According to a recent Indianapolis Business Journal article, the number of Chapter 7 bankruptcy and Chapter 13 bankruptcy filings has decreased for the fiscal year ending September 30, 2011, from the 2010 fiscal year.  However, new bankruptcy filings in the Southern District of Indiana, which includes Indianapolis bankruptcies, still totaled 24,727 for the fiscal year.

Indiana is currently ranked sixth in the nation, down from fourth, for the number of Chapter 7 bankruptcy filings and ranks eleventh, down from tenth, in the nation for the number of Chapter 13 bankruptcy filings.

The decrease in new filings can be partially attributed to the willingness of creditors to delay lawsuit collection activities against debtors because the difficulty trying to collect judgments from unemployed debtors.  Creditors are more reluctant to spend money pursuing lawsuits if they aren’t going to be able to recover.  Indiana is following the national trend where overall bankruptcies are down eight percent from the previous fiscal year.

As a dedicated Indianapolis bankruptcy lawyer, attorney Scott Kainrath, personally reviews every potential bankruptcy in great detail to make a determination if filing bankruptcy is the best option.  The timing of bankruptcy filing can potentially save a debtor hundreds, or even thousands, of dollars.   In many cases bankruptcy is not the best option.  At Kainrath Law Firm, P.C., we also assist debtors with debt settlement.  Many times we are able to negotiate debts down to a fraction of their original amount, allowing bankruptcy to avoided altogether.

If you are unsure as to whether filing bankruptcy is right for your particular situation, talk to a competent bankruptcy lawyer to personally review your individual case.

Beginning November 1, 2011, filing an Indiana bankruptcy will become more expensive.  The Judicial Conference has increased the fees for filing both a Chapter 7 bankruptcy and Chapter 13 bankruptcy as well as increasing fees for a variety of other bankruptcy related filings.  A complete list of fee changes can be found at the United States Bankruptcy Court Southern District of Indiana’s web site.   Consult with an Indianapolis bankruptcy attorney to see how the change in fees could affect your bankruptcy filing.

More importantly, November 1, 2011, also brings changes to the Means Test calculations.  Kainrath Law Firm, P.C. previously posted a blog on October 9, 2011, on the topic of Bankruptcy Qualification and Means Test.  To summarize, the Means Test is used to determine whether a debtor qualifies for a Chapter 7 bankruptcy or to determine whether a debtors Chapter 13 bankruptcy will be a 3 or 5 year payment plan.  Whereas prior to November 1, 2011, a single debtor with no dependents wanting to file a Chapter 7 bankruptcy needed to have a gross income that averaged $3,345 or less per month over the last 6 months which comes out to an annualized $40,135 per year.  A two person household needed to average $4,259 or less per month over the last 6 months or $51,104 per year.  A household of 3 needed to average $4,919 or less per month or $59,028 per year and a household of 4 needed to average$5,769 or less per month or $69,226 per year.  Every additional person in the household allowed for an increase of $625 per month or $7,500 per year.

The new numbers for those filing bankruptcy after November 1, 2011, are for a single person household $3,332 or less per month or $39,987 annualized per year.  For a two person household $4,139 or less per month or $49,669 per year. A household of three needs to average $4,808 or less per month or $57,696 per year and a four person household needs to average $5,608 or less per month or $67,296 per year.  Each additional household member still allows for an increase of $625 per month or $7,500 per year.

What this means is that it is now more difficult to qualify for a Chapter 7 bankruptcy or to be in a 3 year Chapter 13 bankruptcy plan because the amount of money that your household is allowed to earn in order to qualify for those has decreased.  However, it still may be possible to qualify for a Chapter 7 bankruptcy even though your household income is above the Means Test income limits.  For those debtors who believe that they may make too much money to file a Chapter 7 bankruptcy it’s important to speak to a knowledgeable bankruptcy lawyer to see if your particular situation may allow you to still qualify.

I frequently have consultations with debtors who owe income taxes and want to know if they are dischargeable in bankruptcy. Income tax is typically owed due to one of two reasons: 1) the debtor is self-employed and was either unaware that they needed to file taxes or unable to afford their scheduled tax payments, or 2) the debtor claimed the maximum amount of exemptions to increase take-home pay in the paycheck and now they can’t pay their tax liability after they file their income taxes.

Whether their income taxes are dischargeable is depends on several factors.  There are five rules to determine if tax debts are dischargeable.  If the income tax debt meets all five of these rules, then the tax debt is dischargeable in Chapter 7 and Chapter 13 bankruptcy:

 1.   The due date for filing a tax return is at least 3 years ago

 2.   The tax return was filed at least two years ago

 3.   The tax assessment is at least 240 days old

 4.   The tax return was not fraudulent

 5.   The taxpayer is not guilty of tax evasion

 Return must have been due at least three years ago

The tax debt must be related to an income tax return that was due at least three years before the taxpayer files for bankruptcy. The due date includes any extensions.

Example 1: Debtor filed his 2005 tax returns on February 1, 2006, and owes $1,000.  Taxes were officially due April 15th of that year.  The $1,000 becomes dischargeable on April 16, 2009, which is over three years from the date that the tax year 2005 taxes came due.

Example 2: Same scenario except that Debtor got an extension to file his 2005 taxes and the new due date was October 15, 2006. The $1,000 that the debtor owes on October 16, 2009.

Return must have been filed at least two years ago

The tax debt must be related to a tax return that was filed at least two years before the debtor files for bankruptcy. The time is measured from the date the taxpayer actually filed the return.

Example: Debtor filed his 2000 tax return on April 10, 2006, and owes $1,000. The bankruptcy must be filed after April 10, 2008, in order for the $1,000.00 to be dischargeable.

Income tax assessment must be at least 240 days old 

The Internal Revenue Service or Indiana Department of Revenue must have assessed the tax at least 240 days before the debtor files for bankruptcy.

Income tax return was not fraudulent

 The tax return cannot be determined to be fraudulent.

Income taxpayer cannot be guilty of tax evasion

The debtor cannot be guilty of any intentional act of evading the tax laws.

Other Tax Issues:

In order to file Chapter 7 bankruptcy or Chapter 13 bankruptcy you must have filed your income tax returns for the previous 4 years, unless because of lack income you were not required to file tax in any of those years.

If the IRS assessed income tax for you because you failed to file your required tax return then you cannot discharge that tax unless you signed a return for that year.

Occasionally the IRS or the Indiana Department of Revenue will place a tax lien against your property.  Tax liens are not dischargeable in bankruptcy.

Penalties on income taxes due may be dischargeable in a Chapter 13 bankruptcy even if the underlying taxes are non-dischargeable, but penalties are not dischargeable in a Chapter 7 bankruptcy unless the underlying taxes are dischargeable. Consult with an experienced bankruptcy attorney to determine what option is best for you.

A common concern of bankruptcy clients is about credit after bankruptcy. During a bankruptcy consultation at the Indianapolis bankruptcy office of Kainrath Law Firm, P.C., I remind clients that filing bankruptcy does have a negative impact on credit rating, but, equally as important to understand is that this drop in your credit rating is temporary. And you may actually have a chance to have a higher credit score faster than if you had not filed bankruptcy at all.

Credit is especially important in our current national financial situation. In order to obtain necessary purchases, such as homes and cars, a good credit rating is imperative. That said many clients understand that assuming a lower credit rating for an interim period in order to be relieved of many financial debts is necessary, and a temporary situation. It is also important to understand that rebuilding your credit after filing bankruptcy takes work and personal commitment from you.

What Happens to Credit Rating after Bankruptcy

Once you file bankruptcy, all debts discharged will be listed as bankruptcy, or BK, debts. These will remain on your credit report for several years – 10 years for a Chapter 7 bankruptcy and 7 years for a Chapter 13 bankruptcy. These ratings do not preclude you from qualifying for significant loans; however you may notice an impact to your terms.

For example, once some time has passed from filing bankruptcy – about a year – you may qualify for a home or car loan, but your payment terms may not be as favorable as they were on purchases previous to filing bankruptcy. You may not be able to rent or lease, but you should still have access to student loans. Finally, you must understand your fiscal responsibility for these loans, as you will not be able to file another Chapter 7 bankruptcy for 8 years. 

Ways to Rebuild Your Credit after Bankruptcy

With hundreds of bankruptcy clients at Kainrath Law Firm, P.C., our Indianapolis bankruptcy attorneys can  help you understand your options for rebuilding credit.  In order to rebuild your credit after filing bankruptcy, some important items to consider include: open a savings account and add a little bit every week; ask a close friend or family member to name you on their credit card, but do not make any charges on the card; once you’ve saved enough to open a secured credit card, do so in your name only, making minimal purchases and paying off the balance each month; pay all bills on time and inform your bankruptcy trustee or creditor immediately if you will be unable to pay a bill; and finally monitor your credit rating and challenge any inappropriate debts.

During the duration of your Chapter 13 bankruptcy you may be required to get permission or a letter from your bankruptcy trustee giving you permission to obtain additional credit.  Consult a knowledgeable bankruptcy lawyer to understand your options.

The first question that most people who are unfamiliar with bankruptcy have is, “How do I know if I qualify for a bankruptcy?”  The answer is that almost everyone qualifies to file either a Chapter 7 or a Chapter 13 Bankruptcy.  A better question is, “Do I qualify for a Chapter 7 Bankruptcy?” 

To begin with, let’s discuss the timeline qualification. A Chapter 7 Bankruptcy can be filed only once every 8 years.  So if it hasn’t been 8 years since the date that you filed your last Chapter 7 Bankruptcy then you must file a Chapter 13 Bankruptcy. If the last bankruptcy you filed was a Chapter 13 Bankruptcy and you received a discharge, 6 years must have passed from the Chapter 13 filing date before you can file a Chapter 7 Bankruptcy. However, if for some reason you never received a discharge in a previously filed bankruptcy, then you should consult a Bankruptcy Attorney to determine if you can file again. 

Assuming that you meet the timeline requirements, the next step is to determine if you qualify under the Means Test.  The Means Test is designed to determine whether you meet the income requirements to file a Chapter 7 Bankruptcy or to determine how long your Chapter 13 Bankruptcy will last.  The income levels to file bankruptcy in Indiana change periodically, but as of the date of this post, a single person with no dependents and lives by him/herself must make under $40,105 annually, a two person household’s income must be under $51,104, a three person household’s income must be under $59,028 and a four person household’s income must be under $69,226.  The income limit continues to increase with each additional person in the household.  If you are filing a Chapter 13 Bankruptcy and are over the Means Test income limit then you will be in a five year bankruptcy instead of the three year bankruptcy that you would be in if you were under the income limit. In general, if you are over the income limit then you are excluded from filing a Chapter 7 Bankruptcy; however, if you are close, you should consult with a knowledgeable Bankruptcy Lawyer to see if an exception may apply to your situation. 

Continuing our discussion on divorce and bankruptcy from the previous post Divorce and Bankruptcy Part 1, we now look on joint filing of bankruptcy, even if they are going through a divorce.

While it may be possible for both parties to cooperate with each other long enough to file a Chapter 7 Bankruptcy, I strongly discourage a divorcing couple to file a Chapter 13 Bankruptcy.  In a Chapter 13 Bankruptcy, the debtor(s) are required to pay a bankruptcy trustee a monthly payment over the life of the bankruptcy, 3 to 5 years.

If the debtors get divorced during a Chapter 13 Bankruptcy, it’s unlikely that they will continue to cooperate and each continues to contribute to that monthly payment.  It more likely that one of the debtors will just stop paying completely, leaving the other to carry the burden.  Even if the divorce court orders one spouse to make the payments, typically these situations have a high failure rate.  The spouse ordered to make the payments may not be able to afford it, may not want to continue with the bankruptcy and will likely be upset that they have to carry the burden of paying for it.

For your best option when filing bankruptcy while divorcing, be sure to consult a bankruptcy attorney.

"I’m planning on getting divorced, should I file bankruptcy now, after the divorce or should we file together?"

Probably the most frequent questions I receive as an Indianapolis bankruptcy attorney involve the effect of bankruptcy on divorce and vice-versa.  The two topics seem to go together as many bankruptcies result from expenses related to a divorce and from a debtor losing his/her spouse’s income; alternatively, many divorces are caused by money problems.

Before I can go any further in this topic I must explain the difference between a domestic support obligation (“DSO”) versus a property obligation.  A DSO is an obligation by a person to pay either child support or spousal maintenance to another person as a result of a divorce, paternity case or legal separation.  A DSO is a non-dischargeable debt in both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy.  This means that you will still owe the debt even if filing bankruptcy.  On the other hand, property debt is debt that a person owes another person as a result of a divorce, and can be dischargeable through a Chapter 13 Bankruptcy. For instance, a husband and wife get divorced and the husband is ordered to pay his wife $200 per month in spousal maintenance, $600 in child support and $4,000 towards his ex-wife’s credit cards.  The spousal maintenance and child support are considered DSO’s and cannot be discharge in any bankruptcy.  His obligation to pay $4,000 toward his wife’s credit cards is dischargeable in a Chapter 13 Bankruptcy, but not a Chapter 7 Bankruptcy.

Each debtor’s situation is unique and must be analyzed by a competent bankruptcy lawyer who is familiar with both bankruptcy and the effects of divorce on bankruptcy.  If the debts are primarily in the debtor’s name alone then the debtor may consider filing bankruptcy prior to the divorce.  However, if there is significant debt in both the debtor’s and the spouse’s names, then the debtor may consider waiting until the divorce is finalized.  The reason is this - if the debtor files bankruptcy and gets rid of his/her debt prior to getting divorced, the spouse’s debt is still considered marital debt.  If there is outstanding marital debt, the court could order the debtor to pay a portion or all of the debt.  Even though the debtor’s debt was discharged in bankruptcy, he/she is still responsible for paying the debt listed in the spouse’s name.  If, instead, he/she waits to file a Chapter 13 Bankruptcy until the divorce is finalized, then he/she could get rid of all of their debt along with any non-DSO marital debt that he/she was ordered to pay under the divorce order.

A Chapter 13 Bankruptcy provides some unique options that are not available in a Chapter 7 Bankruptcy. One option is Avoiding Second Mortgages, as discussed in my last blog, and another great option is the Cram Down. 

The general principle of the Cram Down is to allow a debtor to keep an item with secured debt and to pay it back at its fair market value and at a reasonable interest rate.  A secured debt is debt that, if not paid back, you will have to return; such as a car, furniture or computer.  In contrast, unsecured debt is debt such as medical bills, credit cards and broken leases with no particular item associated with the debt. 

To qualify for a Cram Down when filing bankruptcy in Indiana, an item must have been purchased more than 910 days prior to filing your Chapter 13 Bankruptcy and the fair market value (amount a willing buyer would pay or blue-book value) must be worth less than what is owed.  During the life of your Chapter 13 Bankruptcy, you will pay off the entire fair market value of item.  At the end of the bankruptcy all remaining amounts owed will be discharged along with the rest of your unsecured debt.

For instance, let’s assume a debtor purchased a vehicle three years ago that has a remaining loan balance of $10,000 and 12.5% interest.  If the fair market value of the vehicle is only $6,000, then the debtor can propose to pay back $6,000 in the bankruptcy at a more reasonable interest rate such as 6%.  The remaining $4,000 of the loan balance will be classified as unsecured debt, and will be discharged at the end of the bankruptcy plan.

The Cram Down offers the advantage of paying less than the amount owed on a secured item at a lower interest rate, and also offers the debtor the ability to spread the amount paid over the life of the bankruptcy. So in the example above, let’s further assume that the debtor has 14 remaining payments at $800 each until the $10,000 was repaid.  If the debtor files Chapter 13 Bankruptcy and the bankruptcy lawyer proposes to pay back the $6,000 fair market value of the vehicle in a 36 month bankruptcy plan, the average monthly payments applied to the vehicle would be reduced from $800 per month to under $200 per month.

As an Indianapolis bankruptcy attorney, a common question I'm asked during the bankruptcy consultation is, “Can I get rid of my second mortgage or home equity line of credit if I file bankruptcy?”

With the condition of the current housing market, many homeowners have discovered their homes are worth far less than they owe.  To make matters worse, many homeowners opened either home equity loans or lines of credit against their house when the market value was much higher.  Now they not only face a home worth less than their first mortgage, they also owe on their equity loan(s) as well.

However, there is hope for these homeowners.  It is possible, in a Chapter 13 bankruptcy, to discharge a second mortgage, equity loan or equity line of credit, if the value of the home is less than the amount owed on the primary mortgage.  For example, a person who owns a home that is currently worth $95,000, but owes $100,000 in a first mortgage and borrowed $20,000 against a home equity line of credit, may be able to avoid the home equity line of credit completely and have it discharged at the completion of their Chapter 13 bankruptcy.  However, if, in the same situation, the home is worth $105,000 (which is more than the amount owed on the first mortgage), the home equity line of credit is non-dischargeable.

As you can guess, getting the home valued is very important since it determines whether or not the home equity loan is dischargeable.  Proof of the current value can be determined in multiple ways; such a having a market analysis performed by a real estate agent, having the home appraised or possibly even using the property tax assessment.  If the home value is close to the amount of the first mortgage then the debtor and his/her bankruptcy lawyer must be prepared to justify the valuation - which is why it’s important to have a knowledgeable bankruptcy attorney assisting you with your bankruptcy.