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Kentucky Bankruptcy Exemptions and Law
Most people cannot weather the financial storms of life. More than two-thirds of Kentuckians have less than $1,000 in savings. A significant number of families have nothing at all. These financial storms include things like serious illness, job loss, and other events which affect almost every family at one time or another.
Families react to these events in different ways. Some use credit cards to pay bills when money is tight. Others stop paying secured debts, like home mortgage payments, and use these funds elsewhere. These stopgaps begin downward financial spirals that can seem endless.
These families basically have two alternatives. They can watch things get worse, or they can work with a Kentucky bankruptcy attorney and regain control over their own financial situations. Bankruptcy has a number of other benefits as well, which are outlined below. Keep reading to find out what this federal debt relief program can do for you and your family, both now and in the future.
Frequently, federal and state laws control the same area. Criminal law is a good example. Some offenses could be charged at the federal or state level. Bankruptcy is another good example. The federal Bankruptcy Code applies in most areas. The Kentucky Revised Statutes apply in other areas.
One sentence, albeit a rather long sentence, tells you pretty much everything you need to know about bankruptcy. According to former Supreme Court Justice James Clark McReynolds, “It is the purpose of the bankrupt act to convert the assets of the bankrupt into cash for distribution among creditors, and then to relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes."
The two basic elements of this fresh start are examined below. Some other aspects of McReynolds' summary, including qualifying for bankruptcy and property exemptions are examined later.
The Automatic Stay
McReynolds penned these words in 1915. A little over a hundred years later, creditors are much less patient with distressed debtors. In fact, banks can legally begin processes like repossession and foreclosure if one payment is one day late.
Bankruptcy's automatic stay protects debtors from such actions. Section 362 of the Bankruptcy Code prohibits all forms of adverse creditor actions, such as:
- Wage garnishment
- Collection lawsuits
- Creditor harassment
Many creditors do not stop with adverse actions. They also revoke credit privileges and unilaterally cancel ACH or other automatic payment arrangements. Banks claim they do these things to comply with the law. But in actuality, they take these actions to punish debtors for asserting their legal and financial rights.
The automatic stay keeps creditors at bay. The debt discharge option makes them go away permanently, at least in most cases. The discharge (forgiveness) option applies to most unsecured debts, such as:
- Medical bills
- Revolving credit accounts
- Payday loans
- Credit cards
- Signature loans
Discharge is optional because many people choose to voluntarily reaffirm certain unsecured debts, like a cell phone plan or a family doctor's medical bill. This option is part of the control-taking process.
Discharge is also limited. It does not apply to all unsecured debts. Furthermore, discharge does not affect the collateral consequences of debt. If State U is withholding Wanda's transcript because she owes tuition, State U may continue to do so, even if Wanda files bankruptcy. Her lawyer must address this matter separately.
Your Options for Bankruptcy
As mentioned, different people have different reactions to similar financial crises. For this reason, there are multiple types of bankruptcy in Kentucky.
Chapter 7 Bankruptcy
Using credit cards to pay bills might work for a few weeks or months, but the long-term consequences are disastrous. Chapter 7 bankruptcy discharges unsecured debt and helps people avoid these consequences.
After these debtors file their petitions and schedules, the trustee meets with them, verifies their identities, and addresses any issues that came up during a bankruptcy review. As part of this review, debtors must produce documents, such as a government-issued photo ID and recent pay stubs. If the requested documents are unavailable, a bankruptcy lawyer can usually arrange for a substitute.
If the trustee recommends discharge, which usually happens, the judge usually signs an order without requiring a hearing.
Chapter 13 Bankruptcy
A Chapter 13 trustee sets you up on an income-based repayment plan. You pay a monthly debt consolidation payment, which the trustee divides among allowed claims. “Allowed claims" usually include secured debt arrears, administrative costs, and a few other obligations.
The automatic stay usually remains in effect for the entire five-year protected repayment period. So, as long as the trustee approves the plan, creditors cannot pressure debtors into paying more money or paying it faster. They must wait for payday to come, like everyone else does.
According to McReynolds' summary, honest yet unfortunate debtors can file bankruptcy. But what exactly does it mean to be honest yet unfortunate?
Words like “unfortunate" are relative terms. Compared with Jeff Bezos, pretty much everyone else is unfortunate. Bankruptcy's written qualifications, most of which are found in the Bankruptcy Code, give the U-word some additional meaning.
The means test usually determines if Chapter 7 debtors are unfortunate. You are eligible to file Chapter 7 if your annual average income is below average. The amount varies by date, location, and family size. As of late 2020, a Kentucky family of four must earn less than $81,619.
Regional variations may apply. The cost of living is higher in Lexington than in other parts of the state. Additionally, if you do not qualify for Chapter 7, a bankruptcy lawyer can offer other debt-relief options.
A debt ceiling is the primary written qualification in a Chapter 13. As of 2021, these debtors cannot have more than $1.3 million in secured debt and $400,000 in unsecured debt. These amounts include past-due and current obligations.
If you are maxed out on several credit cards and/or just purchased a large home, the debt ceiling requirement might be an issue. Once again, if you do not qualify for Chapter 13, a bankruptcy lawyer can show you other options.
Other formal requirements, which everyone must meet, include a pre-filing credit counseling course and a post-filing budgeting course. There are also informal requirements. For example, your assertion that you cannot afford to pay your debt needs to be honest. Any evidence of fraud will put your bankruptcy under the microscope.
McReynolds mentioned asset conversion in his bankruptcy summary. Don't let that phrase scare you. Only nonexempt assets are subject to liquidation and conversion. Most people do not have nonexempt assets, unless they own yachts or private planes. In fact, many people get to keep most of their property in bankruptcy. What you get to keep is listed in the federal or state bankruptcy exemption laws.
If you are filing a no-asset Chapter 7, you probably want to use the simple and straightforward Kentucky bankruptcy exemptions (rather than the federal exemptions). Some highlights of these property protections include:
- Home equity: Kentucky law protects up to $5,000 in home equity. So, if Sam owes $116,000 on a $120,000 home, the trustee cannot touch it. The sales price would not be high enough to pay off the bank loan and Sam's equity. This example raises some interesting questions about asset valuation and sales, which are addressed below.
- Motor vehicle: State law also protects up to $2,500 in vehicle equity. If you own a new car, you probably have almost no equity in it. Vehicle loans, like mortgage loans, are amortized, meaning you pay interest before principal. If you drive a used car, it probably has almost no financial value.
- Personal property: Up to $6,000 in livestock, furniture, pets, electronics, and other such items is exempt. The as-is cash value rule applies here. Mary's $2,000 party dress might be worth about $200 at a consignment store. The personal property exemption also protects some personal injury damage awards, along with most child support and alimony receipts.
- Retirement benefits: Nest egg accounts, like IRAs and 401(k)s, are exempt under Kentucky law. So are pension plans. Their financial value is immaterial. On a related note, life insurance payouts and equity are exempt. On another related note, public benefits, like Social Security benefits, are also exempt.
- Wildcard exemption: Kentucky's laws shield up to $1,000 of otherwise nonexempt real or personal property. You could apply this exemption to cash in a bank account, a hunting cabin, or pretty much anything else.
Debtors can usually claim these exemptions if they live in Kentucky for at least two years before they filed bankruptcy.
If you plan to file anything other than a no-asset Chapter 7, your Kentucky bankruptcy lawyer will probably use the federal exemptions, which include:
- Home equity ($25,150)
- Motor vehicle ($4,000)
- Personal property ($15,000)
- Retirement account ($1.3 million)
- Life insurance ($13,400)
- Child support and alimony receipts (unlimited)
- Personal injury and other awards ($25,150)
- Wildcard ($1,325 plus $12,575 of the unused homestead exemption).
Bankruptcy debtors must pick one list or the other one. They cannot cherry-pick items from both lists.
If the written exemptions do not fully protect your property, a bankruptcy lawyer can often use some legal loopholes and expand them.
The as-is cash value rule, which was mentioned above, applies to real property as well as personal property. A home investor might offer as little as $20,000 for a $200,000 home. Arguably, that offer sets the home's as-is cash value.
Another obscure provision, the best interests of creditors rule, sometimes comes into play as well. Assume Steve owns a fifth-wheel camper which the written exemptions do not shield. The trustee estimates that, after they pay $500 to fix up the trailer and another $500 in sales expenses, a buyer would pay about $1,000 for the fifth wheel.
These numbers don't add up, at least as far as Steve's creditors are concerned. The camper's liquidation would generate little or no money for them. Therefore, a seizure and sale are not in the creditors' best interests.
Connect with a Dedicated Attorney
Bankruptcy protects your property and gives you a fresh start. If these things sound good to you, contact an experienced Kentucky 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.