Tom Scott Law Indy

Bankruptcy Attorneys in Indianapolis Since 1980

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Bankruptcy is an Option for Retirees

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You Can Enjoy the Retirement You’ve Dreamed About

The U.S. and global economies constantly fluctuate, because what goes up must come down, and vice versa. The reasons for recessions vary, but the results are the same in that people suffer regardless of the causes.The Great Recession a decade ago, which caused over eight million people to lose their jobs, resulted in a huge number of business and personal bankruptcies. The current looming recession will probably not be nearly as severe, but the results will still be painful for those personally affected.

Baby Boomers All Grown Up

 

Recent articles suggest the people who will be most negatively affected by the next recession will be the elderly and those heading into retirement. That will be a lot of people, because 10,000+ people retire daily these days, which is twice as many as 20 years ago. That rate will peak at 12K per day in about a decade, when all baby boomers will have reached age 65.
Baby boomers have high debt compared to the previous generation. Late boomers have higher debt than middle boomers, who have higher debt than early boomers. This pattern is contributing to a situation in which many elderly adults will be forced to rely on food stamps and low-income subsidies to make ends meet.
Another inevitable result is that many seniors and retirees will turn to bankruptcy as a last-ditch effort at financial survival.

Times Have Changed

In 1991, two percent of U.S. bankruptcy filings were by people over 65. By 2016, that rate was 12%, while the population growth of that group only grew 2.3%, from 17% to 19.3% – a 9.7% imbalance.
The decline in corporate worker pension plans leaves retirees with less fixed income and higher health care costs to cover. Those costs are continually rising at over 10% annually. This is a recipe for serious financial issues for a large segment of society who are entering a more-vulnerable time of life.
The recipe includes ingredients that include a rise in healthcare costs from 5% of U.S. GDP in 1960 to 18% in 2017, with cost increases expected by about 1% annually in the next decade. Income for retirees could also be negatively impacted by 401(k) retirement plans that fluctuate with the stock market.
If a person’s health is, or becomes, a major issue, which is somewhat inevitable as we age, disability payments may help cover the ever-rising cost of living for those eligible. Otherwise, seniors will need to budget for medical costs not paid for by Medicare, supplemental drug coverage, or secondary insurance policies.
Many reasons exist to explain how we, as a progressive and prosperous nation, find ourselves in this position, but that is for historians and economists to ponder – and hopefully fix – for future generations.

Retirement Retired for Many

It’s too late to point fingers of blame. And it’s too late to find a quick fix for those hard-working Americans who are or will soon be “in retirement” without a sufficient retirement financial plan. The only apparent financial solution for individuals without any serious health issues is to continue working long past the official retirement age.
Many elderly individuals will never actually retire to the life of leisure they dreamed would be at the end of their career. They will still need to work, usually at low-wage jobs, to make ends meet.
If you’re retired or approaching retirement, and you’re still paying off a lot of debt — and adding monthly interest onto that debt — you need to think seriously about the long-term financially reality of your situation.
The burden of aging is bad enough. The additional burden of living on a fixed income sinking into a sea of debt is crushing. If you’ve started taking Social Security before age 70, you’ve taken another blow below the financial belt. If you can wait until 70, you will receive much more each year, so you should try to hold off until then if at all possible.
The current state of homelessness in America may just be the tip of the iceberg, if the nation does not find a solution to the situation a large portion of retirees face. The potential reality we may soon face as a nation is one in which a large portion of the baby boomer generation may be forced into bankruptcy as the only option to avoid a life of destitution.

An Option for Relief

Bankruptcy is usually an option of last resort. Careful consideration is warranted before you decide to file for bankruptcy. But after serious contemplation, you may not have any other viable options available to you.
The relief bankruptcy can offer is like having a mountain of weight lifted off your back. It can create the light at the end of the tunnel that leads you toward a future in which you can finally relax and enjoy the latter stages of your life.
Bankruptcy may be the only solution that allows you to enjoy retirement in a manner that at least somewhat resembles the dream you worked your whole life to achieve. Declaring bankruptcy is not a decision to be taken lightly, but it is a legal option built into our financial reason for a good reason.
Millions of people have taken advantage of the lifeboat that bankruptcy offers to those drowning in a sea of debt. It can help solve an otherwise unsolvable problem. If you head in that direction, you won’t be alone and you won’t have to face an uncertain future filled with financial fear.
To find out more about the possibility of a debt-free future, contact us to schedule a confidential conversation about your situation.

Reference Articles:

– Who Goes Bankrupt in America? Increasingly the Elderly
– What Happens to Your Retirement Plan Now That the Fed Lowered Interest Rates?
– Cutting Interest Rates Hurts Retirees the Most
– Why Are Americans Paying More for Healthcare?
– How Higher Interest Rates Impact Your 401(k)
– Americans are retiring at an increasing pace
– Baby boomers face more risks to their retirement than previous generations

Common Reasons People File for Bankruptcy

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Uninsured medical bills resulting in lawsuits and threats of legal action or garnishment are common reasons for bankruptcy these days. Divorce is also a reason for many bankruptcies—a high percentage of the people who file for bankruptcy protection are single mothers. In a Chapter 13 bankruptcy, a conduit case refers to making mortgage payments through the trustee.

We recently discussed several aspects of bankruptcy with Christopher Holmes and Jess M. Smith, III, partners at Tom Scott & Associates, P.C. The discussion covered several topics, including being "judgment proof," protecting your house from liquidation in a bankruptcy, home equity exemptions, some benefits of filing a Chapter 13 “100% plan,” common reasons people file for bankruptcy, a deficiency balance on a debt, an example of how an ex-spouse can impact a bankruptcy, and conduit mortgage payments. Below is Part 2 of 2 of the transcript of that conversation.

Q: With the economy turning around and the rate of bankruptcies dropping, what are the most common reasons people file for bankruptcy these days? Why are people getting into financial trouble?

Chris Holmes: It’s still uninsured medical bills resulting in lawsuits and threats of legal action or garnishment. The biggest percentage of people I see these days are single mothers on a limited income with children to support. They’re on a razor-thin budget and threatened with garnishment, while they’re barely getting by on 100% of their take-home pay, They can’t afford to lose 25% of their take-home pay through a garnishment, so they come in and seek protection from creditors through the bankruptcy court.

Q: Is credit card debt what’s causing their problems?

CH: I would say uninsured medical issues or an old cell phone bill or maybe a car got repossessed and there is a deficiency balance that the creditor is suing them for. Maybe the economy is better in the sense that the unemployment rate is relatively low, but all the jobs people are getting are such low-paying jobs that they aren’t being paid a living wage to really make ends meet. Then they’re on that razor-thin line with a budget that is just barely enough to survive on. If something unexpected happens there’s a threat of garnishment. If they let the garnishment happen, maybe they’ll be evicted or lose their car and can’t get to work. They’re just desperate to file bankruptcy.

Q: So it’s mostly people in a single-income-with-kids situation?

CH: It seems that way in many cases. Of course, divorce is always a big reason that people file for bankruptcy. People go their separate ways and somebody has been ordered to pay certain marital debt, but they can’t afford to do that, so they have to seek refuge in the bankruptcy court. Job loss is still a big cause of financial problems. I’m sure there are going to be some bankruptcies on the horizon when all of those Carrier employees get laid off.

Q: Have you seen any unusual circumstances in recent cases?

Jess Smith, III: I have a nasty hearing coming up soon. A woman received an offer to sell real estate. She had a divorce decree in which she owned the real estate only in her name and only her name was on the mortgage. But the divorce decree stated that if she were to sell the house, she would keep the first $60,000 and anything over and above that first $60,000 would be split between her and the ex-husband. In the interim, she filed for bankruptcy because she had other debt. He hasn’t paid child support to her in months. The house goes into foreclosure. I hire a Realtor and get permission to sell it—and we get an offer. By the way, we listed the ex-husband as a creditor in the bankruptcy, which basically states, “Speak up or forever hold your peace.” He never filed a claim. Instead, he hired a couple of lawyers and eventually his objection to the bankruptcy plan is overruled. He said, “If we get anything over and above $60,000, you can have that,” knowing that we’re not going to get there. So we had an offer to buy the house. The debtor would get to keep her exemption of $17,600 and as things stand there is presently around $15,000 that would go to the creditors who filed a claim. We had a motion out to approve the sale, but the ex-husband has objected to the sale—even though his name is not on the mortgage and he didn’t file a claim. I have to go before the judge next week.

CH: And the sale will not bear proceeds big enough for him to even get a half.

JS: Right. His objection is, “You should list the house for more money," even though there is a foreclosure pending and he is not current with his child support. I don’t know what kind of patience the judge will have for this gentleman, but I’ve got to bring the debtor into court and also have the Realtor state there will need to be $10,000 thrown into the house, to deal with radon and other things, and that this is the best offer we’re going to get. In the meantime, the foreclosure is actively proceeding to Sheriff’s sale.

CH: So, the payoff on the mortgage is constantly getting bigger.

JS: If we wait, it’s going to take money out of the hands of the other creditors who filed claims.

Q: Have you thought about throwing some his way to make his objection go away?

JS: Our client is an attorney, so when the case originally started we contemplated amending the divorce decree to bump up his position; to give him $5000 or $10,000, but her ex-husband wanted nothing of it. So, he started first with attorney John W. I call John, whom he never paid to file an appearance, but we had discussions and I said, “We’ll move you up the ladder and give you a secured position and give you some money. It wouldn’t be a lot, but it would be something as opposed to nothing.” He never paid John W. a retainer. Then, after we filed our second plan, the ex-husband hired attorney Jim Y. and after a couple of hearings I amended the plan and said, “We’ll give you one-half of anything over $60,000.” He didn’t pay Jim Y., but now on the day of the objection on the motion to sell, he paid attorney Eric R. some money and Eric filed an objection and handed off the files to attorney Keith G. So now I’m dealing with Keith. Then, my client, who is mad as heck, sent me an email saying that her ex-husband was at the house having someone service the air conditioner—and he doesn’t even own the house or have his name on the mortgage or deed. And she still lives there.

Q: He’s paying someone to service the air conditioner at her house?

JS: Yes. And then he asked, through Keith G., for permission to show the house to other people—despite the fact that I have a Realtor with an exclusive listing and a sale pending.

CH: So, he seems to think that she accepted a low-ball offer to move the property and deny him his fair share of the net proceeds.

JS: Yet, he hasn’t paid child support for seven months.

Q: What is the assessed value of the property compared to the sale price? Is it in the ballpark?

JS: The price offered is about $30,000 less than the assessed value, but here’s where it starts to get tricky: When the case started, they had a rental property. In addition, she fell behind in the mortgage payments on their house, because the husband moved out. I explained to her that if she didn’t get current on the mortgage payments for the house, it would have to be a conduit case. In the interim, the rental property went into foreclosure and a judgment lien was placed on that. So, we had to value the rental property low to get the lien avoided—and we got that lien avoided. But now the sale price is higher than what I initially scheduled the value of the property for, which is neither here nor there because the judgment lien holder from the rental property had their opportunity to object and they disclaimed any interest in the real estate and the foreclosure.

Q: You used the phrase “conduit.” Can you explain what that is in relation to a mortgage and bankruptcy?

JS: Conduit means if you file a Chapter 13 and you want to keep your house, and you’re behind on the mortgage payments when you file the case, the ongoing future mortgage payments get made through the trustee, who then disperses it to the mortgage company. Not only the ongoing payments, but the pre-filing arrearage also goes through the trustee.

CH: In the past, you would just cure the arrearage on the mortgage in the plan, then people would resume their regular mortgage payments outside of the plan, directly to the creditor, starting the month after the date of filing. But now the judges have decided that if the debtor is more than one month behind, then they have to make those regular monthly mortgage payments through the Chapter 13 trustee, which debtors and debtors’ counsel don’t really like.

JS: The reason for that is because for years we used to have arguments with the mortgage company about ongoing mortgage payments and whether they were made on time or not. Huge amounts of time were spent accounting and keeping track of payments. I guess the theory is that if the debtor is more than one month behind then they were going to miss some payments along the way.

CH: At the end of the old plan, invariably the mortgage companies would say, “You didn’t pay every single penny and you’re not current on the mortgage.” Now there is either a hearing or the trustee files a notice stating that a debtor is current, which gives the mortgage company an opportunity to say, “Yes, they’re current,” or “No, they’re not current.” The judge would then decide whether or not they really are behind, based on all of those payments that should have been made through the plan.

JS: Typically, the trustee, as the neutral party, has a record of dispersing three to five years of payments to the mortgage company.

CH: With variable interest rates, or the changes in taxes and escrow, those mortgage payments are fluctuating. Every six months, or 12 months, debtors receive an escrow analysis stating that the property owner’s taxes went up, so the mortgage company would have to bump up the mortgage payments a little bit to make up for that additional that would have to be paid in taxes. Or the homeowner’s insurance rate goes up and the mortgage company would have to escrow a little bit more for that increased insurance premium. We don’t see variable or adjustable interest rates much anymore.

Part 1 of Conversation: Protecting Your House From Liquidation in a Bankruptcy

Means Test Helps Determine Filing For Chapter 7 or Chapter 13 Bankruptcy

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The bankruptcy means test was established by congress as a standard method of calculating the disposable monthly income of a debtor, to help determine the amount paid to the trustee of a Chapter 13 bankruptcy plan.

We recently discussed several aspects of bankruptcy with Christopher Holmes and Jess M. Smith, III, partners at Tom Scott & Associates, P.C. The discussion covered several topics, including the means test, the differences between Chapter 7 and Chapter 13, how divorce and child support can affect bankruptcy, and the discharge process. Below is Part 1 of 4 of the transcript of that conversation.

Q: In a Chapter 13 bankruptcy, how is a debtor’s monthly plan payment amount determined?

Chris Holmes: In a Chapter 13 bankruptcy case, the general rule would be that the debtor must pay to the Chapter 13 trustee all of their disposable monthly income. So, we craft their budget to show how much their projected monthly income will be—gross income minus taxes—and then we calculate what they pay for rent, utilities, food, clothing and all of their living expenses. So, income minus expenses, whatever that difference is, that’s the primary way of determining the monthly plan payment. The bankruptcy code says a debtor must turn over all of their disposable income to the Chapter 13 trustee for the benefit of their creditors. And then, as long as they’re not already paying off 100 cents on the dollar, that’s what they have to pay.

Q: How do factors such as everyday expenses figure into determining what a debtor’s disposable income ends up being?

CH: Whatever their real expenses are or there are some IRS standards that we use on occasion. Obviously, a family of eight has expenses that are greater than a family of three. Jess and I have been doing this for so long, we understand, after putting thousands of budgets together, how far you can push the envelope on a food budget, for example, for a family of four. We know that if we go beyond a certain amount—a sort of comfort zone—that the trustee gives us some pushback and says, “Wait a minute. $1200 a month for two people?” So, for example, they can’t be going out to St. Elmo’s Steakhouse every night for dinner. They have to be reasonable in their budget. We’ve learned over time what a reasonable budget is, based on the household size.

The general rule of whatever is left over goes to the trustee was thrown out the window in a recent case we handled, because the husband had a job and the wife was disabled. She received Social Security benefits. Their combined income, including those Social Security disability benefits, exceeded their living expenses by $660 per month. Before the bankruptcy code changed back in 2005, and really up until just recently, their plan payment would have been $660 a month. However, in this case, our associate attorney Andrew DeYoung said we are only going to offer $250 per month. The concern was that the trustee would ask, “What about the other $410?” However, Andrew understood that there is an area of the law developing where judges have decided that because Social Security benefits are exempt—off limits to creditors—and that they don’t count in the means test that determines household income.

Q: So, Andrew was subtracting the disability payments from the means test equation?

CH: The wife collected about $1600 a month in Social Security benefits. Andrew was just arguing that not all of the couple’s disposable income should be turned over to the trustee, because the disability benefits are intended to provide the wife with a safety net, in case her health deteriorates or an unexpected medical situation arises.

Q: In this case, had both the husband and wife declared bankruptcy?

CH: Yes, it was a joint case. When the trustee asked why I only offered a $250 monthly payment, I stated there is some existing case law that suggests creditors cannot claim bad faith or abuse when debtors do not turn over all of their disposal income, because some of it—not all of it; just the disability benefits—is exempt from creditors. The trustee stated she was also familiar with that case law, so she dropped that disability income from the plan and, to our clients’ pleasure, accepted the $250 per month offered. I asked her if any Indiana judges had ruled on this type of situation or if there are any related 7th Circuit Court of Appeals cases. She stated not to her knowledge. The precedent for this is from some other jurisdiction where crafty bankruptcy lawyers have made this argument and evidently those judges have agreed, so she’s basically taken a position that maybe it isn’t money that she can demand from the debtors.

Q: You mentioned a family of four, which obviously includes children, and a related comfort zone of credible monthly expenses. Is there any entertainment budget that you can justify as not part of that family’s disposable income?

CH: There’s two things. There’s the means test, which looks at average monthly income over the past six months before filing. There’s also certain IRS standards for housing and food and whatever. If I refer to the computer program we use, I can look at how much is deemed to be reasonable for a four-person household. So sometimes when my clients don’t do a really good job on their budget, I’ll go to the means test and use the IRS standards to fill in a blank. Also, if a debtor shows too much money left over, and I know they really don’t have it, I’m going to find some place to use up that money, so they’re not too rich for a Chapter 7 bankruptcy. There are standards for what you can put into the different slots within a monthly household budget.

Q: Where do you find the means test you mentioned?

CH: It’s something that congress established, but our computer program provides all of this information, which is periodically updated. In Indiana, there’s currently a medium income for a one-person household of $43,422.

Jess Smith, III: The medium income varies from state to state.

CH: That’s the starting point. So if I have a family of four and their household gross income per year was less than $74,584, they immediately pass this test. The test is designed to determine if someone has an ability to pay back a significant percentage of their debt through a Chapter 13 plan.

Q: What happens if they fail the test?

CH: They’re ineligible perhaps for a Chapter 7, so we tell them that if they want relief from the bankruptcy code, they’ve got to file a Chapter 13 and offer this disposable income to their creditors.

Q: What happens if that disposable income figure turns out to be zero or just a couple of dollars?

CH: They really wouldn’t flunk the means test in that case. There’s an algorithm in the computer program that looks at what’s left over at the end of the month and what their debt is, and it figures out if you have an ability to pay back a certain percentage of that debt. The program indicates whether they’ve flunked or passed the test; it shows if you’re eligible for a Chapter 7. Sometime you can get around that, because we’re looking at income over the past six months. If the debtor has just lost a job and no longer has that income, we can override the test in a way, or at least show this special circumstance—they’re now destitute and don’t have any money—they’re not required to pay back some of this debt when clearly they don’t have an ability to do that.

Q: So that inability to pay back the debt determines whether you file for Chapter 7 or Chapter 13?

CH: Right. Most people will file for Chapter 7, wipe the slate clean, not make any monthly payments, and be done in three to four months. In Chapter 13, it’s three to five years where they’re making this monthly payment to a Chapter 13 trustee who then divvies up the money amongst the creditors in a certain way. Some people do Chapter 13 because they need it to save a house, to pay taxes, or do some other creative things, but there’s a small percentage of people who are required to file Chapter 13 because they are too rich to just wipe the slate clean. It’s not fair; it’s consider an abuse of the bankruptcy code for somebody who makes $100,000 to just get rid of all their debt.

Q: So that medium income is the number that determines whether you makes too much money?

CH: Right. It’s a starting point. If they’re below that number, they pass automatically. If they’re above that number, then we have to do this more-comprehensive test that looks at not just gross income, but where all of that money goes. Taxes, insurance, rent, food, utilities, car payments, student loans—all of those things. Then, after you plug in all of these numbers, the program shows a green happy face if you pass or a yellow unhappy face if you fail.

Bankruptcy Means Test

There’s a case we filed in which we received the green happy face. We filled in the debtor’s average monthly income and then on the next page it totals it up to $62,580. The median income for a family of this size is $62,431. So, because their combined income was a little bit above the median income, I had to go through the program and fill in additional fields, for example car payments and mortgage payments. There are certain standards, for example for a two-person household with two cars it’s $424 per month for gas, oil, and routine maintenance on a vehicle. At the very bottom of this test, in this particular case, we come up with this number for Disposable Monthly Income, which we call “DMI” and here it’s “minus $371.” So, clearly in this case they don’t have any money left over. That’s why the program gives us the green happy face, because it concluded that even though their income is above median income, because of all of their expenses, there is no money left over for the creditors. So they qualify for Chapter 7. Now if this had been a yellow unhappy face, and the DMI had been a significant positive number, then we would have to say to the debtor that the case would get thrown out or threatened with dismissal, so we just know that we have to file as a Chapter 13. Then they’re in this plan for 60 months, five years, to pay back as much of their debt as possible.

JS: And there are certain things that are not deductible on a Chapter 7 means test that are deductible on a Chapter 13 means test.

Q: Such as?

JS: Such as retirement account contributions or 401(k) loan repayments. Going back to the Social Security issue, the code says that, if you have a habit of making retirement contributions, you’re supposed to be able to continue those under this means test. Then you put your budget together going forward. Our associate Andrew DeYoung had a case where he tried to schedule the ongoing contributions, because she had done them within the six months. But he received a creditor objection and Judge Graham said, “I’m not going to allow you to keep socking away this kind of money while paying very little on your debt.

CH: Even though they’re in a Chapter 13, they get credit for it.

JS: Correct. She had a very low Disposable Monthly Income number under the means test, but when it came before the judge, the judge said this doesn’t pass the smell test. If the client were to appeal, maybe the client would have won, but the client didn’t have the resources to appeal.

Q: Was it because the IRA contribution was too high?

JS: It was substantial. Plus, evidence came out that the debtor worked for a university. If she contributed some phenomenal amount of money, her employer would match it with about 20% of the contribution. So this woman was trying to put away $9000 to $10,000 a year, hoping to get another $3000 to $4000 match. It was not the trustee who objected, it was an individual creditor who had loaned the debtor money and who spent enormous resources objecting to the proposed plan. I don’t know that every judge would have sided with the creditor, but this particular one did.

Q: So the judge threw out the IRA contribution entirely or forced her to lower the payment?

JS: She was in a Chapter 13, so the plan Andrew offered met the means test. But the creditor started objecting with old law—pre-2005 case law—and Andrew and I did not believe the creditor could win because it was such old case law.

CH: But it was an extraordinary amount of her income that she was contributing.

JS: Yes, it was about 15%, so a substantial portion of her income was being deferred.

CH: I’ve told people that if their contribution is 4%, or 6%, or even 8%, that no one is going to squawk. But if it’s 10% or more, that’s probably where it wouldn’t pass the smell test.

JS: In this case, the debtor was trying to only pay about $7000 on over $100,000 debt, so the judge said, “You’re not going to walk out of here with a fat 401(k).”

CH: This case illustrates the situation where you go to law school and think the law is black and white. You’re going to learn how to solve problems and there are definite rules. But the law is actually shades of gray. It’s almost never black and white. One judge might say, “That seems reasonable,” and another judge might say “It’s unreasonable.” It’s unpredictable, especially in state court law, where you go to one county and have one judge rule one way, then you go to another county, with the exact same facts, and another judge might rule a different way. Clients always ask, “Can you predict the results?” But that’s next to impossible, because you just don’t know how that judge on that day is going to interpret those facts in light of the law. Sometimes I’ve had judges where it was not what they knew that I was afraid of, it was what they knew that just wasn’t so. They thought that they knew the law, but they didn’t and they interpreted the law improperly. But you can’t go to the judge and imply they’re wrong. The only way you can do that is to appeal and most people we represent don’t have the financial ability or resources to appeal a decision, because that’s really expensive and time-consuming. The case mentioned earlier is a good example of the gray shades of the law and it’s fluidity, because by offering a plan with only a $250 monthly payment, instead of $660 a month, Andrew saved our client $24,600 over the life of the five-year plan.

Part 2 of Conversation: Differences Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

Part 3 of Conversation: Divorce and Child Support Can Impact a Bankruptcy

Part 4 of Conversation: Being Discharged From Bankruptcy

Bankruptcy Strategy for Client with Chronic Medical Condition and No Health Insurance

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Medical Bills Past Due

A remedy is available for a man without medical insurance who has a serious medical condition that prevents him working. Many people with medical conditions seek debt relief through a Chapter 13 bankruptcy plan, with the option of converting that to a Chapter 7 bankruptcy later, if medical bills become overwhelming while the plan is in effect.

We recently discussed how medical issues and bills impact bankruptcy filings with Christopher Holmes and Jess M. Smith, III, partners at Tom Scott & Associates, P.C. Below is a transcript of that portion of the conversation.

Chris Holmes: I have a current client who lives in the near-north side of Indianapolis. He is in his 40s and has children. He recently had undergone some medical treatment for a chronic, persistent problem. Unfortunately, he didn’t have any insurance. He couldn’t work and he didn’t have any accrued sick time, so he couldn’t earn any money. As a result, he couldn’t pay his monthly bills and couldn’t make payment on his medical bills. All of his creditors are now coming after him. Some people in this type of situation might file a Chapter 7 bankruptcy and wipe the slate clean. The medical problem has not yet been resolved and he is going to need additional medical treatment for which he does not have medical insurance.

What we do sometimes in cases like this is to put someone into a Chapter 13 plan, which would last, at a minimum, three years. If, during that three year period after filing the Chapter 13 case, he incurs an extraordinary amount of uninsured or unreimbursed medical bills he can’t handle, we have the luxury of switching or converting the Chapter 13 case to a Chapter 7 case. Whereas you can only list the debts that are incurred as of the time of the filing for bankruptcy, you can move that line down the road to the point of conversion. So, if between the filing of the Chapter 13 and the conversion of the case he incurs all of those unreimbursed medical bills, we can add them to the list. If those medical bills are dischargeable, we’ll discharge them in that converted Chapter 7. It’s a way to insure against uninsured medical bills during that three year time-frame.

Jess Smith: That is a legitimate reason for people to file Chapter 13. Don’t take garnishment now, with the right to convert later.

CH: So, for a minimum payment of $125 a month, which is probably cheaper than any insurance premium, people in this position insure against those uninsured medical bills during that three year timeframe. Now, if they don’t incur any additional medical bills, they can complete their plan and get their discharge, but if those medical bills are more than they can handle, that’s a reason to switch it over to a Chapter 7.

This particular client can’t go back to work for a couple of more months, so we are going to wait to file the case until that time. Chapter 13 used to be referred to as a wage earner plan and was designed for people who had regular steady income above and beyond their monthly living expenses. Without that regular steady income, he can’t propose a feasible plan. So, he is going to be released by his doctor and go back to work and that is when we are going to file. He’s still worried that he is still going to have this persistent problem that would require additional medical treatment and incur those unreimbursed medical bills.

If a medical condition and medical bills are causing severe financial hardship, contact us to discuss possible options that will allow you to get back on your feet and out of debt.