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Kansas Bankruptcy Exemptions and Law
Champagne corks popped in banks around the country when, in January 2021, the Consumer Financial Protection Bureau eliminated one of the last major protections families had against debt collectors. Thanks to this regulatory rollback, which is really the culmination of a series of rollbacks, many debt collectors are more aggressive than ever before. This development is especially bad news for Kansans. Already, banks in the Sunflower State usually don't need court orders to seize your assets and sell them to pay your debts.
As outlined below, bankruptcy might be your best option to stop asset seizure, even if you are several months behind on payments.
We see the interplay between federal and state laws every time we hit the road. Typically, the federal government maintains U.S. highways and interstate highways in Kansas. The state maintains, wait for it, state highways.
Bankruptcy is another example of this relationship. The federal Bankruptcy Code controls most aspects of consumer bankruptcy, such as eligibility requirements and legal procedures. Section 60 of the Kansas Statutes controls most property exemptions (protections).
The automatic stay and debt discharge are two of the basic pillars of a consumer bankruptcy matter. These two things, along with bankruptcy's property exemptions, give distressed debtors a fresh financial start.
The aforementioned regulatory changes have emboldened debt collectors. They often believe nothing can stop them from collecting money. Unless you file bankruptcy and take advantage of the automatic stay, that belief is generally accurate. Section 362 of the Bankruptcy Code is the only legal provision that immediately stops:
- Creditor harassment
- Wage garnishment
Normally, the automatic stay takes effect immediately and remains in place until the judge closes the case. However, there are some limitations.
If you filed bankruptcy within the six months preceding the current filing, the automatic stay might only have a limited effect. These rules prevent people from repeatedly filing bankruptcy and frustrating the rights of creditors. Furthermore, Section 362 of the Bankruptcy Code stops most evictions, but not all of them. Your bankruptcy attorney can review your case and make a clear determination.
The automatic stay keeps creditors at bay, but without debt discharge, or debt elimination, Section 362 is little more than a stopgap. Bankruptcy discharges most unsecured debts, such as:
- Credit cards
- Payday loans
- Medical bills
- Signature loans
- Revolving credit accounts
There are some limitations here as well. Discharge eliminates debt, but not the collateral consequences of debt. If the IRS files a lien against Ray because of unpaid taxes and he then files bankruptcy, the lien remains, even if the bankruptcy judge discharges the debt. A bankruptcy lawyer must deal with the lien separately.
Back taxes are priority unsecured debts. These obligations are only dischargeable in some situations. Other PUDs include criminal fines, student loans, and child support obligations.
Kinds of Consumer Bankruptcy
Most people file bankruptcy because of high medical bills. Other reasons include economic downturn and job loss. High medical bills affect different families in different ways. So, there are different kinds of consumer bankruptcy. Here, we talk about two types of bankruptcy — Chapter 7 and Chapter 13 — and one option bankruptcy lawyers like to call "Chapter 20" bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy eliminates medical bills and other unsecured debt in as little as six or nine months. Because of this short time frame, most Chapter 7 bankruptcies are relatively straightforward and easier to recover from.
After debtors file their petitions and schedules, the trustee reviews the case and verifies the debtor's identity. The review and verification process usually involves document production, such as recent pay stubs and a Social Security card. If the requested documents are unavailable, a bankruptcy lawyer can usually convince the trustee to accept substitutes.
If the trustee has no lingering questions after a brief meeting, the judge usually issues a discharge order without requiring a hearing. That's pretty much that.
Chapter 13 Bankruptcy
Sometimes, high medical bills and other financial crises have a snowball effect. To stay current on some obligations, families allow other ones, like mortgage payments, to slip. Chapter 13 bankruptcy is designed for these families.
Secured debts, such as house notes, are usually not dischargeable in bankruptcy. So, the debtor must repay these obligations. Many banks are very impatient. They want past-due payments immediately. Chapter 13 gives these families up to five years to gradually eliminate secured debt arrearage.
The secret is a monthly debt consolidation payment. Each month, debtors remit their disposable income to the trustee, who divides it among secured creditors and other allowed claimants. As long as the trustee approves the repayment plan, moneylenders cannot pressure the debtor to pay more money or repay it faster.
Chapter 13 does more than allow families to eliminate delinquent debts on their own terms. Like a Chapter 7, Chapter 13 also discharges most unsecured debts.
"Chapter 20" Bankruptcy
The third kind of bankruptcy, one that bankruptcy lawyers usually call a "Chapter 20," may be available as well.
Remember Ray and his tax bill? Let's change the facts of that example. Assume Ray filed Chapter 7 to discharge his tax debt, but he did not meet the qualifications. With the assistance of a bankruptcy lawyer, Ray could probably also file a Chapter 13. He wouldn't receive a discharge at the end of the Chapter 13, but he doesn't need a discharge, since he just received one. Instead, he just needs time to pay his back taxes.
Most people can file bankruptcy and get a fresh start. However, there are a few eligibility requirements. Some are written and some are unwritten.
Furthermore, some qualifications apply to all debtors. For example, everyone must complete two brief personal finance classes, one before they file and one after they file. Other eligibility requirements are chapter-specific.
Chapter 7 Qualifications
In 2005, largely under pressure from big banks, lawmakers added the means test to the requirements for Chapter 7. These lenders successfully perpetuated the myth that people used credit cards to buy luxury items and then declared bankruptcy to avoid paying for them.
So, you may file Chapter 7 if your household income is below average for the geographic area where you file bankruptcy. As of November 1, 2020, this figure was $92,890 for a Kansas family of four. Even if you are over this line, a bankruptcy lawyer might still qualify you for Chapter 7 based on your expenses.
Chapter 7's informal qualification is also related to income, specifically the debtor's income/expense balance in Schedules I and J. Typically, these debtors should be in the red to avoid unwanted questions from the trustee. If it appears that the debtor can repay obligations, the trustee will likely believe a Chapter 7 is unnecessary.
Chapter 13 Qualifications
A debt ceiling applies in Chapter 13 cases. Typically, these debtors must have less than $1.3 million in secured obligations and $400,000 in unsecured obligations. These totals include current and past-due amounts.
Chapter 13 also has an income-based informal qualification. As mentioned above, these debtors must make a monthly debt consolidation payment. So, their disposable income must be high enough to pull this off. The Chapter 13 payment's size varies, but it's usually about as big as a mortgage or rent payment.
The size of this payment helps Chapter 13 debtors recover quickly. Most people keep making the debt consolidation payment for a few months after the judge closes the bankruptcy. Very shortly, they have a financial reserve that is large enough to weather most financial storms.
Bankruptcy trustees may seize nonexempt property and sell it in order to pay the petitioner's debts. As outlined below, most people do not have many (or any) nonexempt assets.
The federal exemptions are unavailable in Kansas. If you have lived in the Sunflower State for at least two years, you may use the state's property exemptions when you file bankruptcy. These property protections include:
- Homestead exemption: Kansas is one of the only states with an unlimited homestead exemption. If you live on less than one acre in the city or less than 160 acres in the country, your primary residence is 100% exempt, no matter how much it's worth.
- Motor vehicle: A $20,000 equity limit usually applies to your car, truck, SUV, or other primary motor vehicle. Most new car owners have very little equity in their vehicles. Very few used cars are worth $20,000, especially if they have anything above normal wear and tear. The equity limit is inapplicable if the vehicle is modified for a person with a disability.
- Personal property: Furniture, electronics, appliances, and most other household goods are 100% exempt. A value ceiling applies to jewelry and tools of the trade. But the as-is cash value rule applies as well. A pawn shop might give Vivien $200 for her $2,000 ring. So, the value ceilings are rarely a factor.
- Public benefits: Many people rely heavily on Social Security, VA disability, and other payments. These benefits are exempt assets in bankruptcy, even if they come in the form of monthly checks. Furthermore, in Kansas, no value ceiling applies. All your benefits are exempt. On a related note, private benefits, like child support and life insurance payments, are usually fully exempt as well.
- Retirement accounts: Other than a house, a nest egg retirement account is often a family's largest financial asset. Bankruptcy laws fully protect every penny of your IRA, 401(k), or other such account. This exemption also applies to most pension plans, like teacher retirement plans, and most tax-deferred savings accounts, like 529 college tuition savings plans.
Kansas bankruptcy debtors may also use the federal nonbankruptcy exemptions. The wage protection exemption is probably the biggest one. It protects up to 75% of your current wages. Furthermore, if a bankruptcy lawyer makes a motion, the judge can raise the exemption amount.
Informal Property Exemptions
Cram-downs and strip-offs sound like conduct you forbid at the family dinner table. But to a Kansas bankruptcy lawyer, these obscure aspects of federal law maximize your property exemptions. There are other legal loopholes as well.
Here's how a cram-down works. Assume Judy owes $7,000 on a car that's only worth $3,500. If Judy files bankruptcy, she might be able to “buy" the car from the bank for $3,500, which is its current fair market value. The bank must tear up the note and forgive the rest of Judy's debt.
As for a strip-off, assume Terry used 80/20 financing to buy his $200,000 home. He has a $160,000 senior lien and a $40,000 junior lien. Further assume that his home's value has declined to $160,000. Since the house's value is not high enough to secure both liens, a judge could classify the junior lien as a dischargeable, unsecured debt.
Reach Out to an Experienced Bankruptcy Lawyer
To protect your property and get a fresh start, call a Kansas bankruptcy lawyer today.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.