Can I Contribute To My 401K After My 401K Loan Ends While In My Chapter 13 Bankruptcy?

In these times of uncertainty about whether social security will be available in the future, it is more important than ever that contributions to retirement accounts be done.  One Judge in the Eastern District of Kentucky has decided that you can contribute to your 401K plan after your 401K loan ends rather than pay the extra amount into your bankruptcy.  This is a big change in the practice of Chapter 13 bankruptcy in the Eastern District of Kentucky.  In the past the Trustee has required that once a 401K loan is paid off the plan payment would then have to increase by the amount of the monthly 401K loan amount.  For debtors who were not contributing to their 401K because of the loan, this meant that they could not contribute to their 401K during the Chapter 13 plan.  If a debtor is making a payment on a 401K loan and contributing to the 401K at the same time, this will not apply to that debtor.  They will still be required to increase their plan payments when the 401K loan ends.

 Example: Debtor is filing a Chapter 13 plan on January 1, 2010 with payments of $500 per month for 5 years.  He has a 401K loan of $250 per month that ends in December of 2012.  He is not currently contributing to his 401K.  The past practice would require that he increase his payment to the Chapter 13 plan in January of 2013 to $750 per month. Under the new opinion, he would not have to increase his payment to the Chapter 13 plan and instead could apply the $250 per month to a 401K contribution.

 The Trustee has asked that in these cases the debtor be required to notify the Trustee within 10 days of the ending of the 401K loan with proof that the amount was now being contributed to the 401K.  If this does not occur then the debtor may be required to turn over the funds to the Trustee as part of the plan payment.

In Re: Seafort and Schuler   08-22380/08-22417

Chapter 13 Bankruptcy: Living Expenses – Need vs. Want

When people consider filing for relief under Chapter 13 of the Bankruptcy Code they are typically consumed with the debts they owe, creditor harassment, and just making it day to day. Because this can be overwhelming, seeking counsel from an attorney can help put things into perspective.

Some people do not think in terms of needs and wants when it comes to considering bankruptcy or even spending and living on a budget. However, this is a major part of what Chapter 13 bankruptcy helps to accomplish.  In the bankruptcy world, a person’s expenses are looked at in two categories – necessary and non-necessary for reorganization purposes.  A necessary expense would be defined as food, clothing, and shelter.  Non-necessary expenses would be things such as cable, internet, gym memberships, etc.  People must begin to put their expenses in perspective and make tough decisions like whether to keep their home or surrender it or whether they can afford to keep their children in a private school which clearly is a non-necessary expense. 

For illustration purposes, let’s look at expenses for food, clothing and other items based on the IRS National Standards for Allowable Living Expenses in bankruptcy cases filed on or after March 15, 2009.  Per month, a household of two people can spend $537.00 for food, $66.00 for housekeeping supplies, $162.00 for clothing and services, $59.00 for personal care products & services and $197.00 for miscellaneous expenses.  These items become budgeted expenses in the sense that you are now limited to what you are allowed to spend on certain things.  Reality sets in quickly and it sometimes stirs up anger or bitterness in Chapter 13 cases when someone must be told that they have to remove their children from private school or give up the RV used for vacation or the boat used for recreation.   Remember, usually these issues only come up when someone files a Chapter 13 seeking to pay unsecured creditors less than 100%.

Anyone who files a bankruptcy is subject to these expense limits and must follow the confines of the law and the applicable rules if they want the benefits that bankruptcy offers. In other words, you have to take the good with the bad.   Because we must follow the IRS expense guidelines, a person can be forced to give up property in bankruptcy and/or reduce their spending in they want the benefits of a Chapter 13 reorganization.  So keep this in mind when you elect to file a Chapter 13 and attempt to pay your unsecured creditors less than 100%.

Question: What Happens To Real Estate That You Own In A Chapter 7 Case When It Is Not Your Residence?

Many people tend to think that they can keep real estate that they own in a Chapter 7 case as long as they are current with the payments at the time the case is filed. However, that is not always true. Debtors must take care to disclose the status of real estate with regard to value, outstanding debt, and payment status to their attorney. No one, including the attorney, wants any surprises.

Facts: Debtor was living between her home and her mother’s home who she cares for.  She had a mortgage on her home and her son lived in the house and paid the mortgage. She had approximately $14,000.00 in equity in the home.  Her living arrangement with her mother was not disclosed during the consultation, review, or filing appointments.

At court, the debtor informed the Trustee of these things. This was the first time the attorney heard of this arrangement. She had also claimed the equity as an exemption under U.S.C. 11 section 522(d)(1). The Trustee determined this was an asset case and objected to the exemption on the basis that she could not exempt this equity because it was not her residential real estate since she resided at her mother’s home. All of her mail went to that address, her driver license had that address, and this was also the address she used for voter registration.  The Trustee later filed a Motion to Sell the Real Estate which the Court granted.

This was not the client’s intention.  She wanted to keep her home and eventually move back in permanently with her son.  In an effort to save her home, she moved the Court to convert to Chapter 13 which was granted without objection by the Trustee.  She must now fund a plan to pay money to her unsecured creditors.

The moral of this story is to fully disclose your assets and any arrangements involving those assets to the attorney.  It is a matter of losing assets you think may be protected by exemptions which may not be the case.  Those assets can be liquidated through sale in a Chapter 7 case by the Trustee to pay your unsecured creditors for the debts you owe.  The attorney can best advise you on how to handle your assets.  Remember that what you don’t disclose can hurt you by either losing the asset, forcing you into a Chapter 13, or most harshly losing the asset and not receiving a bankruptcy discharge at all.

Disclosure of Assets in a Bankruptcy: How Accurate Should You Be?

In a recent case in the Eastern District of Kentucky, the Judge found that debtors who failed to properly disclose their assets were not entitled to a discharge of their debts in bankruptcy.  U.S. Trustee v. Haeberle, 08-10374, AP 08-1016. 

In this case, which was not filed by our office, the debtors listed in their schedules “miscellaneous jewelry” valued at $10,000.00.  The Trustee discovered that this was a misrepresentation by reviewing the debtors’ homeowner’s insurance policy which listed jewelry at $105,925.00 and home furnishings valued at $14,819.00.  The Trustee required the debtors to turn over a list of all the items covered under the homeowner’s insurance policy.  In addition, the Trustee conducted a deposition of the debtors who testified that it was their best belief that the jewelry was not worth more than $10,000.00. 

 The Trustee conducted an auction of the items and received $50,400.00 for the jewelry alone.  The Trustee then filed a nondischargeability action against the debtors pursuant to 11 U.S.C. section 727(a)(2) and (a)(4) requesting the court to deny the debtors’ discharge on the basis that they attempted to hide assets from the Trustee.  The court ruled in favor of the Trustee finding that because the debtors concealed the true value of the jewelry and other personal property, they should be denied a discharge of all of their debts.

Disclosure of all property owned by a debtor is critical when filing a bankruptcy.  As can be seen by the above case, failure to be accurate on the bankruptcy schedules could result in losing those items and, more importantly, being denied a discharge of your debts in bankruptcy.  An actual intent to deceive or hide assets could also be found to be criminal subject to jail time by the debtors if convicted.  So remember, not only should all property be listed, it must also be listed with accurate values.  And by signing the bankruptcy schedules, the debtors are swearing under penalty of perjury that the information is true and correct to the best of their knowledge.

Are Future Tax Refunds Required to Be Turned Over in a Chapter 13 Case in the Western District of Kentucky?

A debtor filed a Chapter 13 bankruptcy in the Western District of Kentucky.  A year later the debtor filed her tax returns and received a combined Federal and Kentucky tax refund in the amount of $1,563.00. The debtor spent the money to catch up on household bills.  Later, the Trustee filed a Motion to Dismiss her case because she didn’t turn over her tax refunds.  What happened? Under our local Rule 13, all Chapter 13 debtors who are paying their unsecured creditors less than 100%, must turn over copies of their tax returns, tax refunds and an updated budget.  The theory behind this local rule is that when a debtor files a Chapter 13 case, she is agreeing to repay her debts to creditors to the extent that there is income available to pay them.  The debtor is in control of the income and is responsible to pay the defined plan payment to the trustee each month.  Once a bankruptcy is filed, an estate is automatically created and consists of property of the debtor, including all income or earnings earned after the case is filed up to the point in time that the case is discharged, dismissed, or converted.  Since it can be argued that tax refunds are considered future income, the judges in the Western District of Kentucky created a local rule that requires this turnover of refunds to the trustee.  Interestingly, the judges in the Southern District of Kentucky and the Eastern District of Kentucky do not express the same views and do not require this annual turnover of tax refunds probably because they consider a tax refund not to be “income” but to be an overpayment to the IRS for taxes that were withheld from the debtor’s paycheck.

Are All Unsecured Credit Card Debts Collectible in a Chapter 13 if the Claim is Timely Filed?

Facts: A debtor in the Western District of Kentucky files a Chapter 13 case in November 2008. An unsecured creditor, XYZ, files a claim in the case for approximately $10,000.00 with supporting documents showing that the debt was last paid by the debtor in 1990 and XYZ had never taken legal action to pursue collection of the debt.  Debtor objected to XYZ’s claim on the basis that the debt was not collectible under Kentucky state law because the statute of limitations had run.

Analysis of the law: When a debtor files bankruptcy, federal law governs the case.  State law can also be intertwined in federal bankruptcy cases.  With regard to the collectability of debts, if a creditor cannot pursue a collection action in state court, then the creditor is barred from pursuing collection in the bankruptcy court.  The creditor does not get a second bite at the apple if the debt cannot be pursued in state court in lieu of the debtor filing for bankruptcy.  The disallowance of the claim is not automatic; the debtor must raise the objection to the claim or it may otherwise be allowed and paid along with other unsecured creditors in a Chapter 13 case.

Outcome: XYZ’s claim was disallowed and the claim was withdrawn.  Here the debtor made the last payment on the account in 1991 and XYZ never filed a lawsuit for the debt owed.  The debtor filed 17 years later.  Kentucky law requires a creditor who is owed repayment on a debt incurred under a credit card arrangement by a debtor to bring legal action within 15 years.  KRS 413.090.

Can You File Bankruptcy on a Debt That You Agreed to be Responsible for in a Divorce Property Settlement Agreement?

Facts: The divorced debtor, Roy, agreed to pay a judgment from the repossession of he and his ex-wife’s Dodge Durango in his divorce. After the divorce was final, Roy listed the Durango debt in his bankruptcy and Sondra, the ex-wife, did not object. The bankruptcy code does not allow for discharge of Domestic Support Obligations (“DSO”) and does not provide that any action be taken by the recipient of the DSO.

Analysis of the Law: Domestic Support Obligations are defined by the bankruptcy code (11 USC 101(14A)) as a debt that accrues before, on, or after the date of the discharge that is owed to or recoverable by a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative. Included is alimony, maintenance, or support, that is established by a separation agreement, divorce decree or property settlement agreement or order of a court (11 USC 523(a)(15).

Outcome: Fortunately for Sondra, the Kentucky Courts share jurisdiction with the Federal Courts to decide if an obligation is discharged. (Mattingly v. Mattingly, 164 S.W.3d 518 (Ky. App. 2005)). The Kentucky Court of Appeals held that Roy’s debt on the Durango was a domestic support obligation and that even though the bankruptcy had discharged the debt as to the original creditor, that creditor could still pursue Sondra for the debt. Sondra was then able to come back to the divorce court and have Roy held in contempt for non-payment on the Durango. Therefore, Roy has to pay Sondra for the debt rather than the original creditor. See Howard v Howard, 2008-CA-001059-MR (June 12, 2009) (to be published).

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