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Exemptions

Keep More of Your Personal Property; Asset Exemption Values Increased for Indiana Bankruptcy Filings

July 8, 2022 by TomScottLaw

Indiana Increases Value of Debtor's Exempted Family Residence & Other Real Estate
Indiana Increases Value of Debtor’s Exempted Family Residence and Other Real Estate

One question we’re frequently asked is, “If I file for bankruptcy, what property am I allowed to keep?”

Indiana has recently changed the dollar amounts relating to bankruptcy property exemptions. Effective March 1, 2022, the provisions relating to the value of the assets a debtor is allowed to keep when filing for a bankruptcy have been adjusted to increase the value of a debtor’s exempted personal property.

The three types of assets affected by the adjustment are a debtor’s personal or family residence, other real estate or tangible property, and intangible personal property. The amounts of the increase are:

  1. Real or Personal Property Constituting Family Residence of the Debtor or Dependent of the Debtor – $22,750 (previously $19,300 / appx. 15.5% increase)
  2. Other Real Estate or Tangible Property – $12,100 (previously $10,250 / appx. 18% increase)
  3. Intangible Personal Property – $450 (previously $400/ appx. 12% increase) – includes money on deposit in the debtor’s bank account, money owed to the debtor from a third party, unreceived tax refunds, inheritances, lawsuit proceeds, etc.

For further detail, see Indiana Code 34-55-10-2.

Creditors or trustees are not able to liquidate these exempted assets to satisfy debts included in a bankruptcy filing in Indiana.

These new asset exemption amounts will remain in effect until the next required adjustment by the Indiana General Assembly, which will be no later than March 1, 2028. To view the official posted ruling on the State of Indiana website, click here: Title 750 Department of Financial Institutions – Emergency Rule – LSA Document #22-37(E)

Filed Under: Exemptions, Personal Bankruptcy in Indiana, Property & Asset Protection, Questions About Bankruptcy Tagged With: assets, Bankruptcy Exemptions, Indiana Code 34-55-10-2, personal property

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

December 14, 2016 by TomScottLaw

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.

Filed Under: Exemptions, Marriage & Divorce, Misperceptions, Wage Garnishment

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

June 7, 2016 by TomScottLaw

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

Filed Under: Chapter 13, Chapter 7, Debt to Income Ratio, Exemptions, Medical Bills Tagged With: 401k, 7th Circuit Court of Appeals, Disposable Monthly Income, DMI, IRA, IRS, means test, Social Security

What’s New in Bankruptcy Law in Indiana (Interview Part 1 of 3)

April 26, 2016 by TomScottLaw

The official bankruptcy forms changed as of December 1, 2015, which will impact pro se debtors filing Voluntary Petitions. Mistakes made by pro se debtors include handling of tax refunds and submission of the document production form. Indiana bankruptcy exemption limitations have also changed.

Editor: We recently discussed the changes in the bankruptcy laws with Christopher Holmes, Jess M. Smith, III, partners at Tom Scott & Associates, P.C., along with associate attorney Andrew DeYoung. Below is Part 1 of 3 of the transcript of the conversation.

Q. What’s new in bankruptcy law in Indiana?

Chris Holmes: First of all the official bankruptcy forms changed as of December 1, 2015, so the forms are much more complicated. I think they require much greater sophistication. It’s probably going to impact the pro se debtor — the people who want to represent themselves in a bankruptcy. The forms are supposed to be simpler, but I believe they are much more complicated and perhaps will drive some people to attorneys to have them filled out properly.

Q: What are the different types of information that those forms are now asking people to include?

CH: The same information is being requested, but in a much more confusing way.

Q: Let’s start with that information. What types of information do the forms require?

Andrew DeYoung: The Voluntary Petition, for example, used to be a three-page document. Now, it’s an eight-page document. They’ve taken the old forms and added more language to read and understand, and it’s increased the size of the paperwork in a petition package to 23 pages per case. (Reference: United States Bankruptcy Court Southern District of Indiana Pro Se Debtor Packet)

Q: What kind of information is included in that Voluntary Petition?

AD: All of the property that a debtor owns; all of the creditors that a debtor owes money to; their income; their place of employment; and money they spend on a monthly basis for their household expenses, so it forces debtors to come up with a budget.

CH: People who think they can do it themselves might be fooling themselves, because the paperwork has become so much more complicated and the law imposes so many more requirements on debtors and their counsel to provide certain information and documents. I saw a story today where a woman was trying to do it herself. She had filed her tax returns, but then she had filed her bankruptcy before she had received and spent her tax refund money. So, the trustee was telling her that he was going to be suing her for his fair share of those refunds, because she had not received and spent them before she filed for bankruptcy. As of the date of filing, the refund was an asset of the bankruptcy estate, and the bankruptcy trustee, on behalf of all of the creditors, is entitled to take his fair share of it and distribute that money amongst the creditors. So, she didn’t know that, because she was doing it herself, and now her case is threatened with dismissal and her debts may never be dischargeable. She’ll be denied a discharge if she doesn’t turn over that money to the trustee.

Q: What other common mistakes do people make when they file for bankruptcy for themselves?

AD: We actually had a client, who retained us at our Shadeland Ave. office last week, whose petition I review at our free consultation. She had done everything correctly, but she paid a petition preparer to get it together, which cost her $300. She showed up at the meeting of creditors, but the trustee sent her home because she did not provide him with the document production form, which is required in Chapter 7 cases. So even though this particular person did everything correctly, it still resulted in the hearing not being held and her coming to retain us to get together her document production and fix the different things in her petition that a trustee may want to see perfected. So, she wound up financially in exactly the same place she would have been, minus $300, if she had just hired us to begin with.

Q: It sounds like cases in which people who file their taxes by themselves receive a letter from the IRS that states they owe thousands of dollar in unpaid taxes, plus interest and penalties, and then they hire an accountant to help them resolve the situation.

CH: Yes. I probably could do my own taxes, but I choose to pay someone to do it for me because it’s complicated and I want it done right. I like to use another analogy. I used to change the oil in my car. It’s doable, but I’d rather pay someone to do it because I want it done right, they can dispose of the oil more efficiently that I can, and I’m also afraid I might not get the lug nut in properly. Who knows what could happen then?

Also in regard to the bankruptcy forms is that the exemptions have changed. Indiana has a statute, Indiana Code 34-55-10-2: Bankruptcy exemptions; limitations, which tells people how much property they can protect from their creditors—or in the bankruptcy context, from the trustee who represents their creditors. Those numbers recently increased. It used to be you could protect $17,600 in equity and real estate; that number has gone up to $19,300. Or people could protect $9350 of tangible personal property; that’s now $10,250. So these are important details. Some people who represent themselves perhaps have valuable property that could be taken by the trustee. Like that tax refund situation, they could protect $400 of the tax refund now, as opposed to only $350 previously. There are some sections in the code that tell you some things that you can protect and some things that you can’t protect that are very critical in determining whether you file a Chapter 7 or Chapter 13 bankruptcy. That’s because something might be lost and liquidated in a Chapter 7, but you can pay your creditors enough money to protect those assets in a Chapter 13 case.

Part 2 of Interview: Property You Can Protect When You File for Bankruptcy

Part 3 of Interview: Accruing Post-Petition Interest on Unpaid Federal Taxes

Filed Under: Exemptions, Personal Bankruptcy in Indiana, Property & Asset Protection, Taxes Tagged With: Document Production Form, Indiana Code 34-55-10-2, Meeting of Creditors, Pro Se Debtor, Voluntary Petition

Avoiding Liquidation of Non-exempt Assets: Overview of Bankruptcy – Chapter 13 and Why to File, Part 5

April 29, 2014 by TomScottLaw

Series: #10 0f 13
In our last article, we took a look at ways to liquidate large tax and other priority obligations in a Chapter 13 bankruptcy, as it sometimes provides the debtor with more time than a non-bankruptcy setting would allow. Another reason to choose to file Chapter 13 rather than Chapter 7 is to help avoid liquidating a debtor’s non-exempt assets.

How to Avoid Liquidation of Non-exempt Assets

As discussed in an earlier article in this series, a Chapter 7 bankruptcy attempts to obtain funds for unsecured creditors by liquidating debtor assets. A debtor who has non-exempt assets (and wishes to retain those assets) may do so through the filing of a Chapter 13 bankruptcy.
11 USC § 1325*(a)(4) states that the court shall confirm a plan if (among other things) “the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date.” This section is referred to, in the Indianapolis district at least, as the “Best Interest of Creditors Test” or “BIT” for short.
Note carefully that the plan language of the Code states that creditors must receive as much as they would have in a hypothetical Chapter 7. It does not state that creditors must receive all funds over and above the debtor’s allowable exemptions.
Accordingly, in the hypothetical Chapter 7 the costs of sale and Chapter 7 trustee fees (as well as exemptions and underlying liens) would all be deducted before paying any money to the unsecured creditor pool.
In addition, the statute is clear that the BIT test can also be used to pay down priority unsecured taxes. For example, a debtor has $20,000 of personal property (including a $10,000.00 lien free auto). In addition the debtor owes $5,000.00 to the IRS for income taxes owed from 2009. Subtracting the $9,350.00 exemption from the $20,000.00 personal property leaves $10,650.00. However, hypothetical trustee fees of $1,815.00 and roughly $1,000.00 cost of sale would provide only $7,835.00 that would be paid to the unsecured creditor pool. Of that amount $5,000 would be paid to the IRS and $2,835.00 would be left for the general unsecured creditors.
Next: Protecting a Consumer Co-debtor

* Source: Cornell University Law School Legal Information Institute

Filed Under: Chapter 13, Exemptions Tagged With: Best Interest of Creditors Test, BIT, non-exempt assets, unsecured assets

Income & Assets: Basics of Bankruptcy – Chapter 13 vs. Chapter 7 – Part 1

October 13, 2013 by TomScottLaw

In this second installment of our series “Basics of Bankruptcy,” we discuss reasons to file a Chapter 13 bankruptcy rather than the less complex Chapter 7 bankruptcy.

WHY FILE CHAPTER 13 ANYWAY?

When considering to file bankruptcy, the first decision that probably should be made is whether you should file either a Chapter 7 or Chapter 13 bankruptcy. There are several reasons why a debtor should (or must) file a Chapter 13 bankruptcy, including (but not necessarily limited to):

  1. Not eligible for a Chapter 7 discharge
  2. Above-Median debtor
  3. Debtor does not want to liquidate assets
  4. Curing a mortgage
  5. Cramming a mortgage
  6. Stripping
  7. Cramming a car
  8. Cramming other personal property
  9. Lowering interest rates on cars (and other collateral)
  10. Liquidating tax debts
  11. Protecting a co-debtor

In this post, we will look at the first three reasons above to choose Chapter 13. The remaining reasons will be covered in parts 2-4 of this series.

Not Eligible for a Chapter 7 Discharge.

Summary: A person cannot file for Chapter 7 bankruptcy within eight year of previously filing for Chapter 7 or Chapter 11, or within six years of filing for Chapter 12 or Chapter 13 protection.

Not Eligible for a Chapter 7 Discharge (opens in new window)
Click for US Code, Title 11, Chapter 7, Subchapter II, Section 727

Pursuant to US Code, Title 11, Chapter 7, Subchapter II, Section 727(a)(8)*, you (the debtor) are not eligible for a Chapter 7 discharge if you were granted a discharge in a Chapter 7 or Chapter 11 bankruptcy in a case that began within eight years before the date of the new bankruptcy filing.
Further, Section 727(a)(9) states that the debtor will not be eligible for a Chapter 7 discharge if the debtor was granted a discharge in a Chapter 12 or Chapter 13 bankruptcy filed within six years of the new filing (unless the plan payments paid 100% of allowable claims or paid 70% of such claims and the plan was proposed in good faith and was the debtor’s best effort).
Thus, an individual who received a discharge in a Chapter 7 bankruptcy six years prior would either have to wait two more years or file a Chapter 13 bankruptcy.

Above-Median Debtor

Summary: The court may dismiss an individual consumer debtor’s case filed under Chapter 7 if the debtor’s household income is greater than the median income for a household of the same size.
Filing Chapter 7 would create abuse.
Pursuant to Section 707(b)*, the court may dismiss an individual consumer debtor’s case filed under Chapter 7 if it finds that the granting of relief would be an abuse of the provisions of Chapter 7.

  • If the debtor’s household income is greater than the median income for a household of the same size, then the court shall presume abuse exists if current monthly income minus the means test standardized expenses leaves at least $182.50/mo (or $10,950.00 for 60 months).
  • If the net result is greater than $109.58/mo ($6,575.00 for 60 months), but less than the $182.50 figure, then there shall be a presumption of abuse if the net figure times sixty is at least 25% of the debtor’s general unsecured debts. In other words, if the debtor has incurred large amounts of debt, then the debtor may actually be more likely to get a discharge in a Chapter 7.
  • The presumption of abuse may only be rebutted by demonstrating special circumstances “such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative” [See Section 707(b)(2)(B)(i)].

Debtor does not want to Liquidate Assets

Summary: Debtor may protect those assets that they do not want to have liquidated by filing for Chapter 13 bankruptcy protection rather than Chapter 7.
Under a Chapter 7 bankruptcy, the duty of the trustee is to “collect and reduce to money, the property of the estate for which the trustee serves” [Section 704(a)*].
If, after utilizing all applicable exemptions for your client, there remains an asset that may be properly liquidated and your client desires to retain such assets, your client may protect those assets by filing for Chapter 13 bankruptcy protection.
As stated in Section 1325(a)(4)*, the court shall confirm a plan if the value of property to be distributed under the plan is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under Chapter 7 of this title.
In our next post, we will discuss mortgage curing, cramming, and stripping, methods employed to help reduce debt.

* Source: Cornell University Law School Legal Information Institute

Filed Under: Chapter 13, Chapter 7, Exemptions, Personal Bankruptcy in Indiana, Property & Asset Protection, Questions About Bankruptcy Tagged With: debtor, discharge debt, lower interest rates, means test, standardized expenses

Basics of Bankruptcy: Introduction to Chapter 7 and Chapter 13

October 4, 2013 by TomScottLaw

This series of posts discusses the basics of Chapter 7 and Chapter 13 bankruptcies and why one should be selected over the other.

Why Choose Bankruptcy?

The goal under any chapter of bankruptcy (at least as far as Congress is concerned) is to try and generate funds to distribute to the unsecured creditors and, in exchange for that attempt, the debtor’s debts will be discharged, other than for for several exceptions including, but not limited to:

  • Certain taxes
  • Student loans
  • Domestic support obligations
  • Criminal fines and restitution
  • Personal injury automobile accidents involving drugs or alcohol

The biggest difference between a Chapter 7 and a Chapter 13 is how the funds are collected.

Basics of Chapter 7 Bankruptcy

A Chapter 7 can be thought of as a “liquidation” bankruptcy. The Chapter 7 trustee appointed to the case will value the debtor’s property and determine whether property may be liquidated and funds distributed on a pro rata basis to the unsecured creditors.
Each state allows debtors to keep property necessary for the “fresh start.” The property that may be kept (which is exempt from liquidation) is called an exemption.
The major exemptions in the State of Indiana are as follows:

  1. Retirement (in a qualified retirement account) is fully exempt
  2. Real or personal property constituting the debtor’s primary residence is exempt up to $17,600.00 in equity ($35,200.00 for a married couple)
  3. Personal property valued up to $9,350.00 is exempt ($18,700.00 for a married couple)
  4. Intangible assets up $350.00 are exempt ($700.00 for a married couple).

While the majority of cases are “no asset” cases, the debtors must honestly and fairly list all assets and cooperate with the trustee in liquidation of assets in order to receive a Chapter 7 bankruptcy discharge.
The entire Chapter 7 bankruptcy takes approximately 120 days from start to finish and is a fairly simply way to obtain a fresh start. This article will focus on the Chapter 13 bankruptcy due to its time and complexity.
Our next post will discuss why to file for Chapter 13 bankruptcy vs. Chapter 7, including income levels and personal assets:
Income & Assets: Basics of Bankruptcy – Chapter 13 vs. Chapter 7 – Part 1

Filed Under: Chapter 13, Chapter 7, Exemptions, Property & Asset Protection Tagged With: assets, bankruptcy attorney, exceptions, liquidation, personal property, real property, Retirement

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