Tom Scott Law Indy

Bankruptcy Attorneys in Indianapolis Since 1980

Misperceptions

Holiday Season and End of Year Preparations if You Have Financial Problems

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Holiday Season and End of Year Preparations if You Have Financial ProblemsThe holiday season is a time of celebration, but for many people it’s a time of year that brings added financial pressure while they struggle to keep up with payments on their existing debt. If you use credit cards to buy Christmas gifts, with the expectation of filing for bankruptcy to get rid of those holiday season debts, those purchases may lead to creditors to accuse you of fraud and those debts could be declared nondischargeable. In that situation, the timing of a bankruptcy filing needs to be carefully considered.
We recently discussed several aspects of bankruptcy with Christopher Holmes and Jess M. Smith, III, partners at Tom Scott & Associates, P.C. The discussion focused on how buying gifts with credit cards and other expenses during the holiday season can contribute to financial problems after the New Year begins. Other topics covered in the conversation include the impact of previous tax liabilities on a bankruptcy filing; federal tax refunds in relation to Indiana law and the IRS Code; the tax filing status of married couples who are separated and have children; and how filing for unemployment benefits or your immigration status might effect your bankruptcy filing.

The simplified explanations in this conversation cannot be taken as legal advise, because every situation is different and complicated. Each case is very fact-sensitive and there is no one-size-fits-all explanation of how a tax liability relates to a specific bankruptcy case.
Q: As the end of the year approaches, what advice can you offer to someone who is struggling financially and researching the possibility of declaring bankruptcy?
CH: Typically, we have a lot of clients who come to see us after Christmas and after they have incurred too much debt purchasing gifts for family members and friends. As a result, when those bills come due in January, February, and March, our clients come to the realization that those accumulated bills are unmanageable and those clients seek our assistance in alleviating the financial problems caused by their inadvertent overspending.
Also, we have had a few clients who have used their credit cards for the purchase of Christmas gifts with the expectation of filing bankruptcy to get rid of those debts. In such cases, the creditors may scrutinize the use – or in their opinion misuse – of credit cards right before the filing of a bankruptcy. As a result, those creditors can use a provision in the bankruptcy code that provides that debts of a certain amount incurred in a certain period of time shortly before the filing of a bankruptcy case are presumed to be a fraudulent and, as a further result, nondischargeable. In those rare cases, we must advise our clients accordingly and we must be more careful regarding the timing of the filing of those cases.
Q: In other words, if you know you’re in financial trouble, it’s not a good idea to think you can “go out with a bang” with one last buying binge right before declaring bankruptcy, because that might be declared a fraudulent act. Don’t make matters worse just because it’s the holiday season.
CH: Yes. Section 523 of the U.S. Bankruptcy Code which is entitled “Exceptions to Discharge” and which sets forth the different kinds of debts that are NOT dischargeable in a bankruptcy includes a section that pertains to consumer debts of a certain amount for luxury goods or services that are incurred within 90 days of when a bankruptcy case is filed, as well as cash advances of a certain amount that are incurred within 70 days of when a bankruptcy case is filed, are presumed to be nondischargeable.
Although the presumptive periods are 90 days and 70 days respectively, creditors will often look for suspicious usage in the 3 to 12 months before a bankruptcy case is filed in order to determine whether a compelling allegation can be made that a reasonable debtor must have known or should have known when they incurred those debts that those debts would never be repaid. If so, then the creditor can assert that those debts were incurred under false pretenses and, as a result, they are not dischargeable.
Q: Are there any end-of-year financial loose ends you can tie up to prepare for a bankruptcy filing after the first of the new year? What should someone take care of first to make filing for bankruptcy as smooth and easy a process as possible?
CH: First and foremost, we meet with some people who have significant income tax liabilities for prior tax years. Although we ask all of our clients about income tax liabilities, we need to know about taxes owed not only for prior tax years, but we need to be aware of income taxes that might be due and owing for the current tax year for which the tax returns are due in the next calendar year. If so, then we must defer the filing of their bankruptcy case until after January 1, so the taxes can be included in the Chapter 13 plan and then paid back without penalty or interest; otherwise, they are deemed to be a post-filing debt that is not included in their Chapter 13 Plan.
JS: I have a similar situation now with a Chapter 26 (i.e., back-to-back filings of two Chapter 13 bankruptcy cases), in which a debtor is coming out of Chapter 13 and he has just paid a bunch of taxes, but still owes much more. We’re also going to delay filing for bankruptcy until 2019, so we can include his 2018 taxes in the plan.
Q: Should someone in a deep financial hole start the process of contacting a bankruptcy attorney as soon as possible, even if they might not file a case until next year?
CH: We’ve learned that some people have never filed some of their tax returns, and those unfiled tax returns must be filed before we file their bankruptcy case. And we will urge those individuals to prepare and file those unfiled tax returns as soon as possible, so we know if income taxes are owed, how much is owed, and for which tax years they are owed, in order to properly advise them regarding whether a Chapter 7 or a Chapter 13 case is more appropriate to resolve their income tax problems. Also, the U.S. Bankruptcy Code includes a provision that requires that all unfiled income tax returns must be filed and copies provided to the Trustee; otherwise, the bankruptcy case can be dismissed.
Q: So, the first tip is you shouldn’t make your debt worse by spending a lot of money on holiday gifts. The second tip is to get your tax filing situation as clean as possible before filing for bankruptcy. Should the approaching end of the year be considered with regard to the sale of real estate or other assets?
CH: Yes, we always look at client’s income tax returns from prior tax years. Not only do we want to know if income taxes are owed, but we need to know if a client is expecting to receive a significant tax refund back from the IRS and/or from the State of Indiana because tax refunds are deemed to be an asset of their so-called bankruptcy estate.
If we file a Chapter 7 bankruptcy case before the debtor receives and spends the tax refund, it’s likely, if the refunds total more than a $1,000, the Chapter 7 trustee assigned to the case will intercept – or take – the refunds and use the proceeds to pay as much as possible to the creditors who file claims for their fair share thereof. Accordingly, we advise people to refrain from filing their bankruptcy case until after they’ve prepared and filed their tax returns, and then they’ve received and spent their tax refunds in an appropriate way. As a result, they don’t run the risk of the trustee taking the money and giving it to their creditors.
By the way, in many situations, most of the refund is the result of the Earned Income Tax Credit (EITC). The good news: Indiana law includes a provision whereby the portion of the refund that results from the EITC is exempt – or off limits – from being taken by the trustee for the benefit of the creditors.
Also, we deal with many clients who have filed their tax returns improperly. For example, married taxpayers can file their income tax returns jointly, or as a married person filing separate from their spouse, or as a married person who files separately if they qualify as “Head of Household.” Unfortunately, we’ve seen many cases in which one of the married couple files as “Head of Household” without being qualified by law to do so, in order to receive a tax refund that is more than they would be entitled if they filed as “Married Filing Jointly” or “Married Filing Separately.”
The Internal Revenue Code has a provision that requires a taxpayer to be legally separated from their spouse for the last six months of a tax year before the taxpayer can claim “Head of Household” status, so we always ask our clients, “Were you living together at any time between July 1 and December 31?” If so, they’re ineligible for “Head of Household” status and the extra tax refund to which those taxpayers might be entitled.
As a consequence, we have people in Chapter 13 cases who get these bigger tax refunds who realize they have filed improperly – and the trustees also look at tax returns – and know they’ve received a refund to which they are not entitled, so they are forced to file amended tax returns with the correct status – “Married Filing Jointly” or “Married Filing Separately.”
Invariably, the refund to which they were legally entitled is less than what they received, and then they must repay the excess refund to which they weren’t entitled, and the Chapter 13 Plan must provide for the repayment of that ill-gotten excess tax refund money.
JS: I’ve just worked with a couple who were clever enough to say they were separated during the last six months of the year, but they both claimed the same child as a dependent on their tax returns. The husband claimed his tax status as “Married Filing Separately,” but the wife claimed “Head of Household,” so we had to have the husband amend his return to remove the child as a dependent for that tax year.
A few years ago I had a client who improperly claimed unemployment benefits, so he had to list the Indiana Department of Workforce Development as a creditor when he filed for bankruptcy. Depending on whether the amount of benefits the agency was paying was significant or not, it may object to discharge on grounds of fraud and have the debt declared nondischargeable.
I had that same type of situation with a different client about a month ago. This client was actually arrested, because a felony criminal charge of fraud had been filed. I know of two other attorneys with clients who have been arrested for the same type of fraud.
CH: I had a case recently in which the Indiana Department of Workforce Development filed its complaint to determine the dischargability of unemployment compensation paid to my client because my client received benefits to which she was not entitled because she received them despite being employed at the time those benefits were received. As a result, it was certain the Judge of the U.S. Bankruptcy Court would determine that those benefits were obtained as the result of my client’s fraudulent conduct and those benefits would be determined to be nondischargeable. As a result, I told my client, “You might as well agree it is a nondischargeable debt,” that passes through bankruptcy and must be repaid to avoid the additional time, effort and expense of fighting a losing battle.
Q: So the bottom line is that declaring bankruptcy does not allow a client to discharge an overpayments of unemployment compensation received due to the fraudulent conduct of the client.
CH: That is correct. We tell people, “If you’ve received benefits to which you weren’t entitled, because you were otherwise employed, the amount of those benefits becomes nondischargeable debt and it must be repaid.”
This type of situation reminds me that from time to time people who are in the country illegally come into our office to file for bankruptcy. Often times they have a fake Social Security number. We have to forewarn them, they do not have to be a citizen to file for bankruptcy in the U.S. but there is the possibility, if the bankruptcy trustee’s office researches their Social Security number and some other person’s name is listed, that will throw up a red flag. I don’t think people here illegally have to worry about the United States Trustee’s office giving that information to the Immigration authorities, and then being deported. But, I think they might be foolish to file for bankruptcy and run the risk of that situation being revealed, which might result in their deportation.
Q: As an attorney, do you have an attorney-client privilege relationship with your clients that legally prevents you from revealing a client’s criminal or immigration status?
CH: Yes.
Q: So, anyone consulting with you can reveal to you, without fear, any information that might impact their decision to file for bankruptcy, because you’re not allowed to repeat that information to anybody?
JS: But if they file for bankruptcy, we have to disclose it. There is no attorney-client privilege in bankruptcy.
Q: Okay. But, if you advise someone to not file for bankruptcy, you’re not going to then turn around and tell some legal agency about that person’s criminal or immigration status. When people come to your office for a free consultation, can they openly discuss their legal situation without having to worry about their personal information leaving your office?
CH: That is correct.

How Bankruptcy Affects Student Loan Debt and Car Loan Interest Rates

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How Bankruptcy Affects Car Loan Interest Rates

As a result of the recent rise of the prime rate, vehicle loans included in Chapter 13 bankruptcy plans can have a higher interest rate than in the past few years. Despite the resurgent economy, single mothers are still vulnerable to financial difficulties. Student loans cannot be eliminated by filing for bankruptcy, but one of several strategies can be used in conjunction with a Chapter 13 plan to pay them back.

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 the recent rise of the prime rate has affected bankruptcy cases; which group of people are currently at risk of financial hardship; how student loan debt is treated in a Chapter 13 bankruptcy case; misconceptions about bankruptcy; and the ability of the Indiana Department of Revenue to implement an administrative garnishment.

Q: How has the recent rise of the prime rate affected bankruptcy cases?

Jess Smith, III: It has affected the interest rate on cars. There was a case years ago, which originated out of Kokomo, Indiana, that involved the interest rate a non-mortgage secured creditor would get on an asset being paid through a Chapter 13 bankruptcy plan. The local court came up with a ruling that was basically sanctioned by the U.S. Supreme Court in 2004 (Till v. SCS Credit Corp.), which stated the creditor would receive the prime interest rate plus a risk factor of 1% to 3%.

If the creditors become astute to the recent rise of the prime rate, it could affect bankruptcy plan agreements. Many of the car loans we see in bankruptcy cases may have had an interest rate of 19% to 23% when the contract was signed. The Till case that was decided by the Supreme Court involved a loan for a used pick-up truck that had a 21% interest rate.

For the past couple of years, I’ve been offering secured creditors or lenders 4.5% interest on their car notes. However, I recently saw a local case being handled by another attorney in which the creditor objected to a similar rate offered in the proposed plan for the debtor. The creditor demanded a 5.75% interest rate and the trustee seemed to think that rate was appropriate, based on the higher prime rate now in place.

Q: The economy has rebounded since the recession of a few years ago, which has caused a decrease in the number of bankruptcy filings. Is there still a particular group of people who are currently at risk of financial hardship and in need of relief through the bankruptcy court?

Chris Holmes: Unfortunately, single mothers who must raise one or more kids without receiving child support payments. If they are sued and are facing the garnishment of 25% of their take-home pay, then they’re unable to pay their rent or their car note, so they really have no choice but to file for relief through the bankruptcy court, to prevent the garnishment of their wages and to wipe the slate clean.

Q: When people come to see you for a free consultation, is there a common misconception about filing for bankruptcy, the benefits of bankruptcy protection, or the types of services you can provide?

CH: Sometimes people think they can’t get rid of a certain debt after they’ve been sued and there’s a judgment—or if a garnishment has already been implemented. They feel like it’s too late and they can’t stop those actions. But you can.

Q: Are there any types of debts that filing for bankruptcy won’t discharge?

CH: The big one is student loans. Occasionally we speak with people who have up to $100,000 worth of student loan debt. I recently spoke with someone who said they saw on the Internet that student loans are now going to be dischargeable, but that’s not true.

JS: I’ve spoken with other attorneys who also stated they’ve had people counting on that.

Q: If a student loan debt is not dischargeable, can it be rolled into a Chapter 13 bankruptcy plan?

JS: Yes.

CH: Let’s say a debtor can’t afford to make any payments. A student loan lender is the only lender that can leapfrog a legal process and go directly to a payroll department to garnish wages.

JS: The Indiana Department of Revenue can also do that, but obviously they’re not a lender. They can do what’s called an administrative garnishment and get 15% of your salary without a court order.

CH: Right. But a regular creditor must (1) file a lawsuit; obtain a judgment; (2) file a Motion for Proceedings Supplemental to Judgment; (3) have the court conduct a hearing; (4) determine if there is gainful employment; and (5) serve the employer with a Final Order in Garnishment. If your net pay is more than $217.50 per week, the creditor can garnish your wages. However, the maximum garnishment is 25% of your net income, which is your gross income minus taxes.

JS: I currently have a client in a Chapter 13 bankruptcy plan who makes about $80,000 a year, but who owes about $70,000 in student loans. The student loan lender was garnishing about 15% of his salary. We included the student loan debt in the plan to stop the garnishment, so he could take care of paying for his car and taxes, while keeping that loan on hold.

Q: When the Chapter 13 bankruptcy is filed, is that student loan debt treated like any other type of debt?

CH: Yes and no. Yes, it can receive a pro rata distribution along with the other general unsecured creditors. No, in that the amount that remains unpaid upon the conclusion of the case will not be discharged. Accordingly, I forewarn debtors that the total amount the student loan lender receives through the plan may not exceed the interest that’s accumulating while the case is pending. As a result, the total owed on the student loan may actually be bigger than when the debtor filed for bankruptcy because of the additional interest that accrued. However, it is often a cost worth bearing so the debtor need not make unaffordable monthly payments directly to the lender for the 3 to 5 years they are under the protection of the court.

JS: It’s just a temporary band-aid, not a cure for student loan debt.

CH: But that band-aid allows a debtor to resolve other debts and then, after the Chapter 13 plan is successfully completed, the debtor can focus his or her attention on paying back the student loan.

Q: If, during the bankruptcy plan, the debtor is in a position to pay back additional money on the student loan, is that possible?

JS: Generally, in this district, if you want to propose to make your regular payments on the student loan directly to the lender, you can propose to do that.

Q: Can a debtor make additional payments to a student loan lender, on top of the monthly payments included in the plan, or is the debtor’s choice one or the other?

CH: It’s either the regular monthly amount paid directly to the lender or the amount paid through the plan.

Q: Is that situation similar to a car loan, in that you might advise a debtor to pay off the car loan outside of the plan, if the debtor can afford to do that?

CH: If a debtor can afford the original monthly payment to the student loan lender outside of the plan, it’s preferable to pay that directly to the lender, rather than having that money paid through the plan for the benefit of all of the creditors. As a result, the debtor gets more “bang for the buck” by having that payment go toward eliminating the student loan instead of distributing that amount amongst all creditors in the plan.

Q: What would happen if a debtor decided to try and pay off the student loan outside of the bankruptcy plan, but for some reason is not able to keep up with the full monthly payments? If the debtor only pays a portion of the monthly payment, or none of it, can the student loan lender then go back to the debtor’s employer to begin wage garnishment?

JS: The lender can’t go back to the employer, but a long time ago I did see a case in which the debtor was going to pay $350 a month directly to a student loan lender. A couple of years into the plan, the debtor stopped paying the lender. The student loan provider then moved to dismiss the debtor’s case for being in default of the bankruptcy plan.

I’ve seen a case in which the lender notified the trustee about missed student loan payments. The trustee demanded that if the debtor stopped direct payments for the student loan, then the amount due to the lender would be added to the monthly bankruptcy plan payment. Remember, a plan payment is based on projected income minus projected expenses. Therefore, if the debtor is not paying the amount due to the lender each month, then the debtor’s monthly living expenses are that much less, which means there is that much more to add to the Chapter 13 Plan payment.

Q: So, if a debtor falls into that type of situation, the trustee won’t adjust the plan so the debtor can pay only a portion of the monthly loan payment?

JS: Correct, but I did have a previous case in which the debtor was actually a married couple with two incomes and two student loans. When the plan began, one spouse was under-employed, so we parked the student loans in the plan along with all of the couple’s other debts. Two years into the plan, the under-employed spouse obtained a new job with a much higher salary. Instead of giving all of those additional earnings to the trustee, we amended the plan to start directly paying back the student loans, directly to the lenders, outside of the bankruptcy plan.

Q: And the trustee agreed to that amended plan?

JS: Yes. Every case is different.

CH: Here is another misconception about bankruptcy. I’ve spoken with a debtor who wanted to include a student loan in the bankruptcy plan, to hold off the lender for the duration of the plan. The debtor assumed the student loan would not bear interest while the plan was in place, which is not true. The automatic stay does not prevent interest from accumulating on the student loan.

JS: Whatever interest is allowable in the loan contract continues to accumulate on top of the loan amount during the three to five years of the bankruptcy.

Q: Here in Indiana, would the closing of ITT Technical Institute in September 2016 be an example of when a closed school discharge could be used to eliminate a student loan debt?

CH: Yes. If some of your money went to ITT and your circumstance meets the criteria established by the U.S. Department of Education, you can contact the lender and initiate an administrative procedure to apply a closed school discharge to that student loan debt.

Q: What would be an example of an undue hardship that could cause a student loan to be discharged?

JS: It’s a very high level of hardship. You basically need to show the court that you’re going to perpetually live below poverty level.

CH: Someone who is disabled or who is on Social Security, who has only enough money to pay their necessities, and who has no money left over for the benefit of a student loan lender.

JS: And no reasonable expectation of any of those circumstances changing. There has been litigation in other districts—in which people have made good faith efforts to pay back the student loan and they demonstrated what they could afford to pay—where some courts have discharged part of the debt. In our district, there has not been much reported litigation like that. It’s expensive to undertake that type of litigation.

Bankruptcy Can Affect a Divorce Settlement / Advantages, Disadvantages, and Misunderstandings of Bankruptcy

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Bankruptcy Can Affect a Divorce Settlement

You can use a Chapter 13 plan to catch up on child support arrearage or spousal maintenance support (alimony) arrearage. If you have received a Chapter 7 bankruptcy discharge, you may still be obligated to relinquish to the bankruptcy trustee assets you receive in the future, such as your next tax refund check, a pending inheritance, or the eventual settlement from a pending personal injury case.

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 property settlement in a divorce; alimony and child support payments; the different eligibility requirements for filing a Chapter 13 bankruptcy compared to filing a Chapter 7 bankruptcy; surrendering exempt assets to protect non-exempt assets; and misunderstandings about being sued and garnishment in relation to bankruptcy.

 

Q: How can filing for bankruptcy affect a divorce settlement?

Chris Holmes: Recently I had a client who, in his Decree of Dissolution of Marriage, was ordered to pay his ex-wife $900 per month for 10 years. He provided me with a copy of his settlement agreement, so I could look for language that indicated whether or not that monthly payment was in the nature of property settlement or if it was in the nature of alimony or maintenance.

There was absolutely no language in the agreement that indicated it was in the nature of alimony or maintenance. The reason that’s significant is that anything that’s in the nature of alimony or maintenance is a nondischargeable debt, whether you file for a Chapter 7 or Chapter 13 bankruptcy. (Child support is another example of a nondischargeable debt.) In this particular case, the Judge awarded $900 per month to the ex-spouse as a way to equalize the respective value of their respective retirement accounts, because his was worth more than hers.

Because the obligation to the ex-wife appeared to be a property settlement, and because Chapter 13 of the bankruptcy code allows a debtor to discharge property settlement debts, I urged this particular client to file a Chapter 13 case, rather than a Chapter 7 case, so he could seek the discharge of this property settlement debt to his ex-wife. (NOTE: He would be required to pay back some of the property settlement through the plan; however, the portion of the property settlement not paid through the bankruptcy plan would be discharged (i.e., rendered null and void). As a result, he decided the benefits of a Chapter 13 case, because he still had over three years worth of payments to make to her, outweighed the additional costs of a Chapter 13 case.

Q: What are some of the other advantages and disadvantages of a Chapter 13 bankruptcy compared to a Chapter 7 bankruptcy? Are there certain circumstances in which you would always lean towards one or the other?

CH: Sometimes people must file Chapter 13 case because it has been less than eight (8) years since they filed a previous Chapter 7 case, which renders them ineligible to file another Chapter 7 until it has been more than eight (8) years since the date of filing the previous Chapter 7 case. In other words, if they desperately need debt relief during that eight-year time frame, they must file for relief under Chapter 13 of the U.S. Bankruptcy Code.

Q: Is there a similar ineligibility time frame for someone who has filed a Chapter 13 bankruptcy?

CH: You can file a Chapter 13 anytime, but a debt will not receive a discharge unless the new case is filed more than four (4) years after the filing of the previous Chapter 13 case. Also, some debtors are rendered ineligible for a Chapter 7 case because they earn too much money to qualify for a Chapter 7 case because of something called the Means Test. In other words, the computer program we use determines that a debtor has the ability to pay back a significant portion of their debt; therefore, they are not allowed to discharge certain debts in their entirety under Chapter 7 of the U.S. Bankruptcy Code. As a result, they must file a Chapter 13 case and pay back as much of their debt as they can afford during a five-year plan.

As we’ve discussed before, we file Chapter 13 cases for debtors who are behind in their house payments and are either threatened with foreclosure, or are in foreclosure, and they need more time to catch up on those overdue mortgage payments.

We also have some clients who have significant income tax problems that are not addressed as effectively by a Chapter 7 case because certain taxes can be paid back through a Chapter 13 Plan without penalties and without interest over a longer period of time.

Also, we have situations like in our recent conversation, in which the debtors are so far upside-down on a car loan (that is, the payoff on the loan exceeds the fair market value of the auto by a significant amount and/or the interest rate is significantly higher than the prime rate of interest plus 1 ½ %. Through a Chapter 13 plan, the debtor can effectively refinance, or “cram-down,” the higher payoff and reduce it to the fair-market value of the auto. As a result, the debtor pays only the fair market value of the auto, plus a lower rate of interest, which saves the debtor a lot of principal and interest.

Sometimes, people are just behind in their car payments and they are desperate to keep the vehicle. We can use a Chapter 13 plan to either catch them up on those payments or to pay the loan in full through the plan. As a result, the debtor is given more time to catch up on their car payments than the lender might otherwise demand.

Q: Going back to the issue of divorce, if alimony and child support are nondischargeable debts, would there be any advantage or disadvantage to someone in a divorce proceeding or having been divorced to lean toward either a Chapter 7 or a Chapter 13?

CH: Let’s say a debtor is behind in their spousal maintenance or child support payments. A debtor can use a Chapter 13 plan to resolve those problems as well. A debtor can use the plan to catch up on child spousal maintenance or child support arrearages. Sometimes, when the obligation is short-term and the payments are too great to be affordable, a debtor can put that obligation into a Chapter 13 plan to extend its payment over 60 months, which reduces the monthly amount to be paid on those obligations to an amount that is more affordable.

It should be noted, however, the bankruptcy code changed in October 2005, and we would need the cooperation of the state court or the child support recipient, because the automatic stay in a bankruptcy case no longer stops the collection of child support. Currently, only with the consent of the other party, can the debtor use a Chapter 13 plan to cure an overdue child support situation.

Q: Have you recently dealt with any unusual bankruptcy cases?

CH: A situation I hadn’t dealt with in many years in a Chapter 7 case arose in which the debtors had assets that were worth a significant amount more than what the law would allow them to protect or exempt. In other words, the debtor filed a Chapter 13 case to pay an amount to their creditors that exceeds the amount the creditors might have received in a Chapter 7 had the debtor’s nonexempt asset been taken and liquidated by a Chapter 7 Trustee for the benefit of the creditors had the debtor filed a Chapter 7 case.

In this case, however, the debtors did not have the disposable income to fund a Chapter 13 plan to pay any money to those creditors. In that case, the Chapter 7 Trustee was threatening to take and liquidate some real estate to get at the equity the debtors could not protect. Fortunately, the debtor owned some vehicles they could live without; therefore, the debtors offered those vehicles to the trustee for liquidation because the net result would be enough to satisfy the Trustee.

In exchange for surrendering assets they normally could protect through a Chapter 13 Plan—the vehicles—the debtors were able to convince the Trustee to abandon his interest in the real estate the debtors could not protect.

Q: So, they chose a Chapter 7 case rather than a Chapter 13 case because the debtors did not earn enough money?

CH: Yes. The debtors were not eligible for Chapter 13 case because they did not have regular, steady income above and beyond their regular living expenses to pay what needed to be paid through a Chapter 13 plan.

Q: What is the most misunderstood aspect of bankruptcy? In other words, what do a lot of people you initially meet with believe concerning bankruptcy about which you have to set the record straight for them?

CH: By the way, sometimes debtors assume that after they’ve been sued and a garnishment has been entered against them, that they can’t stop the garnishment. Fortunately, even if a garnishment order has been entered, as soon as we file the bankruptcy case we can stop and prevent any further garnishments. Also, I’ve met with debtors who believed that if they file a bankruptcy case that they must give everything they own to the bankruptcy court for liquidation and they’ll be left with nothing; however, Indiana law allows debtors to protect an ample amount of assets in order to get a truly fresh start.

Jess Smith, III: One thing some people don’t understand is why they have to turn over tax refunds.

Q: So, why do people who file for bankruptcy need to surrender their tax refunds?

JS: Because, when you file bankruptcy, the bankruptcy trustee takes control and possession of all of your assets until they are abandoned or are determined to be exempt. Certain portions of a tax refund may be exempt, but usually it is a non-exempt asset.

People don’t understand that even though a bankruptcy case is fully closed at the time of the discharge, the asset portion of the case remains open. That confuses a lot of people.

Q: So, after you receive the discharge document from the court, the case may not actually be finished?

JS: One of the roles of a Chapter 7 trustee is to determine if you qualify for a Chapter bankruptcy. A second role is to determine if the debtor has any non-exempt assets that can be liquidated for the benefit of creditors.

So, when people receive their Chapter 7 discharge, they sometimes forget about their non-exempt assets, because they might not have received their tax refund at the time they filed their case, but they have accrued their rights to at least a portion of their tax refund. That portion is what becomes an asset.

People don’t understand that they have to trade that asset in exchange for their discharge. If they don’t cooperate with the asset portion of the case, then their discharge can be revoked.

Q: So, in other words, if a debtor receives a bankruptcy discharge notification in October of this year, the refundable portion of the income taxes they paid prior to the discharge date can be considered a non-exempt asset subject to be taken by the trustee, even though the debtor doesn’t receive their refund check until next year?

CH: Yes. The debtors still have the duty to cooperate and turn over that asset, even though the debtor has received a discharge. Let’s say, for example, a debtor filed a Chapter 7 case on October 12, 2016, which is day 286 out of the 366 days in this leap year. Let’s also assume that as of this date, the debtor might receive a 2016 tax refund, when they file during the next tax season, in 2017. In the eyes of the U.S. Bankruptcy Court, approximately 78% of their Federal and State tax refunds have accrued as of this date. As a result, a Chapter 7 Trustee will force the debtor to provide a copy of the tax returns, which will show the refunds for the year, and then the Trustee will determine that portion of the tax refunds, less the Earned Income Tax Credit, which is exempt, and can’t be taken; whereupon, the Trustee could take and then distribute to the creditors 78% of the non-exempt portion of the tax refunds.

Other similar types of assets a debtor might receive in the future, which the trustee could take, include an impending inheritance or the settlement from a pending personal injury case, if they stem from an event that happened prior to the bankruptcy petition date.

We’ve learned from experience that if the amount of that pending asset is less than $1000, then trustees would probably ignore it, because they would not be able to provide a meaningful distribution to the creditors.

JS: But that decision is up to each individual trustee. Trustees make a commission based on what they collect from debtors on behalf of creditors, so some trustees spend more time than others pursuing small assets.

What if I’ve been sued for overdue debt?

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If you have been sued for an overdue debt, you can presume that the creditor will try to get a judgment on that suit as quickly as possible.
Once a judgment is entered, there will automatically be a judgment lien on any real estate that you own in the county of the suit, you will be ordered to appear at future hearings to testify as to your job and assets, the creditor may be able to freeze your bank accounts, the creditor may be able to garnish wages, and it may become very difficult to pay your other debts.
If you have been sued, you should contact our office as soon as possible to schedule a free consultation.