necessary expenses such as daycare and medical co-pays. You don’t want a plan you can’t afford or a plan which overpays unsecured creditors. You need money in your budget for necessary expenses.
Better attorneys will review expenses with a fine-tooth comb and go over items with you. People often replace autos just before filing a Chapter 13 to make sure they have an auto for the 3 to 5 years they are in a plan. We can’t ethically advise clients to do this. But you need a car for the three or five years you are in a plan.
Priority claims and secured debts must be paid up to date during the plan. Unsecured debts may be repaid 10% or less. Plans are automatically approved when they pay 60-70% back to unsecured creditors depending on the judge. Chapter 13 cases must always repay as much as Chapter 7 would have and repay all of the disposable income. In our Western District of Kentucky, you are required to turn in an annual budget and surrender part of your tax refund while you are in Chapter 13 if your plan repays less than 100%. Indiana and Eastern Kentucky do not have this annual budget requirement.
⎆ About the discharge and the automatic stay.
After you file the petition a temporary order called the automatic stay goes into effect to protect you. The discharge can eliminate various debts incurred before filing, including those from credit cards and medical bills. At the end of the case, you get a permanent court order called the discharge if you qualify for it. In Chapter 7 you only have to take the second class to obtain the discharge and comply with the orders of the court. In Chapter 13 at the end of the case, you must request the discharge and take the second class prior to the case closing. The Chapter 13 request for discharge is a simple one-page form.
Failure to file the financial education certificate means you will probably have to pay added attorney fees and filing fees to reopen the case, file the financial education certificate late and get your discharge.
⎆ Chapter 7 and Chapter 13 bankruptcy trustees.
The moment you file a bankruptcy a Trustee has what is essentially a lien over your property which is similar to a judgment lien. However, your attorney has already checked your exemptions and property. It is rare that this unexpectedly affects you in a Chapter 7 case but it does sometimes happen mostly with young inexperienced attorneys. Because most or all of your property is covered by exemptions the Trustee normally will normally abandon any interest he may have at your 341 hearing.
A Trustee is essentially is in the same position as a creditor who has sued and attached all of your property with a lien. However, the exemptions keep him from taking any property. In Chapter 7 you do not have the right to dismiss the case just because the trustee found the property to sell. Sometimes debtors do attempt to hide property which is then sold. In Chapter 13 you do have the right to dismiss your case or convert it to a Chapter at any time. You must however qualify for a Chapter 7. There is also an early discharge for Chapter 13 if you complete most of Chapter 13 and become disabled and unable to complete it. It is rare for anyone to unexpectedly lose property unless they wish to.
⎆ Filing Chapter 7 & Chapter 13 bankruptcy your 341 meeting of creditors.
⎆ Filing Chapter 7 & Chapter 13 bankruptcy your 341 meeting of creditors.About four to six weeks after filing you go to the 341 first meeting of creditors where you will meet your trustee. This is a simple five to ten-minute meeting. That’s right, you took two to eight hours preparing an 80-page petition for the questions in a 341 hearing which should last only five minutes or less. The average attorney should put in about 8 hours into every case just to prepare, file the case and go to the initial hearings.
Creditors rarely attend 341 meetings. In Chapter 7 you may need to file a reaffirmation agreement. This is an agreement to pay for what is almost always a secured debt such as a car loan even though you filed bankruptcy. In some cases, the car or home is a lemon and needs to be surrendered. If the car or boat is worth less than what you owe you may want to redeem it. Redemptions are used to pay a bank what the auto is worth so you don’t over-pay the bank.
⎆ Hearings in bankruptcy court.
Bankruptcy is in federal court. Your 341 hearing or meeting is not in room 341. It is normally in a federal courthouse. However, sometimes the court may use a room in an available state courthouse. One example of where the Court uses the state courthouse is in Bowling Green, Kentucky hearings. Louisville and Covington use the federal courthouse. The bankruptcy court in Lexington and Frankfort is in a bank building next to the state courthouse. During the pandemic, most hearings were held by ZOOM meetings or by conference calls. We expect this to become the normal method of 341 and confirmation hearings but some hearings will be in a courtroom.
⎆ How Chapter 13 plans work.
A Chapter 13 plan is very much like a contract between you, the Chapter 13 trustee, and your creditors. Chapter 13 plans often require debtors to repay a portion of their general unsecured debts. If you pay the trustee and creditors on time after confirmation and obey the local rules, the plan runs smoothly. The plan outlines how debtors will pay creditors over the duration of the plan. In Western Kentucky, this includes filing an annual budget and turning over tax refunds after the first year.
If you don’t timely pay the plan the trustee will file a motion to dismiss the case. If you don’t pay the mortgage or car loan, secured creditors who are not paid timely in accord with the plan often file a motion to terminate the stay. Then the secured creditor forecloses the home or repossesses the auto. It may be possible to refile a Chapter 13 case. If you run into trouble during the plan call us. People who repeatedly file will be banned from refiling or they may have to wait a period of about six months after voluntarily dismissing a case. This is due to section 109g of the bankruptcy code 11 USC 109(g).
⎆ Making Chapter 13 plans affordable.
There are three items that determine your Chapter 13 payment.
- A Chapter 13 must repay as much as a Chapter 7 would. If you have more assets than the exemptions allow your Chapter 13 payment may increase to repay what Chapter 7 would have repaid. Chapter 13 can also allow for the reduction of the principal loan balance on secured debts under certain conditions.
- The Debtor must pay all of his disposable income. If you have too much income you must file a Chapter 13. Make sure you include all of your expenses so you qualify for a Chapter 7 or if you are in Chapter 13 the plan will be affordable.
- Priority debts that will not be discharged by the bankruptcy and secured debt must be brought up to date. This includes any mortgage arrearages, income tax less than 3 years old, and child support.
⎆ Modifying and lowering Chapter 13 plans.
There are a few exceptions or modifications you can make to a confirmed Chapter 13 plan. If you become unable to complete Chapter 13 you may qualify for an early discharge. If your plan is too expensive because of a loss of income you might be able to lower payment. But plans can also be increased, decreased, or suspended for a short time if you need to. Plans can also have increasing or decreasing payments called step plans. Modifications like step plans can be part of the plan or sometimes be granted later as a modification.
⎆ One last note on filing Chapter 7 and Chapter 13 bankruptcy.
Just be sure to use a well-qualified attorney when filing Chapter 7 & Chapter 13 bankruptcy. Chapter 7 bankruptcy can discharge unsecured debts such as medical bills. Some attorneys have little or no experience. Others use office workers with little or no training or experience in preparing the petition. Both Chapter 7 and Chapter 13 can help eliminate or reduce unsecured debt, providing a fresh financial start. Some attorneys often tell clients you can’t bankrupt income taxes or student loans. The truth is they don’t know how to do it or want to do the extra work. Unless the attorney prepares the petition with you you are not getting years of training, knowledge, and experience you need and you are paying for.
Resources for Bankruptcy
Louisville Kentucky Bankruptcy Forms
Louisville Kentucky Chapter 7 • 341 Hearing • Video
Chapter 13 Step Plans & Chapter 20 Flexibility to Make a Plan
Chapter 7 or 13 Bankruptcy Trustees and the 341 Hearing
Trustee Questions at the Bankruptcy 341 Meeting
If you are thinking about filing bankruptcy, don’t delay because timing is often crucial. Don’t trust the bank or their attorney for advice. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.
