What types of bankruptcy are available?

We need to concern ourselves with only two types of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 is known as “liquidation”. Chapter 13 is known as a “wage earner plan”.



What is the difference between Chapter 7 and Chapter 13?

There are several differences between Chapter 7 and Chapter 13, and a more thorough discussion can be found in the “Chapter 7 vs. Chapter 13” link on this website. Chapter 7 is a relatively quick process in which one discharges his or her debts that are dischargeable. But in Chapter 13, the idea is to pay back to one’s creditors as much as possible for usually 60 months depending on what the debtor can afford to pay, and the part of the debt that is not paid back is discharged.

Based on this simplistic explanation, it sounds as if everyone would want to file a Chapter 7 rather than a Chapter 13. However, this is not necessarily the case because Chapter 13 has several complex advantages over Chapter 7. For example, Chapter 13 will usually allow one to stop the foreclosure on their home or the repossession of their car, whereas a Chapter 7 will merely delay the foreclosure or repossession. One should always consult with an attorney in order to determine which chapter best suits their specific situation.



Do I lose all of my property if I file?

No. In both a Chapter 7 case and a Chapter 13 case, persons who file bankruptcy may keep all of their property which is “exempt.” Each State decides how much property (including real estate and personal property) a person may retain if they file bankruptcy in that State, so that property with a value which falls below a certain dollar amount determined by the State is deemed “exempt” and may be retained by the person filing bankruptcy. Therefore, the amount of property a person may keep in a bankruptcy depends on the State in which he or she files. (For clarification, even though bankruptcy law is federal law, the federal government decided to let the individual states decide how much property a person filing bankruptcy in that State may keep). States may use the federal exemptions or they may “opt out” of the federal exemptions and use their own. Indiana has opted out of the federal exemptions and has developed its own exemptions (see Indiana Code 34-55-10-1).

In Indiana, there are several exemptions that apply to several different types of property, so an exhaustive discussion is impossible here. Currently, most common exemptions include the one relating to personal property such as cars, furniture, and clothing, etc. and the exemption relating to residential real estate (see Indiana Code 34-55-10-2). Basically, persons filing bankruptcy in Indiana may retain up to $8,000.00 personal property and $15,000.00 in residential real estate. These exemptions may be invoked by each person filing bankruptcy, so a married couple filing a joint bankruptcy may retain up to $16,000.00 personal property combined and up to $30,000.00 equity in their home (their residential real estate) combined. The cash exemption is $300.00 per person.

If one owns property or has equity in real estate above these exemption amounts, the bankruptcy court may sell the property and give the sale proceeds above the exemption amounts to the creditors. Property being sold is more common in a Chapter 7 than a Chapter 13 since in a Chapter 13 there are some avenues to keep property even though it is significantly above one’s exemption amounts. Therefore, persons in a Chapter 7 lose property only if it’s worth more than their exemption amounts allow them to keep, and persons in a Chapter 13 seldom ever lose any property even if they are above their exemption amounts so long as they structure their Chapter 13 appropriately.

One should discuss the exemptions pertinent to their case with an attorney prior to filing a bankruptcy petition.

If a person filing bankruptcy has a lien on a piece of property (such as a mortgage on a house or a loan on a car), the loan must either (1) continue to be paid, or (2) be paid through the Chapter 13, in order for the property to be retained. In other words, one cannot file bankruptcy and wipe out the mortgage and still get to keep their home (though Chapter 13 can help one get current on a mortgage again if one has fallen behind on one or more payments).



Will I have to go to court?

Yes. Each person who files bankruptcy must attend one hearing that is called the “First Meeting of Creditors.” Sometimes this hearing is called the “341 Hearing” since Section 341 of the Bankruptcy Code is the section which requires that a hearing be held.

In southern Indiana, each person who files bankruptcy must attend the First Meeting of Creditors in one of four cities, depending on which county they live in: Indianapolis, New Albany, Terre Haute, or Evansville.

The First Meeting of Creditors is usually not held in a courtroom since it is not presided over by the Bankruptcy Judge. Instead, the court appoints a bankruptcy trustee to oversee the bankruptcy case, and it is this trustee who presides over the hearing.

The typical First Meeting of Creditors lasts from five to fifteen minutes, during which time the trustee will ask the debtor (the person who filed bankruptcy) questions about his or her case. The debtor’s attorney is also present to help the debtor with difficult questions. Creditors may also appear at this hearing if they like and ask the debtor questions, though they usually do not appear.

Most of the time this is the only hearing a person who files bankruptcy must attend, though occasionally one may have to attend a second or third hearing. One should discuss this possibility with one’s attorney.



How does the process of filing bankruptcy work?

First, one consults with an attorney to discuss if bankruptcy is the best choice for him or her. If after the consultation the person decides to file bankruptcy then he or she provides the relevant information to his or her attorney. The attorney then uses the information to prepare the bankruptcy petition, which the person reviews for accuracy and signs.

One must also obtain a certificate from an approved credit counseling agency either on the internet, by phone, or in person before filing their case. The certificate is good for 180 days. Before one’s case is over, one must take a two hour debtor education course. Click here for a list of providers in the Southern District of Indiana who provide both the certificate and the course.

Next, the attorney files the bankruptcy petition with the court, initiating the case. After the bankruptcy petition is filed, the court will notify all of the creditors that the case has been filed, so that creditors may not continue to call, bill, or harass the person who filed. Also, creditors may not foreclose on a home or repossess a car once they have notice of the bankruptcy filing unless they first get permission from the court to do so or unless the debtor has filed previous bankruptcy cases which cause the stay to go into effect temporarily only or not at all (see your attorney).

About a week after the case is filed, the court will notify the person who filed bankruptcy, their attorney, and all of the creditors of the date, time, and location of the First Meeting of Creditors, which is the hearing that the person who filed and his or her attorney must attend. This hearing is usually about five weeks after the date on which the bankruptcy petition was filed (and is never sooner than 20 days or later than 40 days after the case is filed (called the “20-40 rule”).

After the hearing, a Chapter 7 case is normally closed 60 days later (at which time the court mails an “Order of Discharge” to the person who filed bankruptcy). In a chapter 13, after the hearing and after any issues that arise are resolved, the court will issue an “Order of Confirmation” in the mail to the person who filed bankruptcy, approving the Chapter 13. The Chapter 13 lasts 36 to 60 months, and at the end of the 36 to 60 months the court issues an “Order of Discharge” to the person who filed, ending the case.

Each debtor must attend a class on financial management (about two hours long) before their discharge. The Courts offer this class immediately after the hearing for the convenience of debtors.



What types of debt may be discharged in bankruptcy?

Debts which bankruptcy will not usually discharge include income taxes that are less than three years old, student loans, child support, alimony, criminal damages resulting from willful or malicious injury or from accidents involving drugs or alcohol, and fraud. These are call “nondischargeable” debts.

Bankruptcy will usually discharge all other types of debts, including credit cards, personal loans, bank overdraft fees, amounts due after the sale of a repossessed vehicle or foreclosed-upon home, utility bills, medical bills, rent, etc.

Even though there are some types of debt that are nondischargeable, even these nondischargeable debts can usually be dealt with in a Chapter 13 case. Also, some debts which are nondischargeable in a Chapter 7 case are dischargeable in a Chapter 13, which is one of Chapter13’s advantages over Chapter 7.

Similarly, some types of debts which are normally dischargeable may in some cases be declared by the bankruptcy court to be nondischargeable. For example, credit cards are normally dischargeable, but if one uses a credit card too recently before filing a bankruptcy, the bankruptcy court may decide that the credit card was being used after the person knew he would be filing bankruptcy on the debt, and therefore the bankruptcy court would not allow the person to discharge the credit card.



How can bankruptcy hurt me?

Chapter 7 is on one’s credit report for ten years, and Chapter 13 is on one’s credit report for seven years, and either one will reduce one’s credit rating by 75-150 points, temporarily. The person filing bankruptcy will get those temporarily lost points back usually within one year after the bankruptcy, so long as he or she pays their bills on time, and structures the bankruptcy so that they keep a car payment through the bankruptcy (a process known as “reaffirmation”). The appearance of bankruptcy on one’s credit report will have a negative impact on one’s ability to get credit, and will influence the interest rate one has to pay for credit that is received.

Typically, bankruptcy will affect one’s ability to get a mortgage loan for less than a year. In fact, many mortgage lenders offer no-money-down financing for debtors one day after their bankruptcy discharges. As a practical matter, however, it is usually about twelve months before the debtor can qualify for their mortgage loan.



How can bankruptcy help me?

Bankruptcy will stop creditors from harassing the debtor and will allow one to have a fresh financial start. Bankruptcy can in most cases stop garnishments and wipe out judgment liens on real estate. Chapter 13 may be used to stop foreclosures and repossessions, and will allow a person to restructure his or her debts into a reasonable and affordable plan (called a Chapter 13 Plan).

One frequently has better credit two years after a bankruptcy filing than they would have had if they had not filed and still had a considerable amount of unpaid debt on their credit report.



What fees do I have to pay to file bankruptcy?

There are usually three fees one must pay to file a bankruptcy case: attorneys fees, the filing fee charged by the court and credit counseling/debtor education fees.

Attorneys fees vary depending on the complexity of the particular case and which chapter of bankruptcy one wishes to file. One’s attorney should indicate the amount of the attorneys fees before one hires the attorney to proceed with his or her case.

The filing fee goes to the court to administer the case and is a fixed amount set by the court. Currently, the filing fee for a Chapter 7 case is $299.00 and the filing fee for a Chapter 13 case is $274.00.

Credit counseling fees are the fees you pay to a third party credit counseling service to get your credit counseling certificate (before you file your bankruptcy case) and to get your debtor education certificate (after you file your case but before your case can be successfully closed). These fees usually total around $50.00 to $80.00.



If I am married, does my spouse have to file too?

No. A married person may either file jointly with his or her spouse or individually. If the spouse does not file also, the spouse’s credit is usually unaffected. It is usually a problem for a person who is filing an individual bankruptcy to transfer assets to his or her spouse or to anyone else.



Can I run up my credit cards and then file bankruptcy?

No. The trustee assigned to a case can object to the bankruptcy if he or she feels that the person who filed the bankruptcy made charges on a credit card or bought anything on credit when that person knew he or she would eventually file bankruptcy on the debt. Also, creditors may object if they see a sharp increase in spending prior to filing bankruptcy.

If the trustee or a creditor wins on his or her objection, the bankruptcy court can rule that the credit card debt is nondischargeable, dismiss the case and allow criminal proceedings to be instituted against you in severe cases “smelling” of fraud and abuse.



What can I do to avoid ever having to file bankruptcy?

Preliminarily, our law office does not offer financial planning and cannot advise anyone on how to prepare financially for life in general, especially for life’s traumas. We recommend seeing a certified financial planner in order to get advice in this field. Sometimes financial circumstances arise that force even the most financially savvy persons to file bankruptcy. However, we can relate what our experience tells us are the most common reasons bankruptcies are filed so that you may try and avoid these pitfalls.

First, unexpected medical bills for which one has no insurance or inadequate insurance causes a considerable number of bankruptcies. So, you should always carry health insurance to avoid accumulating a major amount of medical debt. It may well be the case that is more to your advantage to take a lower paying job that offers health insurance than a higher paying job that does not offer insurance unless you will use the money from the better paying job to fund your own health insurance.

Another cause of many bankruptcies is having no car insurance or inadequate car insurance and then getting into an accident. When you are responsible for a car accident and your insurance doesn’t cover all of your liability or you don’t have car insurance in the first place, then the victim (known as the plaintiff) can sue you and obtain a judicial judgment against you. They can even file paperwork with the Indiana Bureau of Motor Vehicles and get your driver’s license suspended until you pay that judicial judgment off. The good news is that the filing of a bankruptcy can get your drivers license back if you have your licensed suspended because of an unpaid judicial judgment arising from your causing a car accident. The exception to that is if your car accident took place when you were under the influence of drugs or alcohol.

Job loss is a major cause of bankruptcy. This is a really troubling cause of bankruptcy because there is no good way to prepare for it. One way to help prevent massive debt problems is to base their household budget on just regular hours and not rely upon any overtime hours for their budget. Some people make the mistake of basing their budget on what they think they will earn by working many overtime hours. Then, when the overtime hours are not available, the bills are still stacking up from the irresponsible spending that was based on the idea that the overtime will always be available.

Credit card usage is a major cause of bankruptcy. The interest and fees typically compound at such a high rate that one can dig a very deep financial hole without realizing it. Paying only the minimum payment per month is the same as flushing your money since many credit cards will take decades to pay off if you only pay the minimum amount. For example, if you pay the minimum payments on a $10,000.00 credit card balance with a typical credit card interest rate will take you almost 60 years to pay it off. Think about it: if you are 30 years old and you owe $10,000.00 in credit cards and you only pay the minimum monthly payment, you’ll be nearly 90 years old when those credit cards would finally be paid off.

Many people think that they must have a credit card for emergencies, and that is in many cases a true statement. But consider doing something else: map out a plan in which you start today to save at least 10% and preferably 20% of your paycheck and put that in a savings account that you specifically set aside for “a rainy day”, when bad things happen, such as the washer or dryer or refrigerator goes out, or someone in your family is sick and unable to work, or you or your spouse loses their job, or any number of other things that just happen. We should set aside in that emergency account enough money to live on for six months. After all, when we lose our job, studies show that it is usually about six months before we get back to the same level of income in the new job. Or we can choose to be irresponsible: We can continue to be losers and blame it on “bad luck” (there is no such things as “luck”), or we can be responsible, take responsibility for our own lives, and plan ahead for adversity. If we fail to plan ahead by properly saving for inevitable tough times, we can always blame ‘bad luck” and then use our credit card, or so we think.

Let’s focus on taking charge of our financial destiny, rather than letting life happen to us. After we save enough money in our emergency fund to last us for 4-6 months, why don’t we simply continue to save 10-20% right off the top of our paycheck—before we start missing it—and actually start to invest that money into various investments? You will definitely want to read up on various magazines before doing this, including Kiplinger’s, Money, and other books, magazine articles, and online articles about investing, as well as consulting with your personal financial planner. But the point is that whether you end up investing yourself, or doing so with the assistance of a financial planner, you need to start as soon as possible. Let your money work for you, instead of being constantly being overwhelmed by compound interest. If you let compound interest work for you, you can have a very comfortable retirement and even retire early, and contribute generously to whatever social, religious, political, academic, humanitarian or artistic cause that you desire.



What alternatives are there to filing bankruptcy?

This office is not engaged in financial planning, and nothing in this website should be construed to be financial planning advice. It is best to seek a certified financial planner in order to get advice in this area. The observations that follow are for general guidance only and should not be undertaken without first consulting a financial planning expert.

Many persons have had success avoiding bankruptcy by acquiring a home equity loan. If one owns a home and has sufficient equity in that home, one may be able to get a home equity loan (which is called a mortgage) and use the money to pay off other debts. This is called “debt consolidation,” and there are some advantages to consolidating multiple debts into a single home equity loan.

A home equity loan will usually have a better interest rate than the rate on the other debts one is seeking to consolidate (especially if the debts one wishes to consolidate are credit cards).

Home equity loans may allow a repayment term that is several months or years longer than the repayment terms of the debts being consolidated, so the monthly payment will be lower and more manageable. While it costs one more to pay interest over a longer repayment period, it may make the monthly payment sufficiently feasible to allow one to avoid bankruptcy on the debts.

One may be able to settle the consolidated debts for a lower amount than the total amount owed on the debts. For example, if one owes $21,000.00 in credit cards and he can borrow $13,000.00 as a second mortgage on his home, he may be able to get the credit card companies to accept the $13,000.00 as full and final settlement of the cards, causing a savings of $8,000.00. The IRS considers the forgiven debt as income. So in the example above, the savings of $8,000.00 would be taxable. When negotiating a debt settlement with your creditors, always get it in writing first before you send them a check. The creditor will usually want that settlement amount to be in the form of a lump sum, so be sure to actually have the money when you are negotiating with your creditors. And be sure to make the agreed-to deadline, or the creditor might call the deal off.

Home equity loans have another advantage: you can usually deduct the mortgage interest paid on home equity loans from your taxable income. In contrast, the interest you pay on credit cards and non-mortgage loans is not tax deductible.

Home equity loans do have a bad side to them. Let’s say you have $15,000.00 in credit card debt which you could get 100% discharged (forgiven) in bankruptcy. But instead you took out a home equity loan, paid off the $15,000.00 in charge cards and within a year or two, you went on a spending spree and now you’re in debt to charge cards to the tune of another $15,000.00. Now you’re in worse shape than ever, because you now have a higher mortgage payment, less home equity, and at least as much credit card debt. If your bad financial condition continues to the point where you need to file a bankruptcy, you will not be able to discharge your home equity loan in bankruptcy unless you surrender the home. The bottom line is that home equity loans turn what is typically unsecured, dischargeable debt into secured, nondischargeable debt.

If you do not own a home, or do not have enough equity in your home for a home equity loan, then you may be able to avoid bankruptcy by a credit counseling agency, in rare cases. Credit counseling agencies try to negotiate a lower interest for you on your credit cards, medical bills, and other bills other than for your home or auto. In exchange, you pay your bills through the credit counseling agency, with the agency collecting its fee right off the top. Remember our discussion about how long it takes to pay off credit cards: a person can literally be paying off payments to consumer credit counseling for years. Consumer credit counseling stays on your credit report for seven years, the exact same time as a Chapter 13 bankruptcy. But with consumer credit counseling, you typically pay either every dime of the debt or the overwhelming majority of it, with interest, over several years. In contrast, in a Chapter 13 bankruptcy, every dime of the credit card and medical debt is usually forgiven, and your credit score will be about the same about one year after your bankruptcy as compared to just prior to filing it.



Will I get fired for filing bankruptcy?

No. The Bankruptcy Code has a provision in 11 U.S.C. 525 which prohibits employers from discriminating against an employee solely based on the fact that the employee filed for bankruptcy. In most cases, an employer does not even know the employee filed bankruptcy.



Will my creditors stop harassing me if I file bankruptcy?

Yes. 11 U.S.C. 362 requires creditors to immediately stop harassing you upon your filing of a bankruptcy petition. This same code section also generally stops garnishments, writs of attachments, sheriff sales of homes, foreclosure, lawsuits, and repossessions of vehicles. There are some instances where bankruptcy will only temporarily stop collection efforts, or will not stop them at all, if prior bankruptcies were filed too recently (see your attorney for details).



Do I have to use a lawyer to file bankruptcy?

No. However, a bankruptcy filing can be complicated and it is advisable to seek professional help. This is especially true after the new bankruptcy law went into effect in mid-October 2005.



How often can you file bankruptcy?

A Chapter 7 cannot be filed within 8 years of the filing date of any prior case of a Chapter 7. You may file a Chapter 7 if the filing date of your prior Chapter 13 case was at least four years ago. A Chapter 13 may be filed anytime after a prior case, but if it is filed within one year of the pendency of a prior case, the automatic “stay” protects you for 30 days only, unless you get the Court to extend your protection. If two cases have pended within the year before a Chapter 13 is filed, then no stay goes into effect unless you can get the Court to grant one. These rules can be complicated and should be discussed with an attorney.



Once I realize I may need to file bankruptcy, what should I do?

Stop using credit cards. Stop charging and stop making cash advances off of your credit card. Stop all services that continue to bill to credit cards, such as internet providers. Don’t get any more personal loans or payday loans. The Bankruptcy Code has rules against acquiring any of these types of debt too recently prior to filing a bankruptcy petition.

Don’t transfer any property to anyone else, and don’t acquire property. Don’t destroy any business or financial documents. Contact an attorney and set up a consultation as soon as possible. It may be advisable that you stop paying certain bills, so you want to get advice as soon as possible so you don’t continue to throw money away by paying bills that you can wipe out in your bankruptcy case.



Is the bankruptcy filing printed in the newspaper?

Maybe. Bankruptcy filings are public record, so any newspaper that wants to print the bankruptcy filings may do so, but no paper is required to do so.



How long do I have to live in a district before I can file bankruptcy there?

91 days. 28 U.S.C. 1408 requires that one live in a district the greater part of the preceding 180 days in order to file a bankruptcy in that district, though there are some technical rules regarding this code section that should be discussed with an attorney.



I’ve heard of a “Chapter 20”—what is that?

There is no Chapter 20 in the Bankruptcy Code. A Chapter 20 is when you file a Chapter 13 right after you file a Chapter 7. One reason some people do this is that you cannot stop a home foreclosure with a Chapter 7, but you cannot file a Chapter 13 if your unsecured debt exceeds a certain dollar amount. So, if someone’s home is being foreclosed but their unsecured debt amount exceeds the limit for a Chapter 13, those persons may file a Chapter 7 and wipe out the unsecured debt, then file a Chapter 13 to stop the home foreclosure. Courts generally frown on Chapter 20s.



Do I have to have a certain amount of debt to file bankruptcy?

No. You may file Chapter 7 regardless of how much money you owe, and you may file Chapter 13 so long as your debt does not exceed certain dollar amounts. However, if you don’t owe very much, your situation may not justify filing bankruptcy. Ask your attorney.



Does my filing bankruptcy protect a co-signor?

No. The only way to protect a co-signor is to continue to pay the debt after the bankruptcy is filed (either directly after a Chapter 7 or through the Plan in a Chapter 13) or have the co-signor file bankruptcy also.



What is the typical debtor profile?

People from all walks of life and ages file bankruptcy for various reasons. About 44% of bankruptcy filers are couples; 30% are women filing alone; 26% are men filing alone. Persons who file bankruptcy are slightly better educated than the general population. Two out of three people who file have lost a job; half the people who file have suffered severe health problems. Over 91% of those who file have suffered a job loss, medical event, or divorce. Indiana is the second highest bankruptcy filing state per capita in the country behind Ohio.



Is there anything I can do to get collection agencies to stop calling me besides filing bankruptcy?

Yes. Collection agencies (which are companies who collect debts owed to another person or company) must follow certain rules in collecting debts pursuant to the Fair Debt Collections Practices Act, which is federal law written in Title 15 of the United States Code. One may send to collection agencies a letter similar to the sample letter listed below in order to stop harassing phone calls. However, sending this letter does not mean that the debt is not owed, or that the creditor cannot sue you to collect the debt, but merely requires the collection agency to follow certain rules in attempting to collect the debt. Also, this letter is applicable only to collection agencies, which are companies collecting debts owed to another and not to the original creditor if that creditor has attempted their own collection efforts.

The following sample letter is designed to be mailed to a collection agency by Certified Mail, Return Receipt Requested, with the sender retaining a copy:

____________________________________________________________________________________
(Collection Agency’s name)                                                                                              (Date)
(Collection Agency’s address)

Via Certified Mail, Return Receipt Requested, Certified Article number

Re: (Your Name)
(Your Account Number)

Dear Collection Agency:

Please be advised that while I am not at this time disputing the validity of the debt on which you are collecting, though I expressly reserve that right for the future if that becomes applicable, I am hereby exercising my right under federal law to require you to collect that debt in a legal manner and in conformity with the Fair Debt Collection Practices Act.

Pursuant to 15 U.S.C. 1692c (Fair Debt Collection Practices Act section 805(c)), I am hereby informing you that I demand that you, your company, and any and all agents thereof to cease further communication with me other than as permitted under the above-cited statute. This means that pursuant to 15 U.S.C. 1692 (c) (The Fair Debt Collection Practices Act section 805(a)(2)), the only further communications you are allowed by law to make to me is limited to (1) advising me that your further collection efforts are terminated, (2) that you may invoke remedies which are ordinarily invoked by your company, and (3) to notify me that you intend to invoke a special remedy. According to the same statute, you also may not contact my spouse, parent, guardian, executor, administrator, employer, or any other person in connection with the debt.

Also, this letter serves as your notice that it is inconvenient for me, for the purposes of 15 U.S.C. 1692c (Fair Debt Collection Practices Act section 805(a)(1)), for you to contact me by telephone or in person at any time, and any further communications from you to me must be made in writing.

If you contact my spouse, parent, guardian, executor, administrator, employer or any other person in connection with my debt, either by mail, in person, by telephone, or by any other means, or if you contact me by an means other than by mail, or if you mail me anything other than that which is permitted as described above, I may have the right to pursue sanctions against your company pursuant to 15 U.S.C. 1692k (Fair Debt Collection Practices Act section 813) or any other applicable state or federal law.

Sincerely,
(your signature)
(your name printed)
____________________________________________________________________________________

This website is designed to provide general information only. The information presented in this site should not be construed to be formal legal advice or the formation of an attorney-client relationship. Persons accessing this website are encouraged to seek independent legal counsel for guidance regarding individual circumstances.