Tom Scott Law Indy

Bankruptcy Attorneys in Indianapolis Since 1980

Archives for August 2015

Auto Loans and Bankruptcy: How to Avoid Repossession of Your Vehicle

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We Can Help You Keep Your Car

Are you behind in your monthly car or truck payments to the point where you are unable to satisfy your bank or financial institution and they’ve placed the loan in default? If you answered “Yes,” there may be a way out of your tough situation.

If you’re having financial troubles and are desperate to avoid repossession of your car or truck, filing for a Chapter 13 bankruptcy may be the solution that can help you keep your vehicle. In this type of situation, you would be consider the “debtor” and the lender would be considered the “creditor.”

How Your Auto Loan Became Upside-Down

Let’s assume the loan is more than 2 ½ years old (at least 910 days before filing date) and the debt is “upside-down,” which means the unpaid balance of the loan is more than the value of the vehicle. Also, we’ll assume the loan is at a high rate of interest, perhaps 18-21%.

An example of this type situation could be that you bought a new $35,000 car three years ago on a six-year loan. The value of the car has since depreciated to only $12,000. However, because of the high interest rate, you still owe a loan principal amount (i.e., balance before monthly interest is added) of $22,000. In this case the “secured” value of the vehicle is only $12K, because that is the current replacement value if the car was repossessed and sold by the creditor.

Thanks to Chapter 13 of the U.S. Bankruptcy Code, you can force the bank to let you keep your car and, in effect, refinance the loan for the current replacement value. This process is known as a “cramdown” and it is not available in a Chapter 7 bankruptcy.

How a Cramdown Helps You Keep Your Vehicle

In a cramdown, the creditor would need to accept only the value of the vehicle as the principal amount for the refinanced loan ($12K in the example described above), plus only about 4.75% interest per month. This would significantly reduce your monthly auto loan payment.

The lending institution would then discharge the additional amount you owed, as well as the interest due based on the original higher rate. The court will determine the actual interest rate you’ll pay, which will be based on the current prime rate when that is determined.

The remaining amount of the loan principal that is not crammed down will be lumped into the pool of your other nonpriority unsecured debts ($10K in the above scenario). You will only pay back pennies on the dollar of the discharged amount, as part of your monthly payment to your bankruptcy trustee, which is distributed to all of your creditors.

At the end of the Chapter 13 plan, which will last 3-5 years, the creditor must provide you with a lien-free title to your car or truck.

Learn More Auto Loan Cramdowns and Bankruptcy

To learn more about how filing for bankruptcy and pursuing a cramdowm can help you avoid having your car or truck repossessed, and the other ways it can you relieve the pressure of your financial situation, submit the form above or contact us to schedule a free consultation.

Tax Returns, the Affordable Care Act (Obamacare), and Bankruptcy

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We recently interviewed Christopher Holmes and Jess M. Smith, III, the senior partners at Tom Scott & Associates, P.C. Below is Part 3 of that interview, which focuses on filing your taxes in relation to when you file for bankruptcy, as well as how a subsidize premium for health insurance purchased through the Healthcare.gov website can affect your taxes.
Q: On another topic, what happens when someone who has filed for bankruptcy has not been filing their taxes on time every time?
JS: A hot issue is tax returns in Chapter 13 filed late.
CH: Pre-2005, if you filed bankruptcy first and you had a bunch of unfiled tax returns, you could turn them in after your bankruptcy and basically all of the taxes were going away except for the ones from the last three years. That gave great incentive for people to get right with the IRS after they’ve file for bankruptcy. Now, they’ve reversed the law to make it much more harsh on debtors. If you don’t file your taxes within two years of the bankruptcy the taxes due are never going away.
Here is a horror story example: A salesman in his late 50s, who lived in Noblesville in Hamilton County, came to us in 2009 with a bunch of letters and documents from his accountant. Based on his recollection and the documents, he thought his taxes from 2000 through 2005 had been filed in 2005. So we were getting ready to file his bankruptcy case in 2009, we made sure he paid his taxes for 2006, 2007, and 2008, which were the three years before his bankruptcy filing. We went through the bankruptcy and he paid those taxes, and then he eventually obtained his bankruptcy discharge.
About two months after his discharge, the IRS started coming after him saying that his returns from 2000 through 2005 weren’t filed until 2008. Because they were filed within two years of the bankruptcy, they were had not been discharged. He swore those returns had been filed and said, “I know my accountant mailed these in.” he gave me power of attorney and I got on the phone with the IRS in Sacramento. Unfortunately for the client, the IRS had scanned the envelopes, with the postmarks, of all of those returns, so they had image files that showed that for some reason the returns had not been mailed in until 2008.
So, he had misrepresented to me the status of those returns when we filed his case in 2009, so as soon as he was out of his bankruptcy when we paid his 2006 through 2008 taxes, we now had to file another bankruptcy to deal with these old taxes, because the IRS was starting to levy his pension.
CH: His old taxes would have been discharged because they were more than three years old, except for the fact that those taxes were filed within two years of the day of the filing of the bankruptcy case, so you don’t get the benefit of that so-called three-year rule, which meant the taxes didn’t go away as they would have back in the good old days before 2005.
JS: Looking back, he had to file his case in 2009, because he had another creditor pursuing him in court, so he didn’t have the luxury of waiting two years and a day to file for bankruptcy. That’s important for people to understand now, if you have not filed your taxes and you want to get resolution on them. Usually, the recommendation is to get them done sooner rather than later to have any hope of discharging them in a bankruptcy.
CH: The moral of the story is to file your taxes every year to avoid that sort of problem.
JS: Another issue that is moving to the forefront of bankruptcy cases – and I don’t know yet how we’re going to resolve it because it is such a new issue – is that people have been signing up for personal health insurance under the recently legislated Affordable Care Act – otherwise known as Obamacare – and then it is turning out that their annual income is too high, so when they file their taxes they no longer qualify for the subsidized premiums they received. they are then getting nailed by the IRS with huge liabilities. I have client coming in tomorrow who owes over $3000 on his 2014 taxes.
CH: So he had a subsidy that was bigger that it should have been because it was based on his current income?
JS: Correct.
CH: So they projected his income as less than what it proved to be, so he received a bigger subsidy than he would otherwise.
JS:  I don’t yet know all of the details, but instead of receiving the refund his accountant projected, the IRS said, “No, you owe us a little over $3000.” What I currently know is that it has something to do with Form 8962 Insurance Premium Tax Credit, referred to as the PTC form. Moving forward, that is probably going to be a common issue that triggers tax liabilities the people don’t anticipate.
CH: Because the subsidy is based on an income means tests.
JS: I don’t know for sure yet, but apparently he sought out a subsidize premium when he applied through the Healthcare.gov website in 2013 for healthcare insurance coverage for 2014. When tax time came in 2015 to recapture, he got nailed. We’ll have to wait and see how this situation gets resolved, but it is an issue that will likely come up more frequently in years to come.

Parts 1 and 2 of This Interview

Part 1: Divorce and Bankruptcy
Part 2: An Experienced Bankruptcy Attorney Can Help You Keep Your Personal Property

An Experienced Bankruptcy Attorney Can Help You Keep Your Personal Property

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We recently interviewed Christopher Holmes and Jess M. Smith, III, the senior partners at Tom Scott & Associates, P.C. Below is Part 2 of that interview, which focuses on keeping your property when you file for bankruptcy, as well as the benefits of a bankruptcy attorney who has other types of legal experience.
Q: What is the difference between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy in regards to keeping your property and assets?
CH: Chapter 13 of the bankruptcy code gives us the clout to do things that you can’t do in a Chapter 7. For example, in a Chapter 7 bankruptcy a debtor can only protect a certain amount of assets from his or her creditors and a trustee has the power to “take” certain property, liquidate it, and use those net proceeds from the sale of those assets to pay back a certain amount of debt.
I have a case right now in which a man has too much equity in his home, so in a Chapter 7 a trustee could conceivable take the house, liquidate the house, pay off the mortgage, and with the money that’s left over pay a certain percentage of all of the different debts. So what we are going to do is put him into a Chapter 13 bankruptcy, so as long as he pays back to his creditors, through this three- to five-year plan, as much money as those creditors would have received in the Chapter 7 had his house been taken and sold, he then gets to protect and keep his house. That requires him to be in that plan for three to five years and to pay a certain amount each and every month, to make sure those creditors once again receive as much money as they might have received had his assets been liquidated.
JS: Keep in mind that this case is very fact-sensitive, There is no one-size-fits-all plan. That’s why you need to have an experienced attorney on your side.
CH: Some lawyers don’t even meet with the clients to have a consultation. They have a paralegal or some other non-lawyer handle the situation. We think that we provide a better service to the clients, because it’s a real live lawyer who does the initial consultation. We get certain facts and certain circumstances from them, and then we diagnose the problem and then we can better prescribe the remedy for them, because we get more information from them. Then, we can filter the information that through the lens of our expertise to figure out whether a Chapter 7 or a Chapter 13 is the more-appropriate remedy for that particular person. Given the number of years we’ve been practicing bankruptcy law, we’ve experienced so many different circumstance that we can reflect back on to say, “This case is like that previous case and the circumstances from that case apply here.”
JS: Also worth mentioning is that while our practice is now largely devoted to bankruptcy, it hasn’t always been exclusively devoted to bankruptcy. You find a lot of these bankruptcy firms have attorneys that don’t know anything other than bankruptcy. They don’t have that broad base of experience that Chris and I have in areas family law, personal injuries, estates, probate, where those area all impact how bankruptcy cases are decided.
CH: Back in the day we were general practitioners and handled just about any type of legal issue that came through the door.
JS: Chris has over 30 years of experience and I have 22 years of experience. Chris had done bankruptcy for about 17 years exclusively and I’ve done it for about 12, so I had about a decade of handling other type of legal work. I think we can offer the benefits of those other experiences, whereas some of the other bankruptcy offices in Indianapolis can’t offer that broad base of experience.
CH: Every once in a while something comes up and I harken back to those days when I did divorce law or criminal law or probate, and something comes up where a previous experience helps me devise a remedy in bankruptcy court that fits the situation. Some of these young whippersnappers out of law school who have done nothing but a little bit of bankruptcy, there’s no way they can handle a case like we can handle it having done thousands and thousands of bankruptcies on top of all of our other legal casework. It easy to think we’ve seen it all in the world of bankruptcy, but every one in a while something comes up where we tap into those previous experiences to device a remedy for that new wrinkle.
Q: Hearing you say that, reminds me that you do other things for your clients beside just handling bankruptcy issues.
JS: Correct. We do some wills, some life planning documents, power of attorney, along with divorces and non-contested child custody cases.
CH: Yes, everybody needs a Last Will and Testament, so do offer that service for a reasonable fee, so if someone is interested should contact us. We also do living wills and durable powers of attorney, documentation of healthcare representatives.
JS: We also co-counsel. We’ve recently had a few cases where people come to us with a personal injury claim where we co-counsel with other firms to obtain settlement for our clients. I’m not an expert in medical malpractice, but I know someone who is, so I can help you find the right attorney for you particular circumstances.

Parts 1 and 3 of This Interview

Part 1: Divorce and Bankruptcy
Part 3: Tax Returns, the Affordable Care Act (Obamacare), and Bankruptcy