Tom Scott Law Indy

Bankruptcy Attorneys in Indianapolis Since 1980

Chapter 7

COVID-19 Update: How Will the CARES Act Affect a Chapter 7 or Chapter 13 Bankruptcy?

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CARES Act Will Temporarily Change Chapter 7 and Chapter 13 Bankruptcy Rules

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) legislation being developed by Congress, to provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic, also provides temporary changes to Chapter 7 and Chapter 13 of the United States Bankruptcy Code. The changes are as follows:

  • For purposes of calculating a debtor’s income to determine his or her eligibility for Chapter 7 and Chapter 13, coronavirus-related payments from the federal government are excluded from the analysis.
     
  • Similarly, coronavirus-related payments are not considered in determining a debtor’s disposable income for a Chapter 13 plan of reorganization.
     
  • Lastly, the CARES Act allows Chapter 13 debtors who have already confirmed a plan to modify the plan based on a material financial hardship caused by the pandemic, including extending their payments for seven years after their initial plan payment was due.

The changes apply in pending Chapter 7 and Chapter 13 cases and will be applicable for one year from the effective date of the CARES Act.
For more information about how this affects your situation, please contact us.

U.S. Congress Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

  1. PDF provides a complete and accurate display of the text.
  2. Web page with links to each section of the bill’s text.

Bankruptcy and Personal Injury Claims / Modifying a Chapter 13 Plan / Joint and Several Liability

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Bankruptcy and Personal Injury Claims

If you have a pending personal injury claim when you file for Chapter 7 bankruptcy, you relinquish to your trustee all control of the settlement of the case, but you retain some control with a Chapter 13 bankruptcy. In rare Chapter 13 cases, the cram-down method of reducing debt for an automobile can be used to reduce the first mortgage payments on a house.

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 how a debtor’s pending personal injury claim affects a bankruptcy case; how the cram-down method of debt reduction can be used for a mortgage in rare instances; the willingness of bankruptcy trustees to modify a Chapter 13 payment plan; how the Rash decision affects a debtor’s ability to surrender a car in the middle of a Chapter 13 plan; and the circumstances during a bankruptcy in which divorced spouses can both be held jointly and severally liable for debt incurred during their marriage.

Q: How does a debtor’s pending personal injury claim affect a bankruptcy case?

Jess Smith, III: If a debtor files for a Chapter 7 bankruptcy, he or she loses all rights and control over that personal injury action. The Chapter 7 Trustee has complete authority to prosecute it, settle it, or abandon it. Also, the Chapter 7 Trustee will, in all likelihood, take all of the net proceeds and distribute them amongst those creditors who file a claim against the Debtor. In other words, none of the net proceeds will be turned over to the Debtor unless those net proceeds exceed the total amount of the claims filed against the Debtor.

With a Chapter 13 filing, the debtor maintains some control over the personal injury claim regarding settling it or taking it to trial. If money is paid to the debtor as a result of a trial or settlement, then there is a negotiation between the debtor and the trustee as to how much goes to the debtor’s creditors and how much the debtor is allowed to keep for his efforts to acquire that money. That is why sometimes a debtor will choose to file a Chapter 13 bankruptcy versus a Chapter 7.

Typically, a Chapter 13 trustee will allow a debtor to keep one-third (1/3) of the net proceeds, with the remaining two-thirds (2/3) of the net proceeds going to the creditors.

Q: Have you recently handled any bankruptcies that included a personal injury claim settlement?

JS: Yes. In a current Chapter 13 case, the trustee is allowing the debtor to keep 50% of the net proceeds, because his bankruptcy plan is paying all of his creditors in full; therefore, I was able to acquire a little extra money for my client.

Q: If there is an existing Chapter 13 plan in place, which pays back all of the debt to the creditors, and all of the creditors had already agreed to that plan, why does the trustee want 50% of that personal injury claim?

JS: Because it gives the creditors some money right away, in the event the plan fails down the road. For some unforeseen reason, the debtor might run out of money and won’t be able to pay the creditors according to the plan. The trustee has a duty to at least get some of that personal injury money and disperse it now, as opposed to waiting on the debtor’s good promise and good intentions to pay it.

Q: If the debtor maintains the payment schedule, does that shorten the length of the plan?

JS: Yes, in a full-repayment plan it will shorten the length of the bankruptcy. If the debtor is not in a 100% repayment plan, the money received from the personal injury claim, usually two-thirds (2/3) of the net amount, is extra money for the creditors of the debtor.

Q: What are some of the more common circumstances you encounter in which a debtor does not meet the original payment schedule obligation of the plan to pay back creditors?

JS: Job loss or significant decrease in income after approval of the plan. Also, the divorce or separation of joint debtors can cause a plan to fail. Also, any other significant change in circumstances that causes an interruption in income.

Q: If that occurs, what happens to the filing of the bankruptcy?

JS: The case is dismissed, the Chapter 13 case is converted to a Chapter 7 case, or the Chapter 13 plan is modified and the plan payments are changed to redress the problems caused by a change in disposable monthly income.

Q: Let’s expand upon those options. If a debtor is not able to meet the obligations of a bankruptcy plan, why would that case be dismissed?

JS: Because the creditors are not receiving what they are entitled to receive.

Q: If the bankruptcy case is dismissed, what happens to the debts?

JS: It is as if the bankruptcy proceeding never happened and the creditors can resume their non-bankruptcy actions to try to collect on the debts.

Chris Holmes: It usually is a situation in which the debtor is unable to make their bankruptcy plan payments and they are not eligible for a conversion to a Chapter 7 case. As a result, the case is dismissed and their creditors are free to resume their efforts to collect on the debts. The primary reason a debtor would not be eligible to convert a Chapter 13 to Chapter 7 would be if they filed the Chapter 13 within eight (8) years of the filing of a prior Chapter 7 case. As a result, the only option is to allow the case to be dismissed and the debtor may be able to refile under Chapter 7 if it has been more than eight years since the filing of the previous Chapter 7 case.

Q: In most cases, if you’ve never filed for a Chapter 7 bankruptcy and you’re having trouble meeting the obligations of a Chapter 13 plan, then that option to convert to a Chapter 7 still exists?

CH: Yes, provided the debtor qualifies for relief under Chapter 7 of the U.S. Bankruptcy Code, the debtor has no nonexempt assets that can be confiscated and liquidated by the Chapter 7 Trustee, and the debtor is prepared to deal with certain secured creditors or nondischargeable debts outside the U.S. Bankruptcy Court.

Q: Have you had any extraordinary situations arise that are resolved more effectively by a Chapter 13 case rather than a Chapter 7 case?

CH: Recently, I had a very rare situation in which a woman owned a home that is worth less than the balance due on her first mortgage and, as a result, her second mortgage was wholly unsecured. As a further result, Chapter 13 of the U.S. Bankruptcy Code allows us to, as we say, “strip off” or avoid a wholly-unsecured second mortgage because there is no equity in the home to which that second mortgage can effectively attach.

JS: In other words, the debtor can change a secured debt into an unsecured debt and, as a result, we can treat that debt just like we would treat credit card debt or a medical bill.

CH: What made this particular case extraordinary, however, was how we treated the partially secured first mortgage in the debtor’s Chapter 13 Plan. First, I asked the debtor: “Do you really want to pay off a mortgage that, with interest, totals more than twice the current value of the home?” Given her home is located in a neighborhood in which the value of homes is depressed, and her home is in a state of disrepair, we concluded that it was unlikely that the creditor would want to foreclose on its mortgage and take possession of a home that will be impossible to sell for more than what the debtor owes on the mortgage. Also, the home would be expensive to maintain until it is sold. As a result, the debtor offered to pay the holder of the first mortgage only the current value of the home, plus a reasonable rate of interest, through the plan, and treat the balance of the mortgage as an unsecured debt. (If you recall, we do something comparable with certain auto loans—what we refer to as a “cram-down.” When an auto loan is more than two-and-a-half years old and the payoff exceeds the retail value of the car, the debtor can force the creditor to accept only the retail value of the auto plus a reasonable rate of interest, and then treat the balance of loan and any unpaid interest as an unsecured debt to be discharged.)

Legally, we can’t force the creditor to accept a “cram-down” on residential real estate; however, the debtor decided to give it a chance in the hope that the creditor preferred to accept what she offered rather than assume the risk of a worse outcome if it took possession of the property…and the creditor accepted! And given the debtor’s plan payment is roughly equivalent to her first mortgage payment, she will be able to resolve all of her debts using the money the debtor would have otherwise used for only the first mortgage. And should she successfully complete her plan, the balance due and owing on her other debts will be discharged and the debtor will own her home free-and-clear.

Q: In regards to debtors who do not successfully complete their Chapter 13 plans, what circumstances do you encounter most frequently as the cause?

CH: The primary reasons why Chapter 13 Plans fail: The debtor fails to make regular monthly plan payments due to a reduction in income caused by a job loss, or the debtor must use the money earmarked for their plan payments to pay some unforeseen, extraordinary expense such as car repairs or uninsured medical bills that arise after the filing of the case.

Q: Are there situations in which you adjust the plan payment to make it easier for the debtor to continue to make their payments on time?

JS: Yes, sometimes. If the debtor’s disposable monthly income decreases, then we can reduce the monthly plan payments accordingly.

CH: Also, if the debtor fails to make a few plan payments, then we can ask the Judge to modify or amend the debtor’s plan. For example, if the plan life is shorter than 60 months, then we can extend the life of the plan by the number of months in which plan payments were missed, in order to make up for the shortfall.

Q: What would happen if the debtor’s plan is already set at 60 months?

JS: I’ve just been in communication with a debtor who has a motion to dismiss. Her current plan payment is $1000 per month and she is behind by two months. What we’ve agreed to do is tack on an additional $100 per month for the next 20 months to catch up on the total amount due. This will place her in kind of a probationary status. If she misses another payment, the trustee can then choose a quicker route to get the case dismissed.

Q: How willing are trustees to negotiate to modify plans?

JS: The longer you’ve been in the plan, and the trustee sees your making a sincere genuine effort, the more likely the trustee will be to work with you. For example, I have a married couple as a client and they have a plan that is supposed to be 60 months long. For most of the plan, the debtors were having a portion of the trustee payment deducted from their wages, but one them lost their job, so they fell slightly behind in their plan payments.

At the end of the 60 months, the trustee stated the payments were two months short of the total amount due and filed a motion to dismiss. I objected, because payments were still being made to the trustee. The hearing is now set in about month 63. As long as that money is still coming in, the trustee will agree to just continue the hearing on the motion to dismiss until all of the money due has been paid.

Q: Does the trustee need to go back to the creditors to get them to agree to the extended period of time it will take to fully pay the amount due?

JS: No, it’s within the trustee’s discretion. If a creditor wanted to show up at the hearing and voice their own displeasure, they could. But most of the time the unsecured creditors rely upon the trustee to have the more intimate knowledge of what’s going on with the case and the debtor’s situation.

Q: So in any circumstance where you try to go back and renegotiate the terms of the plan, is it strictly up to the trustee to accept the proposal?

CH: No, the creditors can object if the modification of the plan negatively impacts them. For example, if the debtor’s plan base (i.e., the total of all plan payments) is reduced and, as a result, the amount of money to be distributed amongst the creditors is decreased, then the creditors must be notified and given an opportunity to object if the creditor believes the modification will be unreasonable or unfair.

Q: Is it like you’re going back to the beginning of the bankruptcy filing process?

JS: Yes, if you’re reducing the plan base. There is some interesting case law out there, which fortunately doesn’t come up much in our district.

For example, let’s say a debtor had a $15,000 car that they were going to pay for through the plan. The debtor gets the benefit of driving the car while the trustee is giving the creditor who made the car loan a few dollars every month towards the car payment. Three years into the plan, the car breaks down and the debtor says, “I don’t want the car anymore. I’m going to change the plan, reduce the amount owed on the car by cutting it out of the plan, and have the lender come pick up this piece of junk.”

Most of the time, in this district, the creditor will not object. But there is case law in other circuits outside of Indiana, such as the Rash decision (In the Matter of Elray and Jean RASH; United States Court of Appeals, Fifth Circuit.; Decided: July 30, 1996), which deals with this type of situation. The Rash decision is a widely-followed decision that states if a bankruptcy case is approved and a secured creditor is to receive a specified amount for a car, the creditor can object to a plan modification that surrenders the car back to them, because the debtor is the person who drove the car into the ground, not the creditor.

Those are some issues in limited circumstances—where you try to give back a secured asset after it breaks—in which a creditor will sometimes object. And if the creditor would push it, they would probably win. At that point, the debtor would have to decide to either (A) give the creditor the money they’re entitled to and fix the asset, or (B) to convert to a Chapter 7 bankruptcy, if otherwise eligible, or (C) to let the case be dismissed and start all over. Those are all options, but fortunately we’re fairly lucky in this district that we don’t have a lot of secured creditors object when we try to surrender an asset after the plan has been approved.

CH: I can’t remember the last time a creditor objected to the surrender of a car midway through the plan.

JS: I’ve seen a few instances with certain lawyers based in Kentucky who cite the Rash decision.

CH: In our previous conversation we talked about a debtor who owed his ex-wife a property settlement debt based on their divorce agreement. Because the debtor filed a Chapter 13 bankruptcy, that property settlement debt was dischargeable; whereas, it would not have been dischargeable in a Chapter 7 case.

I had a similar situation recently in which our client told me she had a car loan from the marriage that both her ex-husband and she had co-signed. In the divorce decree, the judge ordered our client to pay that debt and to hold her ex-husband harmless (that is, to protect the ex-husband from any liability thereon).

As it turned out, our client couldn’t make the loan payments, the car was repossessed, and the car was sold for less than the unpaid principal balance on the loan. As a result, there is a deficiency balance—the unpaid portion of the debt—for which both her ex-husband and she are jointly and severally liable.

In a Chapter 7 bankruptcy, her obligation to hold him harmless is a nondischargeable debt. That means the ex-husband could ask the divorce court judge to hold our client in contempt for not holding him harmless, should that car creditor sue him for that deficiency balance. According to Chapter 13 of the U. S. Bankruptcy Code, our client can list her obligation to the ex-spouse—to hold him harmless on that debt—as a debt to be discharged, which is another compelling reason why some people opt for a Chapter 13 case rather than a Chapter 7 case. As a consequence, our client will be able to discharge her personal liability on this $12,000 deficiency balance, and her ex-husband will not be able to go to ask the divorce court judge to hold our client in contempt for not holding him harmless on the underlying debt.

Q: It sounds like the husband thought he was going to be protected, but ended up not being protected. Did he make some sort of a mistake in his negotiation of their divorce agreement?

CH: Sometimes divorce lawyers will insert language into a property settlement agreement that asserts that such obligations are in the nature of alimony or maintenance and, therefore, nondischargeable. Whether such a provision is enforceable is a matter for the Judge of the U.S. Bankruptcy Court to resolve.

Protecting Your House From Liquidation in a Bankruptcy

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If you own a home, Indiana law allows you to protect a portion of the equity in that home. A liquidation analysis determines what would be available for creditors after you deduct the cost of sale and other expenses.
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 1 of 2 of the transcript of that conversation.

Q: In regard to a person’s financial situation, what does it mean to be “judgment proof?”
Chris Holmes: Some people have too much debt and maybe they’re on Social Security or they have no income. Those individuals are what we call “judgment proof” because creditors can’t make them pay if they don’t have wages to garnish. A person’s take-home pay must exceed $217.50 per week before they can be garnished. In addition, some sources of income, like Social Security and veteran’s benefits, are exempt—off-limits—from garnishment. If those individuals don’t have any real estate or they have less than $10,250 in tangible personal property, there’s nothing a creditor can take from them to liquidate, to pay on the debt. Sometimes I tell people that they don’t even need me, if they have a strong enough stomach to withstand the calls, the letters, and being dragged into court periodically.
Jess Smith, III: On the other hand, I had a woman come in to see me recently and she hardly has any income, but her name is on the deed of an ex-boyfriend’s piece of lien-free real estate that is worth $90,000. Therefore, she had to pay 100% of her debts to protect that property. She said, “Well, I better go out and find a job first.” She was behind on her residence and thought she could get rid of her other debt and just keep her residence, but she found out her name is on this other piece of property.
CH: Sometimes people come to us, creditors are hounding them, and they don’t have the ability to pay them back. Most people would prefer to file a Chapter 7 bankruptcy and just wipe the slate clean, but we have to evaluate their home and compare it to what’s owed on it. If you own a house in your name only, Indiana law allows you to protect $19,300 of equity in that home. So let’s say you have an $80,000 house and you only owe $30,000 on it, so there’s $50,000 of equity. You can only protect $19,300, which leaves just under $30,700 of non-exempt equity. In a Chapter 7 bankruptcy, the trustee has the power to take that house, sell that house, pay the commission for the sale, give you your $19,300 equitable interest that’s protected, and use what’s left over to pay back some of your debt.
Q: So how do you avoid that?
CH: For those people, if they want to protect their house, I ask them if they have a rich relative or a retirement account or some resources to tap. We do what’s called a liquidation analysis to determine what would really be leftover for the creditors once you factor in the cost of sale and some other things. I had a case where a woman couldn’t afford to come up with money herself, but she had a rich uncle who stepped in and gave her a sum of money equivalent to what the trustee wanted to prevent him from taking and selling her house. Otherwise, what most people have to do is file a Chapter 13 bankruptcy plan to pay back to their creditors, over a three- to five-year period, as much or more money than they would have received had the house been taken and liquidated.
Q: Are they paying the full amount of the equity or a certain percentage on the dollar?
CH: What we can do is factor in not only the mortgage and the exemption, along with the cost of sale. We figure out how much would the trustee in a Chapter 7 have received for doing all of that work and liquidating—the trustee gets a percentage of every dollar they collect for the creditors—so we can subtract that amount out. What’s left over is a reduced amount that has to be paid or distributed amongst all of the creditors during that three- to five-year period.
Q: Are those all of the factors that go into the liquidation assessment?
CH: Sometimes there are some other things, like certain taxes that have to be paid first in a Chapter 7, so we factor that in, which reduces the amount even further that somebody would have to pay to protect their home from liquidation.
Q: In a general sense, would you say it’s better to file for Chapter 13 bankruptcy and keep your house rather than to file a Chapter 7 and lose your house?
CH: It depends on the debtor. Maybe they don’t even care. They might live in a terrible neighborhood and don’t like their neighbors, or they’re tired of raking the leaves and mowing the grass. It’s rare, but I’ve had a client who said, “Fine. Mr. Trustee, take my house, sell my house, and give me a check for my equity amount.”
Q: Tell me a little more of the specifics about this woman who had her name on the deed of her ex-boyfriend’s house.
JS: Her first issue is that, because she is between jobs, she is behind on the regular mortgage payments for her residence. She owned her own home and had a half-interest on this other house, so she was going to have to file a Chapter 13 to catch up on the overdue payments on her home. Then, when she lost her job, her car got repossessed, because she couldn’t pay for it. I don’t know which came first, the job loss or the repossession, but she just had the car repossessed and she thought she had a citable deficiency of about $15,000. In other words, after the car was repossessed and sold, they’re coming after her for that $15,000. I explained to her that because of the equity she has in the non-residential real estate, she would likely have to pay the deficiency on the car she just lost. So she said, “I understand that and I knew that, so I’ve got to get a job to make this all work.”
Q: Who owns the other half of that non-residential property?
JS: An ex-boyfriend that put her name and his name on the deed about 20 years ago when she had loaned him some money.
Q: So your recommendation to her was to not file for bankruptcy?
JS: Not until she has some cash flow that can fund a Chapter 13.
Q: Why did she want to protect the ex-boyfriend?
JS: I’m not sure, but she was very adamant that he should not lose that real estate because of her.
Q: Could she have taken a different, less-friendly approach regarding that other property?
JS: She could have filed a Chapter 7, but it wouldn’t help her cure the arrearage on her residence. We’ve agreed she’s going to eventually file a Chapter 13.
Q: Would you have to meet the best-interest-of-the-creditors test if she didn’t care if that other property was taken and sold?
JS: Yes, because a Chapter 13 trustee is not going to liquidate it. I have the same issue in another case I have in which a woman is in what’s called a “100% plan.” She has to pay everyone back, because she has $50,000 to $60,000 equity in a residence. In addition to that equity, she was also try to cure the arrears on it, because she had one health issue after another after another. The ongoing mortgage payments were being paid by the trustee, but she wasn’t making enough to do that and pay for the car she wanted to drive. She had visions that she was going to refinance the mortgage outside of the bankruptcy. So, I filed an amended plan that says we surrender our interest in the house, but we now want to pay for the car and pay the balance of the attorney fees, and chop the payment way down from about $1500 a month to $400 a month. I now have an objection from the trustee saying we haven’t met the liquidation test on the equity of the house.
Q: Even though she’s surrendering the house?
JS: We haven’t fought it out yet, but it drew an objection.
Q: What is the objection based on?
JS: Because she could sell her real estate and pay off the mortgage and there would still be money for other creditors creditors. That’s what the trustee said. At least on paper, there’s a ton of equity here. She has a son and his fiancé who’ve said they want to refinance it, but the trustee wants money for the creditors.
Q: For clarification, what exactly is a 100% plan?
JS: Every creditor that files a claim will get paid in full.
CH: So, in that Chapter 7 liquidation, there would have been enough money to pay back every single penny of all of the debt. In a Chapter 13, to prevent the sale of the house, you have to make sure that every single penny of that debt gets paid, to protect the equitable interest in the real estate. The benefit of the Chapter 13 then could be—because I’ve had people ask, “What benefit is it for me to file Chapter 13 bankruptcy if I have to pay back everybody in full?”—first of all, once they’re under the protection of the Chapter 13 bankruptcy creditors can’t call, can’t write, can’t sue, can’t garnish. Also, as soon as we file the case, no more interest can accumulate, no more late charges can be imposed or attorney fees assessed. And, those creditors have a window of opportunity—about four months from the date of the filing of the case—to file what’s called a Proof of Claim. So if somebody wants to get paid, they have to file a claim with the bankruptcy court before what’s called the bankruptcy Bar Date. If they don’t file a claim by that date, they don’t get any money.
Q: So, it puts the onus on the creditors to do something to get paid?
CH: Right. We had an extraordinary Chapter 13 case not too long in which we had a high-income dentist making enough money to pay everyone in-full. The total of her unsecured debt to be paid through the plan was around $106,000. So we came up with a plan payment that over 60 months she would pay every single penny of that debt, without any interest or late charges. But—and it’s the only time I’ve ever seen it happen—not one single creditor filed a claim. So, whereas she would have had to pay the entire $106,000 through this plan, she got out of the plan with a discharge on all $106,000 of debt and didn’t have to pay one penny on any of that debt, because not one of those creditors was on-the-ball enough or smart enough to file a claim.
Q: If there were no payments to be made, did the discharge come immediately?
JS: Actually, after payment of attorney fees and trustee fees; after the claims deadline.
CH: I had a Chapter 7 case in which the trustee decided the debtor had an asset that legally could not be protected, so the trustee wanted to take and liquidate it. The trustee sent out a notice to all of the creditors to file a claim, because there would be money available for them. Not one single creditor filed a claim, so the trustee sent out a second notice that said, “I’m going to have money for you if you file a claim.” Again, not a singular creditor filed a claim, so the trustee had no one for whom to collect some money, so he could not and did not take the property that had been subject to liquidation. The debtor got to keep the property, because for whatever reason, creditors did not file a claim. Those are anomalies, but when you do as many cases as we do, you see more and more of those kinds of unusual situations.
Part 2 of Conversation: Common Reasons People File for 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

Differences Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

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The primary difference between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy is that a Chapter 7 bankruptcy can eliminate debt in a period of three to four months compared to the three to five years it takes to complete a Chapter 13 plan. Under certain circumstances, a Chapter 13 bankruptcy can be converted into a Chapter 7 bankruptcy.

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 2 of 4 of the transcript of that conversation.

Q: For a debtor, in terms of moving forward with your life after you declare bankruptcy, what are the differences between between Chapter 7 versus Chapter 13? How does that affect your credit score or your standing in the financial world?

Jess Smith, III: In the short-term, a Chapter 7 is probably more advantageous, because when you’re in a Chapter 13 there’s always the risk that you won’t complete the plan and you’ll become eligible to convert it to a Chapter 7. Therefore, you can add debt to your bankruptcy that accrue from the time you file your Chapter 13 to when you convert to your Chapter 7. That makes lenders nervous about extending credit to you while the Chapter 13 is open, because they could take a hit.

Chris Holmes: I always tell people you’re in a case for three to four months under Chapter 7. Your done and you can do whatever you want. In a Chapter 13, you can’t borrow money without permission of the trustee or the judge. As Jess pointed out, debts that are incurred after the filing of the case, if they change their mind and switch to a Chapter 7, they can be thrown into the mix for discharge.

Q: So what would be the circumstance in which someone could switch from a Chapter 13 to a Chapter 7?

JS: A loss of income is the primary one.

CH: People start out and maybe they’re too rich. they make $100,000 a year and can pay back some of the debt. Then their job goes overseas and they’re making $10 an hour; income plummets; no money left over for the creditors; case is no longer feasible. And so we switch to a Chapter 7, dispense with the monthly payments, and just wipe out the rest of the debt.

JS: Another reason someone might want to start as a Chapter 13 and contemplate having the option of a Chapter 7 later is that you have people with substantial medical issues. Perhaps they have a few creditors coming after them now, where they need that protection. But they don’t want to file Chapter 7 now, because they know they’ve got medical issues within the next eight years that are going to crop up. Some of them will go into a Chapter 13, to establish a payment plan with those existing creditors, knowing that if a medical calamity happens before the Chapter 13 is done they can convert to a Chapter 7 and add those debts.

CH: It’s kind of a way to insure against uninsured events over this three- to five-year period, so if something terrible happens—they run up $50,000 of uninsured medical debt and they can’t afford to pay it—the law says we can switch from a Chapter 13 to a Chapter 7 and move those debts. Generally speaking, when you file the case, you’re going to list the debts prior to that date. In a Chapter 13 or a 7, you can’t add debts thereafter. Unless you switch it from a Chapter 13 to a Chapter 7, so that deadline before which debts can be added moves up to the date of conversion to a Chapter 7. So, all of those debts incurred in-between, that otherwise a debtor would have been stuck with, are added to the list.

Q: It seems as if wiping out debts completely under Chapter 7 is a more drastic financial transaction. Does that affect your credit score more negatively than filing a Chapter 13?

CH: You would think that someone filing under Chapter 13 who is paying back some of the debt would get some kind of credit for that. But my understanding is that a bankruptcy is a bankruptcy is a bankruptcy to most creditors, whether it’s a Chapter 13 or a Chapter 7. People don’t get credit, in a sense, for paying back some of their debt through a Chapter 13 plan.

JS: Not until the Chapter 13 discharge, but while you’re in it you get no positive benefit from it.

CH: No one is going to pat you on the back and say, “You’re paying back some of your debt, here I’ll give you more money.”

JS: At the end, if it shows you paid your mortgage on time and you paid your car off in full, you’ll get credit for those things. But your not going to get a boost for running into a Chapter 13 as opposed to a Chapter 7. Not in the short-term, no.

Q: But in the long-term?

JS: Potentially, yes.

CH: I tell people that supposedly debts stay on your credit reports seven to 10 years.

JS: Usually from petition date.

CH: So being in a Chapter 13 for three to five years, as opposed to a Chapter 7 for three to four months, won’t stay on your record any longer.

JS: A Chapter 13 will actually come off the credit report sooner. A Chapter 7 will be up there for up to 10 years; a Chapter 13 for about seven years.

Q: So an advantage to completing a Chapter 13, in the long-term, is that it will help you establish better credit sooner?

JS: Potentially. But in the short-term it’s the same.

CH: People always ask, “What’s a bankruptcy going to do to my credit rating?” Well, if you’ve got $50,000 of credit card debt, $30,000 of medical bills, and people are suing and garnishing and hounding you, your credit worthiness is already shot. In a weird sort of way, when you get a discharge in bankruptcy, you wipe that slate clean. You can’t file another bankruptcy for eight years, but if you have decent income and no debt, I would imagine that one’s credit worthiness is going to be enhanced by wiping the slate clean. We have debtors who tell us that just weeks later they start getting inundated with car loan applications, even though they’re in a bankruptcy. I assume that’s because the creditors are sophisticated enough to know they can’t file another bankruptcy and they can’t add any post-filing debt to the bankruptcy. So, any car loan after the filing can’t be added; they can’t file another Chapter 7 for eight years, and they’ve got decent income and they know all of this debt is going to be wiped out, a new loan can’t be discharged. I assume that’s why they are aggressively marketing to those people.

Q: So, you can’t file another Chapter 7 for eight years after having filed a Chapter 7?

CH: Date of filing plus eight years.

Q: How about if you file for Chapter 13, then complete that 60-month plan and the bankruptcy is discharged?

JS: If you file a Chapter 13 first and complete it, you can file a Chapter 7 six years after your Chapter 13 filing date, under certain circumstances. If you file a Chapter 7 first and then you file a Chapter 13, it has to be four years after your Chapter 7 filing to be eligible for a discharge. We have people who file them so close together they’re not eligible for any discharges. They complete an umbrella, so they can get their things sorted out. With an umbrella, the creditors are told to stay, while the debtor makes some sort of a payment plan. We have people complete those payment plans and then they still have to deal with the debt, because it wasn’t discharged. But, in the interim, that period of the five-year window, they’re able to live their lives and try to get their affairs in order.

CH: Or we put them in one of these bankruptcies just long enough until finally it’s been long enough to file a bankruptcy from which they can get a discharge. So, we let the case be dismissed and then re-file when it’s been long enough.

JS: I just placed someone into a Chapter 13 where basically the primary purpose was that her main debt was student loans. She made about $70,000 salary and, based on her household size, she could file a Chapter 7. But the student loan creditor said, “You owe us over $100,000, so we’re going to administratively garnish 15% of your wages. And she said, “No you’re not. I’m going to file a Chapter 13 and I’m going to pay you $500 a month for the next five years, so I can get my kids out of the house.” Otherwise she knew that 15% was going to have her end up being evicted, because it was too much of her income.

CH: Another reason we do Chapter 13 filings is because student loans are nondischargeable. If, for example, the debtor has other problems and the student loans is just too burdensome, we put them in a Chapter 13, so they can keep the student loan creditor at bay for five years. Meanwhile they can resolve some other cash issues or save their house or do whatever they need to do. But then, of course, because it’s nondischargeable, down the road that student loan is still there. Chances are that what was paid to the student loan through the five year plan won’t cover the interest that accumulates, so that student loan is probably going to be bigger. But at least they can get rid of all their other financial problems and then they can focus on the student loan at the end of five years. Hopefully at that time the money that was in the plan to solve other problems will be there to solve the student loan five years down the road.

JS: We refer to that as a Chapter 26. That’s when you get through your first Chapter 13 and shed everything but the student loan, and then if you’ve got all of the kids out of the house, maybe you’re in another Chapter 13 where your student loan is your only creditor and you try to knock it out during the second five-year plan.

Q: So, regardless of whether you file Chapter 7 or Chapter 13, student loans are not dischargeable?

JS: Correct. By and large, with rare exceptions.

Q: And that’s the same for federal taxes?

CH: Well, no. Taxes are a little different, although that gets complicated, too. But, generally speaking, if the taxes are less than three years old, you’ve got to pay them back. Taxes more than three years old may be dischargeable, but then you have to worry about whether there is a federal tax lien. Some of the tax might have to be paid back. I’m about to file a case for a debtor who had some taxes owed for 2012. The clock didn’t start ticking until April 15, 2013, because taxes are always due by April 15 the following year. So, I said to her, “Look, you’ve got all of these taxes owed for 2012; we don’t have to file your bankruptcy sooner than later. Let’s wait until after April 15, 2016, so they’ll be more than three years old and then maybe those 2012 taxes will be treated just like a credit card or medical bill, and be totally wiped out.” The threat was that in the interim, unbeknownst to me, the IRS filed a tax lien, which would make some of the tax payable. The hope is that the tax is going to fall off as a dischargeable debt.

Part 1 of Conversation: Means Test Helps Determine Filing For Chapter 7 or Chapter 13 Bankruptcy

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

Part 4 of Conversation: Being Discharged From Bankruptcy

Divorce and Child Support Can Impact a Bankruptcy

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Divorce is one of the major causes of bankruptcy. If your divorce agreement includes child support payments, your ex-spouse can play a significant role in determining whether or not your bankruptcy will be discharged.

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 3 of 4 of the transcript of that conversation.

Q: Have you been dealing with any unusual circumstances recently?

Jess Smith, III: I have a gentleman who completed his Chapter 13 plan; he made all of his payments and was getting ready to file his motion for discharge. However, his ex-wife objected to it because he fell behind—not on his post-petition child support—on his share of the uninsured medical expenses for the child. She had taken him back to the divorce court and got a judgment against him for not paying his share of those medical expenses, which is classified as a domestic support obligation. She objected to his discharge under Chapter 13.

Chris Holmes: Before anyone can get a discharge under Chapter 13, they have to certify they have paid every single penny of child support that came due after the filing of the case up until the day of discharge. In this poor guy’s case, he had paid every single penny of child support, but then because that other expense—which is in the nature of child support—had not been paid, it became an issue. Child support is not just the weekly amount that’s paid, sometimes people are ordered to pay a percentage of medical and dental and optical expenses. Evidently, he didn’t pay his fair share, so she sued him and got a judgment against him.

JS: She filed a contempt on him in the divorce court. She also filed an objective to his bankruptcy discharge.

Q: If he was denied a discharge, would that mean his personal liability on all of those other debts would still be there?

JS: The bankruptcy judge waited to see if he was going to make any headway on it. No resolution was made, so the judge said to the debtor, “Either I’m dismissing this case or you might be able to convert to a Chapter 7 and there might be ramifications of that or not.” So, we converted to a Chapter 7 and we got his discharge. So, all of his other debts were discharged, but he did not get a Chapter 13 discharge, In this case, it was really of no consequence, because he was not paying taxes in the plan.

I’ve got another case in which the debtor had a Chapter 13, with taxes being paid in the plan. He also owed his ex-wife child support and he estimated that he owed her $5000 of child support. So the ex-wife got notice of the bankruptcy and was given a claims form. She never filed a claim. So, eventually the trustee was sitting on this money and he paid the taxes first. Then he said to the debtor, “We’ve got this $5000; you better file a claim for your ex-wife, otherwise I’m going to have to disperse it to Visa and MasterCard, and you won’t receive any child support credit for it.

CH: The ex-wife hadn’t file a claim and if you don’t file a claim you can’t get paid through a Chapter 13 plan.

JS: About a year and a half ago, I filed a claim for the ex-wife and I put the state court divorce number—the Indiana Support Enforcement and Tracking Number. Instead of sending the money directly to the mother, the debtor scheduled a flat $5000 payment and we had it go through the state address where they basically put that money onto a Visa debit card. The trustee pays it through the Indiana Child Support Collection Unit. In the meantime, he’s having his regular support deducted out of his wages. We’re getting close to the plan length, so we tell the debtor that he needs to come in to sign off that he is current. He says, “My kids are 19 and they’re still yanking it out of my check.” I ask, “Are you current or are you not?” So he hired me to find out why they are still taking out child support from his wages. I went to the state court, pulled 17 years worth of records, and did a hand audit. There were periods within those years during which he would miss eight months at a time, and despite the fact that he continued to pay support beyond the child’s 19th birthday, his estimate of what he owed his ex-wife was way low.  I created a spreadsheet that accounted for every nickel of child support he ever paid and then told him that he still owes about $5900, even after the recent $5000 payment. I tell him that I can’t file the certification for his Chapter 13 discharge, because it would be a false representation of his bankruptcy. For him to get a Chapter 13 discharge, he has to certify to the bankruptcy court that he has paid all post-filing and all pre-filing child support, unless there was an order in the state court to the contrary stating he doesn’t have to do it.

CH: He has to swear, under the penalties for perjury, that he has paid every single penny of child support from the date of filing to the date of discharge.

JS: The bottom line is I tell him we can’t do this. Meanwhile, the child is 19, so we file a motion to emancipate the child and determine an arrears. There’s a hearing set in June. Basically, I’ve talked to the ex-wife and she said, “I don’t care about the medical expenses, but I want every support payment that’s due. I’m not going to hold up his discharge, but I want my money.” What had happened is when he swore to me that he had paid everything, I filed a motion to terminate his withholding order. His employer received a copy of it, but with no order from the state court they just quit paying the ex-wife. She hasn’t received any money in about four months. But she says, “I want every nickel that is due to me, but I’m not going to hold up his discharge.” I then talked to the bankruptcy court and asked if they had ever had a case like this. They said, "No," and that we should make up a waiver form, have the mother sign it. and the judge will set up a hearing and grant the discharge, because the mother is not objecting to the discharge going through despite the fact that he has not technically complied with the bankruptcy code. If the mother did contest it, just like the other case, the judge would say, "I can’t grant the discharge."

Q: What would have happened if the mother contested the case and forced the judge to actually say, "I can’t grant the discharge."

JS: This particular debtor has only been in the bankruptcy about three years. I would probably put him back into the bankruptcy to stretch the plan out and pay it. But, I don’t want to do that because the trustee charges a fee on the money she collects to disburse to the state, so I’ve got the waiver worked out.

CH: That would be a remedy, if he had the luxury of stretching it out.

JS: If he had more time. We probably have about 16 months left now to delay, but I’m not going to go there.

CH: If it was a five-year plan, we couldn’t extend it. If she objected, the only other option would be to convert to a Chapter 7.

JS: If we converted to a Chapter 7, he would have to deal with some potential past issues in his particular case where he wouldn’t get the same benefits.

CH: Otherwise, he would be out of a bankruptcy without a discharge. So, if he only paid ten cents on the dollar on all of his debt, he would still owe his creditors the remaining 90%, plus interest and whatever late charges are nondischargeable.

JS: They could have closed the case without a discharge. It’s one of those gray areas. There’s no black and white in the code to deal with that issue. We have to kind of make it up as we go and see if the judge will bite on it.

CH: We’ve been doing this a long time. I’ve been doing nothing but bankruptcies since October 1997, when I joined Tom Scott, and Jess started focusing on bankruptcy shortly thereafter. There are attorneys out there who dabble in bankruptcy and there are lots of young lawyers right out of school. I can’t believe that without the experience that there is any way they render as effective legal representation to their clients as we do, because we’ve been there, we’ve done that, and we’ve seen so many strange situations.

In addition, we have the background to relate bankruptcies to other law. There are people who get out of law school now and just go straight into bankruptcy, not knowing how it impacts family law, personal injury, taxation, and other issues. Jess and I are both diversified lawyers. We started out as general practitioners, where we did criminal, divorce, probate, and everything that came through the door—we figured out how to do it.

Part 1 of Conversation: Means Test Helps Determine Filing For Chapter 7 or Chapter 13 Bankruptcy

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

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