Tom Scott Law Indy

Bankruptcy Attorneys in Indianapolis Since 1980

Wage Garnishment

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.

Common Reasons People File for Bankruptcy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What happens if I do not declare bankruptcy?

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Our office often works with creditors to try and negotiate a lower settlement on claims and has reached great success. Our office oftentimes has a greater success in non-bankruptcy workouts because the threat of bankruptcy is always on the creditors mind when we negotiate.
Creditors know that our office has filed thousands of bankruptcies and that if they do not settle then there is a good chance that they will get nothing (or much less than we have offered).
In order to have a successful non-bankruptcy workout, we like to see a limited number of creditors (as any single non-cooperative creditor may ruin the whole deal for everyone) and a source of funds (such as borrowing from a friend or taking a hardship loan from retirement).
We recently had a client settle on four claims for less than $17,000 when he owed over $70,000. He did not want to file and was able to borrow from a retirement account. Our fees for saving him $50,000 was less than $2,000.

Will my paycheck be garnished?

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In most Chapter 7 bankruptcy cases, your wages cannot be garnished. Exceptions exist, such as past-due child support. If you have a job and do need to declare bankruptcy, Chapter 13 might be a better choice. Learn more at Chapter 7 vs. Chapter 13.
Be sure you understand all of the ramifications of filing for bankruptcy and all of your options, whether you do or don’t file. For immediate assistance, please contact us.