• Skip to main content
  • Skip to primary sidebar

Tom Scott Law Indy

Bankruptcy Attorneys in Indianapolis Since 1980

  • Home
  • Indianapolis Bankruptcy Lawyers
    • Basic Financial & Estate Planning Legal Services
  • 2 Indy Law Offices
  • Fees
  • Forms
  • What to Bring
  • Questions?
    • Cost to file bankruptcy?
    • Bankruptcy Information
    • Bankruptcy Process
    • Chapter 7 vs. Chapter 13
    • Credit Counseling
    • Client Center
  • Make Payment
  • About Us
  • Contact Us

IRA

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

Property You Can Protect When You File for Bankruptcy (Interview Part 2 of 3)

April 26, 2016 by TomScottLaw

Retirement accounts are exempt from creditors when filing for bankruptcy, but an inherited IRA is not. A recent ruling extending the time to cure arrearage might help you save your house after a tax sale.

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 2 of 3 of the transcript of the conversation.

Q: Can you mention some of the things you can protect and some that you cannot protect when filing for bankruptcy?

Chris Holmes: Real estate. If it is your residence, you can protect up to $19,300 of equity. If it’s a joint filing and the property is owned jointly by a husband and wife, they can protect up to $38,600. Sometimes, when only one of them files, the property owned by a husband and wife is totally off limits to the creditors. That comes in handy sometimes.

Q: Based on cases you’ve dealt with, what are examples of the types of property people will include in their bankruptcy filing?

Jess Smith, III: The cash value of life insurance polices.

Andrew DeYoung: 401k accounts. IRA accounts. It can be as general as the clothing on your back. It’s what the exemptions apply to.

CH: But inherited IRAs are not exempt.

JS: It’s complicated and that’s why you should consult with an attorney.

CH: In general, retirement accounts—IRAs, 401Ks, defined benefit pension plans—are exempt, off-limits, no matter how much money is in there. But there was a recent decision where someone inherited a person’s IRA. The person who had the IRA died; someone inherited the IRA. The person who died could have protected that in its entirety from his or her creditors, but when it was inherited by the recipient—the debtor— it wasn’t off-limits to the creditors. It became subject to being taken and liquidated for the benefit of the debtor’s creditors.

Q: Was this decision a case you worked on or a precedent-setting case?

CH: It was a precedent-setting case in the 7th Circuit Court of Appeals in 2013, Clark (debtor) v. Rameker (trustee), in which a decision was made by the judges that an inherited IRA is not exempt in certain circumstances. (ed., The Supreme Court affirmed this decision by unanimous vote in 2014: Funds held in inherited Individual Retirement Accounts are not “retirement funds” within the meaning of 11 U.S.C. §522(b)(3)(c) and therefore not exempt from the bankruptcy estate.)

JS: And there was the case of someone buying a new car on the eve of bankruptcy to protect the lien, or affecting the lien. If the creditor does not affect the lien on the title, sometimes the trustee can take the car itself.

CH: Right. I recently had a case where right before the people came in to sign the paperwork, just two days before, they went out and bought two cars. So I had to change the paperwork and their list of creditors, but then the problem was that we had to know for certain that the creditor had put their lien on the title to each vehicle—and they had to do that within 30 days of whenever the people got the car. Otherwise, in a Chapter 7 bankruptcy, or even in a Chapter 13, the trustee could void the lien, take the car and liquidate it. Unless we did something else to prevent that, we would have to wait 91 days from the transfer of the title to file the bankruptcy. Otherwise, it creates what’s called a “preferential transfer.” With that situation, a trustee could set aside that preferential transfer and try to confiscate and liquidate that car.

There is another recent precedent-setting case that has changed in bankruptcy law. Previously, when a house had been sold by the county treasurer for delinquent taxes, the debtor had one year to redeem the property—pay the taxes plus a rate of interest—to keep the house from going to the tax sale purchaser. In the bad old days, we would have to tell people, "You’ve got to file a Chapter 13 bankruptcy before the tax sale to get the benefit of the three- to five-year Chapter 13 plan, to cure that real estate tax arrearage and save the house. If the tax sale had occurred, we couldn’t use a Chapter 13 plan to give them three to five years to cure that problem. They still had this one-year statutory redemption period, but luckily one of our judges, Judge Carr, ruled that you can now use a Chapter 13 plan after the tax sale has taken place to force everyone to back off for three to five years, to give that debtor ample time to cure that arrearage. So that is a new development we can use to save houses after tax sales.

Part 1 of Interview: What’s New in Bankruptcy Law in Indiana

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

Filed Under: Foreclosure of Home / House / Real Estate, Personal Bankruptcy in Indiana, Property & Asset Protection, Taxes, Vehicles Tagged With: 401k, Inherited IRA, IRA, Life Insurance, Pension Plans, Preferential Transfer, Statutory Redemption Period

Divorce and Bankruptcy

July 27, 2015 by TomScottLaw

We recently interviewed Christopher Holmes and Jess M. Smith, III, the senior partners at Tom Scott & Associates, P.C. Below is Part 1 of that interview, which focuses on a few aspects of how a divorce can impact bankruptcy.
Q: We know that divorce is one of the major unfortunate events that cause people to file for bankruptcy. For someone who is considering a divorce or who is already divorced and is considering whether or not to file for bankruptcy, what circumstances might they encounter and how can those be handled to their advantage?
CH: We had a client from Avon, which is in Hendricks County, in his thirties, who was divorced not so long ago. In the divorce decree, his ex-spouse was awarded a property settlement of over $46,000. He had some other financial woes, but this property settlement was the biggest, so he wanted to file bankruptcy.
I told him that under Chapter 7 of the bankruptcy code that the divorce settle was a non-dischargeable debt, so he would be wise to file under Chapter 13 of the bankruptcy code, because we could discharge the vast majority of that settlement.
Q: What was the nature of the debt that would make it different under the those two chapters of the bankruptcy code?
CH: Because it was a property settlement, the bankruptcy code states that it is a non-dischargeable debt under Chapter 7. He was going to keep the properties and she was going to get money in exchange for her equitable interest in those properties. So this settlement was a debt that, according to Chapter 7, you cannot get rid of, but the United States Congress made it a dischargeable debt in Chapter 13.
JS: Congress created the legislation on the theory that if you do the best you can and pay what you have to pay, and the ex-spouse gets in line with the other debtors and receives a portion of what you owe, that’s fine under Chapter 13. But you just can’t file under Chapter 7 and walk away from the property settlement debt completely.
CH:  So as long as the settlement debt is not deemed to be in the nature of alimony, maintenance, or child support,  he pays back a few pennies on the dollar. Then, upon the discharge of his bankruptcy, the rest of the debt is wiped out, rendered null and void. So, the ex-wife thought after the divorce was finalized that she was was going to be receiving money in exchange for the physical properties he kept as part of the divorce settlement. But that money owed to her went into the Chapter 13 and she had no recourse but to accept those pennies on the dollar.
JS: The other time where property settlement comes into play is when you have one credit card that both divorced spouses used while they were married. One spouse is ordered to pay that credit card debt and says, “I didn’t incur that credit card debt,” but the divorce judge say, “I don’t care. You’re paying it.” That is a debt in Chapter 13 in which they can list the bank or financial institution that issued the credit card and the ex-spouse as creditors, so they pay pennies on the dollar to the original creditor and the ex-spouse – and then the credit card company goes after the ex-spouse for the difference.
CH: In that situation, she can’t go back to the divorce court and ask the judge to hold her ex-husband in contempt for not paying the debt as he was originally ordered to do in the divorce decree. In addition to that debt, to further this gentleman’s problems, he has a child support obligation that he has been unable to pay in full, so he has what is called a child support arrearage. so, in a Chapter 7, he is pretty much at her mercy with a non-dischargeable debt. The benefit of a Chapter 13 would be that he can force the woman to accept the cure of that child support arrearage over the life of the Chapter 13 plan. Meanwhile, she can’t go back to divorce court to ask that judge to hold in in contempt for not paying all of the child support. So, he has a very powerful remedy to keep his ex-spouse at bay on both the back child support and the non-payment of the property settlement.
Q: If alimony was a part of the divorce settlement, would it be covered in this situation as well?
CH: Alimony is non-dischargeable, but if he is behind in paying the alimony, he could use a Chapter 13 to, as we say, cure, or catch-up on that situation. It also forces the ex-spouse to accept that cure or re-payment over a 3 to 5 year period, as opposed to being forced to come up with it in a much shorter period of time.
Q: Does this individual’s employment status affect the case?
CH: He is a self-employed home remodeler with two children, so unfortunately his income is variable, which prevents him from paying his child support in a timely manner, because his income goes up and down. What we are hoping to do in his plan is to buy him more time to resolve that problem.
Q: What is the process you would go through to make his case or a similar case to the divorce court judge?
CH: Luckily, the bankruptcy code has provisions that make it pretty clear-cut that if we propose this plan, unless there is some legitimate objection, whether the ex-spouse likes it or not, she is compelled to comply with the terms of it,or at least accept the terms of the plan.
Q: Were there any legitimate exceptions that you feared might come into play when proposing the plan on his behalf?
CH: My fear was that her divorce court lawyer might try to assert that this property settlement was in fact in the nature of maintenance. I’ve had that happen in the past where even though it clearly stated “property settlement” in the divorce decree, they convinced the state court judge to say, “Oh no, what I really meant was that this is in the nature of maintenance, which makes it a non-dischargeable debt,” and therefore the client couldn’t get rid of it in the Chapter 13 bankruptcy.
JS: I’ll give you an example of an experience our associate Andrew DeYoung had. The bankruptcy code says that an above median debtor can contribute to the retirement accounts during the bankruptcy – basically shielding money from their creditors. Andrew had a case recently in which the debtor, his client who is a divorced woman, proposed to still contribute big chunks of money into her retirement account. Her ex-husband’s attorney said, “This plan is not being proposed in good faith, because she could stop these contributions to put more money into the plan.” The judge agreed the contributions were in contravention of the code and basically said, “I don’t think you should fully fund your retirement account and I’m going to make you offer some more money to the bankruptcy plan.” The judge didn’t state what that amount would be, but it forced them to eventually reach a deal that both sides could live with.
I think had Andrew’s client had the money to go up to the Court of Appeals, he might have won the case for her, but she didn’t have the money to pay for an appeal. That particular judge did not like the – quote, exorbitant, unquote – amount, about $800 per month, being put into her IRA, which her employer would then match on top of that, so she had great incentive to contribute to her protected retirement fund. Her ex-spouse objected and the judge agreed that she could not soak all of that money away from the settlement and just pay three cents on the dollar, so she had to do something else. As I stated, they eventually worked it out and agreed upon an amount she could put into her IRA.

Parts 2 and 3 of This Interview

Part 2: An Experienced Bankruptcy Attorney Can Help You Keep Your Personal Property
Part 3: Tax Returns, the Affordable Care Act (Obamacare), and Bankruptcy

Filed Under: Chapter 13, Credit Card Debt, Marriage & Divorce, Non-Dischargable Debt Tagged With: Arrearage, Child Support, Dischargeable Debt, Individual Retirement Account, IRA, Median Debtor

What Constitutes Property of the Estate in Chapter 13 Bankruptcy and What are the Consequences of Failing to Amend the Schedules?

November 3, 2014 by TomScottLaw

#1 of 8 in Series

Property of the Estate in Bankruptcy: Difference between Chapter 7 and Chapter 13

Property of the Estate in BankruptcyThe goal of any chapter of bankruptcy is to try and settle debt with creditors. The difference between chapters 7 and 13 is how creditors go about looking for money. Ch13 is a wage-earner plan, in that you have a job and are making money or because you have assets you want to protect – that you don’t want liquidated, or because you want to deal with tax issues, or divorce issues, or to save a house, or to lower the payment on a car.
Chapter 13 is for when you have a job or assets you want to protect.

Bankruptcy Code has Broad Definition of Property

Section 541* of the Bankruptcy Code is very broad in its definition of “property of the estate” and states:
(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.
(2) All interests of the debtor and the debtor’s spouse in community property as of the commencement of the case that is—
(A) under the sole, equal, or joint management and control of the debtor; or
(B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable.
(3) Any interest in property that the trustee recovers under section 329(b), 363(n), 542, 550, 554, or 723 of this title.
(4) Any interest in property preserved for the benefit of or ordered transferred to the estate under section 510(c) or 551 of this title.
(5) Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date—
(A) by bequest, devise, or inheritance;
(B) as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree; or
(C) as a beneficiary of a life insurance policy or of a death benefit plan.
(6) Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case.
(7) Any interest in property that the estate acquires after the commencement of the case. 

Basically, once you have file for bankruptcy, you don’t own anything; it all becomes property of the estate. The court, after looking at what you can keep, abandons certain property back to the debtor, and keeps the rest and sells it.
In a Chapter 7 bankruptcy, possessions are defined as property owned on the date the case is filed.
In a Chapter 13 case, the law states, “Not only does it include 541 properties, it also includes all property the debtor acquires after the case is filed, but before the case is closed, dismissed, or converted to another section.”

Property Includes All of Debtor’s Legal and Equitable Interests

The Seventh Circuit has defined the scope of Section 541 broadly stating, “When a bankruptcy petition is filed, virtually all property of the debtor at that time becomes property of the bankruptcy estate. Section 541 of the Bankruptcy Code defines ‘property of the estate’ broadly to include all of the debtor’s interests, legal and equitable. United States v. Whiting Pools, Inc., 462 U.S. 198**, 204-05 and nn. 8, 9, 103 S.Ct. 2309, 2313 and nn. 8, 9, 76 L.Ed.2d 515 (1983). ‘[T]he term `property’ has been construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed.’ Segal v. Rochelle,382 U.S. 375**, 379, 86 S.Ct. 511, 515, 15 L.Ed.2d 428 (1966) (bankruptcy estate includes right to refund). A debtor’s contingent interest in future income has consistently been found to be property of the bankruptcy estate. See In re Neuton, 922 F.2d 1379**, 1382-83 (9th Cir. 1990) (collecting cases). In fact, every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of § 541 (emphasis added).” In the Matter of Yonikus, 974 F.2d 901** (7th Cir.1992). 

Everything you own or are entitled to receive is property of the estate.
However, the bankruptcy code does allow you to get some of that property back, they can’t liquidate everything. Property of the bankruptcy estate is what the court is generally going to keep to pay money back to creditors, what they are going to try and sell.
Here’s how to look at it: If the court was going to sell everything, your clothes, your bed, your pots and pans, etc., and leave you with nothing, you’d have to buy some things to replace that property, it would be on credit, and you’d be right back where you started.

Property Does Not Include Specific Funds and Financial Assets

Note that property of the estate does not include assets that are specifically listed in Sections 541(b)-(c). Among other items, such property does not include funds in an education Individual Retirement Account (IRC §530(b)(1)) if those funds were placed in the account more than a year prior to filing, and subject to certain limitations. 11 U.S.C. §541(b)(5). Such property also does not include funds contributed pursuant to IRC §529(b)(1) for college tuition expenses, again subject to certain limitations. 11 U.S.C. §541(b)(6). The estate also does not include amounts withheld by employers from wages of the debtor, or received by the employer from the debtor as contributions, to ERISA plans under IRC §414(d), deferred compensation plans under IRC §457, or tax-deferred annuities under IRC §403(b). It also does not include amounts contributed by the employee to health insurance plans regulated by state law. 11 U.S.C. §541(b)(7)(B). Spendthrift trusts enforceable under Indiana law would not constitute property of the estate. 11 U.S.C. §541(c)(2). 

For your fresh start, the bankruptcy court allows individual consumers to keep certain items, including: 

  • Any Retirement account (IRA, 401K, PERF)
  • Up to $17,600 of equity in your house (as a married couple, that would double to $35,000)
  • $9,350 of personal tangible property
  • $700 of intangibles ($350/person), which can include:
    • cash
    • stocks and bonds
    • lawsuits settlements
    • accounts receivable
    • anticipated tax refund
    • inheritance
    • life insurance with a cash surrender value
    • investments

 

Next Article in Series: Debtor in Bankruptcy Must Disclose All Assets and Liabilities or Risk Severe Penalties

* Source: Cornell University Law School Legal Information Institute
** Source: Justia

Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

Filed Under: Chapter 13, Property & Asset Protection Tagged With: 401k, Individual Retirement Account, IRA, PERF, Property of the Estate

Primary Sidebar

Contact Us for Free Consultation (Non-Business Cases Only)


South Indy Office: 317-786-6113
East Indy Office: 317-870-3232

Submit This Email Form For Free Consultation*

*Free consultations only apply to potential non-business bankruptcy cases.

Name(Required)
Email(Required)
DISCLAIMER(Required)
 
Get Free Credit Report (opens in new window)

FREE CREDIT REPORT

Credit Counseling Companies

Credit Counseling Companies

CREDIT COUNSELING

Make Secure Payment Online (opens in new window)

MAKE  A  PAYMENT

Bankruptcy Blog – Info You Need to Know

  • Keep More of Your Personal Property; Asset Exemption Values Increased for Indiana Bankruptcy Filings
  • COVID-19 Update: How Will the CARES Act Affect a Chapter 7 or Chapter 13 Bankruptcy?

Bankruptcy Blog Categories

SOUTH INDIANAPOLIS OFFICE
4036 Madison Ave.
Indianapolis, IN 46227
Phone: 317-786-6113

Click for map to south Indianapolis Bankruptcy Law Offices of Tom Scott & Associates
*Map opens in new window.

EAST INDIANAPOLIS OFFICE
1705 N. Shadeland Ave.
Indianapolis, IN 46219
Phone: 317-870-3232

Click for map to East Indianapolis Bankruptcy Law Offices of Tom Scott & Associates
*Map opens in new window.

 
  • Home
  • South Indy Office
  • East Indy Office
  • What to Bring
  • Forms
  • Fees
  • Make a Payment
  • Client Center
  • Blog
  • Sitemap
  • About Us
  • Contact Us
Facebook     Twitter  
  *Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.
Copyright © 2025 Tom Scott & Associates, P.C. All Rights Reserved.
Top of Page