Bankruptcy Information
Bankruptcy is a legal proceeding, which allows a debtor to get out of excessive debt and gain a fresh start financially. Bankruptcy is governed by federal law. Indiana law determines only what assets a debtor may keep upon filing of his or her bankruptcy petition.
There are four types of bankruptcy; however, one is generally for businesses and the other for farmers. The two main types for individuals are Chapter 7 and Chapter 13, which are described in this questionnaire.
Chapter 7 bankruptcy allows an individual to discharge virtually all debts and get a fresh start. In a Chapter 7, all unsecured creditors are completely discharged. Unsecured creditors are creditors that do not have any form of collateral as protection for the debt. A secured creditor is one for which there is collateral. For example, most personal loans, medical bills and credit card debts are unsecured and home loans and car loans are secured. In the car loan, the car is the collateral for the loan.
Chapter 13 is simply a reorganization plan. In a Chapter 13, the debtors can usually keep all of their property. It is designed for “wage earners” whose income mandates that a portion, or all, of their debts be repaid. In addition, a Chapter 13 allows a debtor to repay mortgage arrearage to avoid foreclosure. The timeframe to pay the debts, or a portion thereof, and/or mortgage arrearage is for a three to five year period. The advantage of a Chapter 13 is that the debtor loses no property, regardless of the total value of the assets.
In the event you own real estate and have fallen behind on your mortgage payments, Chapter 13 allows you to repay the arrearage over time and keep the house. Chapter 13 also allows debtors to repay car and furniture loans within the plan for potentially the current value of the property or the balance on the loan at potentially a reduced interest rate. For example, if you owed $12,000 for a car that was purchased more than 910 days from the filing of your case that is only worth $6,000, in Chapter 13, you could keep the car but only pay $6,000 for the vehicle at what normally would be a reduced interest rate (prime rate as of the date of filing + 1.5% under normal circumstances). Please note that if the car happens to of been purchased less than 910 days from the filing of your case, you have to the pay loan balance, but you still get to “cram” the interest rate (prime rate as of the date of filing + 1.5% under normal circumstances).
Once a bankruptcy petition is filed, it operates as an “automatic stay” of all debt collection procedures. Generally, this means that all debt collection or repossession activities by creditors must stop. Likewise, all lawsuits against the debtor must stop which the bankruptcy action is before the bankruptcy court. The purpose of the stay is to transfer all collection and debtor-creditor matters to the bankruptcy court. However, criminal actions against the debtor continue, as do all actions for the collection of alimony or child support.
If you have not already stopped making payments to unsecured creditors, you should stop once your petition for bankruptcy is filed. You should, however, stay current on debts incurred after you filed the petition.
Under Chapter 7 bankruptcy, the trustee liquidates the debtor’s assets for distribution to the debtor’s creditors. However, an individual is allowed to keep a certain amount of exempt property to allow the debtor to gain a fresh start. The determination of what property is exempt is somewhat complicated. Although bankruptcy law is federal law and is generally uniform throughout the United States, the rules governing exemptions allow for certain variations by state.
In Indiana, the debtor is generally allowed to keep (1) Real estate constituting a personal or family residence valued at $15,000 or less; (2) Personal property (including motor vehicles, furniture, clothing, etc.) valued at $8,000 or less; (3) Intangible personal property of $300 or less; (4) Professionally prescribed health aids; (5) Any interest the debtor has in real estate held as a tenant by the entireties up to $125,000 (i.e. with his or her spouse), unless a joint petition for bankruptcy is filed; and (6) Interests in a retirement plan in certain circumstances. If the petition is joint, the dollar amounts are doubled.
Debts in bankruptcy are considered either dischargeable or non-dischargeable. Most debts are dischargeable under Chapter 7 bankruptcy. This means that the creditor no longer needs to be paid back and the debt is deemed canceled.
Certain debts are NOT dischargeable, including but not limited to:
(1) Taxes assessed within three years of the filing, which remain unpaid;
(2) Debts incurred by the use of false financial statements or other false pretenses;
(3) Debts that the debtor fails to list on his or her petition;
(4) Debts that arise from fraud or from the misuse of funds when the debtor was acting as a fiduciary;
(5) Alimony and child support debts – known as “Domestic Support Obligations”;
(6) Any debt incurred from willful or malicious conduct;
(7) Fines and penalties;
(8) Education loans unless you can prove an undue hardship;
(9) Debts for luxury goods or services over $500 when incurred within 90 days of the filing of bankruptcy;
(10) Debts for cash advances in excess of $750 on credit cards incurred within 70 days of bankruptcy;
(11) Debts arising from a judgment incurred from drunk driving,
(12) Withholding taxes due from the debtor as an officer of a company; and,
(13) Debts other than child support and alimony incurred in the course of divorce or separation.
In addition, an individual debtor may be denied a discharge of all debts for any of the following reasons: hiding or destroying assets to hinder, delay or defraud a creditor; failing to keep financial records or hiding or destroying financial records; refusing to comply with an order of the bankruptcy court; having filed bankruptcy and received a discharge of debts within the preceding eight years. Therefore, it is important that you be totally honest and complete in preparing your responses to the following questions and in the handling of your affairs both before and during the bankruptcy proceeding. Only then can you be assured that your debts will be discharged through bankruptcy.
The process of filing bankruptcy is a simple one. After we have prepared your petition for bankruptcy, we file it with the Clerk of the Bankruptcy Court in the Southern District of Indiana. The court then notifies your creditors of your bankruptcy filing within approximately two weeks. However, you may notify creditors of your filing earlier if necessary to stop creditor harassment. Remember, once creditors learn of your bankruptcy, they can take no further action to collect their debt.
About three weeks following the filing of your petition, we will receive a notice of the first (and typically only) meeting of creditors. You must appear at this hearing; otherwise, your bankruptcy may be dismissed. If you cannot attend on the date and time specified, you should contact us as soon as possible so that we may request a continuance. At the hearing, a bankruptcy trustee will ask you general questions concerning your assets and other information contained in your petition. Review your schedules in advance so that you are prepared and can justify the information in your petition. Although the trustee conducts the hearing, any creditors that are present may also question you. (Often, secured creditors will be present to discuss whether you wish to surrender the secured property or “reaffirm” the debt with them, or in other words “keep and pay for” the secured item. Most first meetings for simple personal bankruptcies are straightforward and last only a few minutes.
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