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As an Indiana bankruptcy lawyer, one of most important ways I can be of help to clients is in the decision about which type of bankruptcy to file. Personal bankruptcies fall into two categories – Chapter 7 and Chapter 13.
Two main factors must be considered: your income and whether you are trying to save a home from foreclosure. Your income needs to be considered, because if it’s above a certain level, you must file a Chapter 13 bankruptcy. (The income level is determined by comparing your income with the median income in our state.) Your status as a homeowner needs to be considered, because while bankruptcy temporarily halts a foreclosure, you will still need to pay any missed mortgage payments if you want to keep your home.
Of the two types, Chapter 7 is quicker. Chapter 7 is also called “straight bankruptcy” and “liquidation bankruptcy”. Within six months, sometimes even sooner, many of your debts can be cancelled (exceptions include child support, student loans, and taxes owed for the most recent three years). Chapter 13 bankruptcy, by contrast, involves a debt repayment plan that extends over a three to five year period of time.
While the title “liquidation bankruptcy” gave rise to the myth that you lose all your possessions, most Chapter 7 filers don’t lose anything, and, in fact find Chapter 7 to be the best plan for debt elimination.
As one of only fifteen Board-Certified Consumer Bankruptcy Specialists in Indiana, I helped write the portion of Indiana bankruptcy law that deals with exemptions. Exempt property is property a debtor is allowed to keep. Most of our clients lose nothing, because, by the time they decide to file bankruptcy, they’ve used up most of the “equity” in their property.
In the state of Indiana, there are exemptions for houses, mobile homes, land, cars,trucks, household goods, furniture, and many other things. What’s more, life insurance cash value and retirement plan money are exempt.
And do you know what the very main thing that will be “exempt” is? YOU! Bankruptcy will, by law, halt all lawsuits, wage garnishees, and even telephone calls to you demanding payment. Bankruptcy “buys” breathing room, time to plan and reorganize, time to make a fresh financial start.
One reader of my Indiana bankruptcy blogs is concerned about his unemployment benefits, asking whether creditors can garnish those benefits. The general answer to his question is "No." Creditors cannot garnish unemployment unless it’s for child support or alimony. Creditcards.com adds that states cannot garnish payments from the federal government, and, conversely, the federal government cannot garnish payments from the state. On the other hand, if you owe money to the state, the state can garnish your unemployment benefits.
By way of review, garnishment is a court-ordered process that takes property or earnings from a person to satisfy a debt. All the states allow garnishment for alimony, child support, federal student loans, and taxes. For other debts, the creditor would first need to get a court judgment, and then "get in line", because there are limits in each state on how much of a person’s wages can be garnished. In the state of Indiana the wage garnishment limit is the lesser of 25% of disposable earnings or the amount of disposable earnings that exceed 30 times the federal minimum wage.
I helped write the exemptions portion of Indiana bankruptcy law, so I can reassure readers that in a Chapter 7 bankruptcy filing, you can almost always keep unemployment compensation, workmen’s compensation, and crime victim’s compensation benefits. Other exemptions include property worth less than $8,000, individually prescribed health aids, most retirement plans, most pensions, life insurance policies, and medical care savings policies.
Filing bankruptcy is the first step in a three-step process, which is something I’ve been saying for more than twenty years to my bankruptcy clients and which now I say in my Indiana bankruptcy blogs. Step two is saving money, and step three is rebuilding credit.
Oddly enough, stress relates to all three of these steps. Often, just filing bankruptcy can provide immediate stress relief. Some of that relief comes because, when people face up to their problems instead of trying to avoid them, they are able to let go of negative feelings and move on with their lives. From a legal standpoint, because of bankruptcy’s "automatic stay", filing puts an immediate halt to the legal proceedings and collection efforts which have typically been such a big source of the stress. Whew!
The Chicago Tribune writes, "In this economy, bankruptcy may be an answer for many." In Newsweek a couple of months ago, financial journalist Jane Bryant Quinn talks about "the case for walking away, saying that "if you’re reaching the end of your rope, don’t try to hold on. Save what you can…..go bankrupt in 2009."
Stress in the workplace is a subject that has gained the attention of many of the world’s major employers. In the United Kingdom, studies revealed that stress was the trigger for 70% of doctor visits. In Japan, the threat of stress is perceived so strongly, they have a word for sudden death from overwork – "karoushi".
As a bankruptcy attorney in Indiana for so many years, I’ve learned something very interesting about stress – most people file bankruptcy not to get rid of debt, but to get rid of stress! And, while I’ve often blogged about the fact that job layoffs are one of the three leading causes of bankruptcy (along with divorce and medical bills), the interesting thing I’ve found is that stress relief helps increase job security!
How can that be? Stress in the workplace reduces productivity, hurting the performance of the brain in memory, concentration, and learning. Once some of the pressure is relieved, people bring less stress to work each day, life starts to look more hopeful, and their superiors notice they’ve become more cheerful to be around – and more productive in their work! Their job security may actually be enhanced!
No, the job markets won’t have changed. "As a result of globalization, outsourcing, contracting, downsizing, recession, and even natural disasters, job security can seem like a thing of the past," writes Mindtools.com. But now, you’re "dealing with the feeling", more focused on your future, better prepared to face whatever comes.
I’m just old enough to remember the 1977 science fiction movie "Close Encounters of the Third Kind". In the film, an Indiana man’s life changes after he has an encounter with aliens in an unidentified flying object. When I think about the awful problems that often ensue when people embark on the payday loan "trip", I’m reminded of the title of that film, and about how very important it is for people to have encounters of the right kind in order to get help with their debt situation.
- More and more middle class families have been so stretched financially that they have been caught in the high-interest payday loan cycle. And that cycle can truly turn vicious. The state of Indiana has rules designed to prevent people from getting into deep trouble through payday borrowing:
- The maximum loan amount is the greater of $550 or 20% of the borrower’s monthly gross income.
- The maximum finance charge for a 14-day loan is 15% (10% if the loan is more than $401).
- Only one loan can be outstanding to a lender at one time, and two loans is the maximum that can be outstanding for any one borrower.
- There are no longer any "rollovers" permitted.
- After three consecutive loans, the lender must offer an extended payment plan, at no additional cost, of at least four equal installments.
Since each payday loan must be paid in a week or two, explains the website PaydayLoan Info.org, consumers may not realize just how costly the loans are. A typical payday loan is $300, most loans are for 14 days, and the average customer has eight to thirteen payday loans in one year. Using those numbers, the total repayment for the year would be $690, or a whopping annual interest rate of 260%!
As I’ve said in earlier blog posts (see "Payday Loans Pave The Way To Bankruptcy"), the next encounter for anyone who gets to the point of using payday loans just to keep everyday bills paid needs to be an encounter of the RIGHT kind – with a bankruptcy attorney. It’s best to get professional advice before things go from bad to worse to 260% interest – to bankruptcy!
It’s more than ironic – three of my four Indiana bankruptcy law offices are in big college towns (Indianapolis, Bloomington, and Anderson), and yet student loan debt, a rapidly growing problem, is mostly non-dischargeable in bankruptcy!
What I’ve been finding is that, while student loans seem to be the main factor driving younger and younger people to seek bankruptcy protection, that’s not all because of student loans, but because students are doing what the Butler Collegian calls "putting college on a tab", using credit cards to pay for tuition, books, and other direct college expenses.
The federal government, realizing what a big problem student debt is becoming, created direct consolidation loans that allow borrowers to combine their federal education loans into a new, fee-free loan with four different flexible payment plans and renewed deferment opportunities.
On July 1st of this year, a new Income Based Repayment Program went into effect, allowing graduates to pay no more than 15% of their income towards student loan repayments. Those with moderate to low incomes will be able to pay much less, and in some cases, to defer paying anything at all. These concessions apply only to government loans, not to private loans.
With job markets shrinking, preventing employers, parents, and relatives from helping graduates who are behind on their loan payments, the student loan default rate is rising rapidly. Debate continues to rage about treating student loans and mortgage loans the same as other forms of consumer debt when it comes to bankruptcy, but no comprehensive legislative relief for student loan problems has been passed.
The way the law operates now, student loans are non-dischargeable in bankruptcy unless substantial hardship can be established. That in itself is complex, involving documented proof that efforts have been made to repay the student loans for at least five years leading up to filing bankruptcy, proof of severe physical disability, or proof of dependents’ needs. The bottom line is that the debtor has to prove he or she could not maintain even a minimally adequate standard of living and still repay the loan.
So, how am I able to be of help? Bankruptcy helps eliminate other debts, freeing up money to repay the student loans. In the case of Chapter 13 bankruptcy, bankruptcy buys time to spread out payments to other creditors.
One reader of my Indiana bankruptcy blog posed an interesting question, and the answer might be of help to other readers, I thought:
How are frequent flyer points treated when the owner files personal bankruptcy?
In earlier bankruptcy blog posts (see "Airline Ticket Holders Are Unsecured Creditors In Bankruptcy"), I talked about the opposite situation, where an airline has filed bankruptcy, leaving consumers holding frequent flyer mile accounts. I explained that, despite an airline’s public relations announcements saying it intends to honor all tickets, it’s really up to the bankruptcy court to decide. Ticket holders are unsecured creditors, last in line to get paid after secured debts are paid. If the airline is shut down by the bankruptcy court, mileage credits become worthless.
Now, what about the status of an individual’s frequent flyer miles when he or she files personal bankruptcy? As a board certified consumer bankruptcy specialist who helped write the exemptions portion of Indiana bankruptcy law, I want to begin by assuring readers that most people who file bankruptcy don’t lose any of their property. In general, frequent flyer miles may be used only by the individual named on the account. That means that, although the miles represent an asset, they cannot be used to pay creditors towards the debts you owe.
However, certain frequent flyer programs allow the owner to redeem points towards a discount on merchandise purchased from participating online retailers. In this case, the trustee could take the vouchers and sell them to someone else, if the contract with the airline allows this.
One of the reasons I thought this reader question about frequent flyer miles was important is that it allows me to clear up a common misconception of bankruptcy as a punishment for people who have mismanaged their financial affairs. The old concept of punishment, complete with debtors’ prisons, disappeared more than two hundred years ago. The modern image of bankruptcy is a safety net, designed for helping responsible people who have faced insurmountable obstacles rebuild their financial lives.
Back in April, I quoted a U.S. News and World Report article that advised "Mad about money? Avoid a Fight". I explained that every day, in my bankruptcy law offices around Indiana, my colleagues and I deal with couples who are dealing with each other around money issues.
And, after almost twenty-five years of this, I have to admit I’m still not sure about the "Which came first – the chicken or the egg?" aspect of divorce and bankruptcy. What I’ve often discussed in these Indiana bankruptcy blogs is that divorce is one of the three leading causes of individual bankruptcy (and sometimes of business bankruptcy as well), along with medical expenses and job layoffs.
On the other hand, I’ve been very firm in stating that one of the big myths that constantly needs debunking is that bankruptcy leads to divorce. Actually, filing bankruptcy often works the opposite way, because it relieves all the unbearable marital stress that’s been building up as the couple’s financial situation worsened.
I was very interested in MainStreet Financial Planning President James Ludwick’s money communication tips couples can use to reach a compromise when money conflicts arise. I really think these tips might be helpful for business partners as well as for couples in handling financial matters. In fact, as couples – or partners – go through the bankruptcy process itself, these communication tips could go a long way towards moving away from blame and focusing on the future.
Tip #1: "Money Dates". Set aside a specific time at least twice a month to talk about spending, saving, debt payments, and changes in plans. Begin each discussion by telling each other what you most appreciate about the other regarding finances.
Tip #2: Each partner should ask a money-astute friend for a personal finance book recommendation to read. Then, partners can share ideas from the books with each other.
Tip #3: Use a free online program to track spending and make a budget.
I’m certainly no psychologist or marriage counselor and. I practice law only as a board certified consumer bankruptcy specialist, not as a divorce attorney. But, over my quarter century in practice, I’ve seen it work again and again as couples go through bankruptcy together. Once the burden of indecision about the financial situation is unloaded, they get back to supporting each other.
Bankruptcy is a legal process, but what it’s really about is moving forward in life.
Mortgage modification has been a topic in some of my recent Indiana bankruptcy blog posts.
As part of my bankruptcy services in Indiana, I’m quote often called upon to assist with mortgage modifications and negotiations with lenders. This process can be quite frustrating for all concerned, because, as I pointed out in former blogs, a number of significant problems keep cropping up.
First, the original mortgage lender and the bank that’s servicing the loan are often two entirely different entities. In fact, often the owner may be a group of investors who bought mortgage securities. The second big problem is that most servicing companies have not increased or trained their staff to handle the extensive mortgage modification paperwork.
I was very interested to read a Washington Post article reproduced in the Indianapolis Star offering some insight into mortgage modification from the banks’ point of view. "Despite federal policy push, modifying all distressed loans isn’t profitable," explains the Post.
There are three general categories of situations, reporter Renee Merle explains.
Situation type #1: Borrowers, because of their job status or other factors, are likely to fall behind even after receiving a modified loan.
Situation type #2: Borrowers, based on their earning power and assets, can somehow, (perhaps at some sacrifice), catch up on their delinquent payments without a modification.
Situation type #3: Borrowers who, without a modification of their mortgage, would never be able to keep up, but who would be able to keep up under more modest payment terms.
The federal administration has offered lenders billions of dollars in incentives to modify home loans in an attempt to restart the stagnant housing markets. Even so, modifying a mortgage is profitable for the bank only in Situation #3.
In the meanwhile, foreclosed homes are "flooding the market", to use Merle’s words. Nationwide, only 200,000 mortgages have been modified, compared to the 1.5 million homes subject to foreclosure notices or proceedings since the program launched in March.
The Indianapolis-Carmel area has fared better than many other metropolitan areas, with the number of foreclosed homes falling by 12% in the first six months of this year.
The professionals in my four Indiana bankruptcy law offices continue to do what we can to help clients navigate the mortgage modification system and to explore all their options.
Yesterday I talked about Anderson car dealers and parts dealers, and how the government’s "Cash For Clunkers" program might have both good and harmful effects on businesses related to the automotive industry. Throughout the state of Indiana, I’ve been tracking news, good as well as not-so-good, about automobiles and automobile owners.
One very positive piece of news concerns the city of Anderson. With the help of a $2 million grant from Indiana’s 21st Century Research and Technology Fund, a company called Truck Emission Control Technologies out of Jackson Michigan, is establishing a new headquarters for operations and manufacturing of diesel emission controls in Anderson’s Flagship Enterprise Center.
Also on the positive side, Enerl, which produces automotive batteries in Indianapolis, is teaming up with Nissan Motor Company to research how to improve the quality of electric and hybrid vehicle batteries.
Some not-so-good news relates to auto parts maker Delphi Corporation’s plan to emerge from bankruptcy, which won the approval of the bankruptcy court. The plan calls for Delphi to hand over most of its assets to its lenders and to GM, its former parent and biggest customer. (GM, of course, just emerged from its own bankruptcy process.)
As a lawyer offering bankruptcy services throughout central Indiana, I am keenly interested in the news about Delphi. First, Delphi’s story is a good illustration of how a corporation navigates through the bankruptcy process. More to the point of this blog post, when Delphi turns over its assets, that could include the Delphi plant in Kokomo, Indiana, which is the second-largest employer in the city.
The biggest auto-related news stories are coming out of Connersville, Indiana. Carbon Motors, a high-tech police car manufacturing company, chose that location for its new headquarters, which could mean thousands of new jobs coming to the area.
Since jobs are so vital to the success of the bankruptcy process, as a consumer bankruptcy specialist, I have been following the story closely.
In addition, there’s a special legal twist to this particular story, in that the plan was to house the Carbon Motors headquarters in the old Visteon plan. Visteon filed Chapter 11 bankruptcy in May of this year, with the idea of buying time to reorganize while continuing to honor their obligations to suppliers and employees. The city of Connersville was planning to buy the plant from Visteon, but the transaction would need to be approved by the bankruptcy trustee. Before Carbon can get federal funding, it has to name its location. I’m staying tuned to learn the results of this dilemma, and will keep you posted….