Personal bankruptcies almost always fall into one of two categories - Chapter 7 and Chapter 13.  As I know from having helped write the latest version of Indiana bankruptcy exemption law, these two types are, in a way, like the two sides of the income coin.  Simply put, consumers who have income might have the means to repay most or all of their debts over time.  Those who don't have income, either because they can't work or because they were laid off and haven't been able to find new employment, obviously can't repay their debts, and so they file Chapter 7 bankruptcy under which some of their debt can be discharged, or forgiven. 

In fact, during the more than twenty years I've been a bankruptcy lawyer in Indiana, one of the truly important functions of my work with clients is understanding the ins and outs of the "bankruptcy means test" so that I can advise clients which chapter of bankruptcy is most appropriate given all their circumstances.  While some clients have income from veterans' benefits or other government programs, it's fair to say that income and jobs are very, very closely related. And while most personal bankruptcies are the result of a combination of factors building up over time, job layoffs are certainly one of the big causes leading to bankruptcy along with medical costs and divorce.  The job market itself is changing, and finding new employment can be very challenging, as I wrote in It's Not Your Daddy's Job Market.

Some newspaper and magazine articles I've been reading lately talk about entrepreneurship in Indiana being up because of job layoffs - the idea being that people lose jobs, then start their own businesses.  Needless to say, it's not that easy; most people who lost jobs don't have enough money saved up to launch a business, and getting credit is a lot harder these days as well.  Sharon O'Donahue, executive director of Business Ownership Initiative of Indiana, interviewed for an Indianapolis Business Journal feature, advises getting creative.  "Today, it's about patchworking income - threading together sources of income that meet household needs."  I know one thing for sure: - clients emerging from bankruptcy will need to be especially creative as they work on rebuilding their financial lives, so the phrase "patchworking income" is likely to become an integral part of my discussions with my Indiana bankruptcy clients.

Foreclosures have been featured a lot in the news lately.  In one of my very earliest bankruptcy blogs, Dis Or Dat? Foreclosure Or Bankruptcy?, I pointed out that there is no "one size fits all" solution, and that designing exactly the right plan for each client's situation is what my work as an experienced bankruptcy attorney is about.  In other words, in working with some clients, it's best to create a strategy focused on avoiding foreclosure, and in other situations, that may not be the way to go.

In deciding which form of bankruptcy to file, one of the factors to consider is that a Chapter 13 bankruptcy offers individuals an opportunity to save their home from foreclosure.  A chapter 13 can be referred to as a wage earner's plan of bankruptcy, because it is meant for people who have regular income coming in that they can use to make installment payments to their creditors. To qualify for a Chapter 13 bankruptcy, a person's unsecured debts (such as credit card bills, utility bills, and medical bills) must fall within certain limits (the number is indexed for inflation, and it's now $336,900.)  Their secured debt (such as car payments and mortgage) also must fall within a limit (now $1,010,650).  The process is quite detailed, one reason it's important to seek expert legal counsel.

The point I want to bring out here, though, is that, by choosing Chapter 13 rather than other forms of bankruptcy, individuals can stop foreclosure proceedings on their home.  If they are approved for a Chapter 13, they will "cure" their delinquent mortgage payments, but they'll be able to do that over time (three to five years), all the while keeping up with the regular mortgage payments and saving the home.

A second reason some people choose to file a Chapter 13 bankruptcy is that this kind of bankruptcy has a special provision that can protect co-signers on consumer debt.  In some situations, this can be very important in protecting the assets of parents, spouses, or adult children. (In a Chapter 7 bankruptcy, by contrast, co-signers are not excused from liability.

Over almost twenty-five years of practicing bankruptcy law in Indiana, one important lesson I've learned is that people's financial lives tend not to be cut-and-dried; each situation has different factors that must be weighed in coming up with a plan that is the least damaging to the people involved, as well as to their families, business partners, and creditors.  Yet it's important to choose a plan that offers bankruptcy clients the greatest chance for rebuilding their financial lives.  Sometimes, after a long day in my office or at the bankruptcy court, I find myself sighing, "It ain't easy, being a bankruptcy attorney!"  But then I remind myself how rewarding I find this work, because I know I'm helping people get a fresh financial start.
 

Every month or so, I like to keep my bankruptcy blog readers up to date on the job market in our state.  As a bankruptcy attorney serving clients in 38 Indiana counties with offices in Bloomington, Columbus, Anderson, and Indianapolis, I’m always on the lookout for news that has to do with the availability of jobs.  That’s because, as I’ve often explained, having a regular source of income and benefits is extremely important to my clients who are rebuilding their financial lives following a bankruptcy filing.  Clients who have filed a Chapter 13 bankruptcy probably already have regular jobs, or at least sources of regular income, but it’s important that layoffs not derail their bankruptcy debt repayment plans.  Clients who have filed Chapter 7 bankruptcy, on the other hand, need to gain control of their regular finances and keep bills paid.

Overall, Indiana has lost about 12,000 manufacturing jobs this year.  To put our situation in perspective, however, it’s important to mention that the 5.8% unemployment rate in Indiana is lower than that in Illinois, Kentucky, Michigan, or Ohio.

Negative news during the past month included the bankruptcy filing by Steve & Barry’s, a discount retailer in Washington Square and Lafayette Square shopping malls. Logistics companies, one of our strong suits in Indiana, are suffering from high fuel costs.  Two trucking companies have filed bankruptcy, Tradewinds (in Arcadia) and Icon Transportation (in Indianapolis).  Chrysler announced a plan to cut 1000 jobs.  (While they say most of the effect will be on jobs in Michigan, the cut could affect Chrysler's 670 salaried workers in Kokomo.) Indianapolis-based Davis Homes closed down for good, affecting not only their own employees, but possibly construction workers and suppliers from other firms as well.

On the good news front, Nestle is expanding its Anderson plant by 260,000 square feet, while Cooper Tire & Rubber Company is moving into a new building in the Franklin Tech Park.  Meanwhile, in Terre Haute, N.E.W. Customer Service announced it would create 480 new jobs by 1011.  In northern Indiana, Zimmer Corporation announced it will be needing at least 100 new workers. Right near where I live and shop, Nordstrom at Keystone Crossing Fashion Mall announced it will be hiring 250 workers to staff its new store.

Bankruptcy is all about rebuilding and fresh starts.  Observing all the changes in the job market in Indiana, I need to remind myself that sometimes demolition needs to be done before new structures can rise.  The advice I offer my clients - keep learning, seek training, plan the work and work the plan.

A person's credit history (also known as credit score or credit file), is a detailed record of how he/she has managed debt over time. It lists credit accounts and their outstanding balances, how often the individual was late in paying an account, whether any account for that person was ever turned over to a debt collector, whether the IRS ever put a lien on that person's assets, and whether any creditor ever obtained a judgment against that person after a lawsuit.  The credit history also shows whether that person ever filed bankruptcy.

Each of the credit reporting agencies collects information from public records and then maintains that information in a computerized database.  The information can then be sold to anyone the law says is entitled to use it.  Basically that includes five groups:

Creditors use your report in deciding whether to increase or decrease credit limits, or even whether to cancel the account, as well as to decide whether to lower or raise the interest rate you're being charged or to leave it as is.

Employers initially use your report to help decide whether to hire you.  Later, the report helps an employer decide whether to give you a promotion (or a demotion), or whether to fire you.

Insurance companies use your credit report to decide whether to sell you insurance and whether to charge you standard rates or increased rates.

Landlords use the credit report to help decide if they want to rent you an apartment - or an office for your business. The landlord wants to know if he can depend on you to keep up your rent payments.

Government agencies use the credit record to help decide if you are to be given a security clearance or perhaps a special license for which you've applied.

Your credit record can be restored after bankruptcy.  While a Chapter 7 bankruptcy will stay on your credit report for ten years and a Chapter 13 for seven years, you will be able to rebuild your credit. 

As a bankruptcy attorney in Indiana for almost twenty-five years, the one thing I want to stress to everyone is this: Your credit report is your passport.  Don't leave home without it. You won't get very far!

As I've explained in earlier bankruptcy blogs, the two most often-used types of bankruptcy to provide relief from consumer debt are Chapter 7 and Chapter 13.  By way of quick review, a Chapter 7 bankruptcy is a liquidation bankruptcy.  While that only occasionally happens, the bankruptcy court trustee can take legal possession of the debtor's assets (except for certain assets that are exempt under the law), sell those assets, using the cash to pay each of the creditors at least part of what is owed.  Then, some of the remaining debts are discharged, meaning forgiven.  (Of course, there are debts that cannot be discharged, including child support, alimony, most student loans, and certain taxes.)

Chapter 13 bankruptcies, by contrast, are reorganizations.  This form of bankruptcy usually allows a debtor to keep most or all of his assets and to arrange a full or partial repayment of debts over a three to five year period.  All of the debtor's "disposable" income goes towards repaying the Chapter 13 debts according to the agreement.

One very ironic thing that happens around bankruptcy courts is that creditors' representatives stand outside the courtroom waiting for the proceedings to conclude.  They then approach the person who's just filed bankruptcy and make an offer to "reaffirm" the debt owed to that company.  Say you've just had your debt to ABC Company discharged and wiped off the records in court as part of your Chapter 7 bankruptcy.  Now ABC is offering you new credit if you'll take the old debt back as well. Needless to say, almost never (there could be some exceptions with very small debts) is this offer anything but a trap for the unwary.

Renew your vows with a spouse?  Wonderful idea!  Reaffirm your debts?  Before even considering the possibility, better renew your talks with your consumer bankruptcy attorney!

When a person gets behind in paying debts, creditors begin to take action. And, when that happens, as I've warned many times in earlier bankruptcy blogs, it's time for the debtor to take action, too.  Telephone calls at home and at work from creditors could be just the beginning.  Foreclosure proceedings may be started against a debtor's home.  Automobiles may be repossessed, along with other property.  If creditors obtain a court order they may garnish wages, put liens on property, even seize bank account.  Working with a bankruptcy attorney can help avert a good deal of the ensuing pain, provided steps are taken before matters become worse.

Despite some myths, most bankruptcies are very private affairs. The rare exceptions tend to involve well-known local business leaders or political figures.  These unfortunately cases serve as a reminder of how business failures can sink even the most experienced of entrepreneurs.

Sometimes the first episode of a story is a Chapter 7 business bankruptcy.  Then, sometimes, a personal bankruptcy filing will follow, especially if the business was involved in lawsuits and ends up losing in one or more of those.  In the background there might be tax issues compounding the problem.  With wages garnished to pay back taxes, it can be very difficult to catch up and begin to rebuild financially.  Although, as I explained in my earlier blog, It's The Business, Stupid!, corporations and LLC's can file bankruptcy without the owner himself filing, the cumulative effect of many business debts and back taxes owed can resulted in personal bankruptcy even for some very once proud business personalities.
As a bankruptcy attorney in Indiana specializing in both small business bankruptcy and personal bankruptcy, I'm saddened but not surprised when I encounter, in my work with clients,r the sequence of events I just described    Almost all small business owners' personal and business finances are closely intertwined.  In fact, a 2005 study published in the California Law Review reveals that more than 20% of personal bankruptcy filings are business-related.  The bankruptcy system is designed to provide a safety net and a fresh start in situations like this. For a free capitalistic system to work, entrepreneurs need to be willing to take risks.  The fact that there is a "last resort"  in place when the best efforts fail serves as encouragement to do just that.

Bankruptcy’s in the news – again, but this time it’s not the usual individual or small business involved with bankruptcy court.  And it’s not one of the big manufacturing companies, either.  I’ve been reading about two cities, Vallejo, California, and McCall Idaho.  As a bankruptcy attorney in Indiana, I’ve helped tens of thousands of people through the process of bankruptcy.  I don’t typically work with cities and towns, but with individuals, families, and small businesses.  The fact is, though, that cities and towns file for bankruptcy, too.  For most of our history in this country, cities and towns weren’t eligible for bankruptcy protection. During the Great Depression, when more than 2000 municipalities were forced to default on their debts during Roosevelt’s presidency, laws were enacted that allowed municipalities to file bankruptcy.  A new section of the bankruptcy code, Chapter 9, was approved just for municipalities. (In an earlier bankruptcy blog, Yes, Your Business Can File Bankruptcy Without You, I talked about Chapter 7, Chapter 11, and Chapter 13 for individuals and businesses.) 

The three main causes for bankruptcy among individuals are job layoff, unusual medical expenses, and divorce. In the past year, falling home prices and property destruction due to floods, storms, and hail damage have all added to the pain.  In the case of municipalities, the big three causes appear to be losing big lawsuits, mismanagement, and distress in the economy.  Just as with individuals, when a municipality’s credit rating declines, it has trouble getting new credit to use for expenses (meaning to provide regular services to the people who live there).

When a Chapter 9 bankruptcy is filed, there’s one major difference as compared with individual or business bankruptcy.  There’s no provision in Chapter 9 for liquidating assets and using the money to pay creditors, as would happen in other forms of bankruptcy.  Usually reorganizing debt (bonds issued by the municipality) means lengthening the maturity date of the bonds to buy more time for repayment, or reducing the interest rate on the bonds.  Since “something’s gotta give”, as the saying goes, essential services may be reduced in that city, county, or town, even cutting back fire and police staffing or reducing social services staff. Projects such as building new bridges or new schools will probably be put on hold.  Most important, a city filing bankruptcy carries a much worse stigma than a corporation or even an individual. Municipalities will try anything to avoid using Chapter 9.

The first large municipal bankruptcy was filed in 1991 by Bridgeport, Connecticut.  The largest Chapter 9 was Orange County, California in 1994. New York City came very close to bankruptcy in 1975, but with Congress’ help, never went over the edge. What’s happened in McCall is that they owe $5 million to a contractor for remedying environment concerns, and that contractor is suing to have the debt all paid now.  Meanwhile, in Vallejo, ongoing negotiations with the fire and police unions have exhausted the city’s reserve funds.

In both cases, the problems have been building for years, with each administration trying to stave off the inevitable.  Although, as I said, my everyday work is not with municipalities but with individuals, the news out of Vallejo and McCall reinforces my plea for people to deal with financial problems early on.  The earlier in the process people begin to strategize and take steps to mitigate the problems, the more options will be open to them.  I’m no doctor, but when it comes to bankruptcy, early treatment offers the best chance for a cure!

As I brought out in an earlier blog, Foreclosures Hit Even The Famous, even folks who were at one time very successful and wealthy have fallen on hard times.    I’ve been practicing bankruptcy law for close to twenty-five years, and one thing I’ve found is that, by the time clients come to see me to try to stave off foreclosure or to file a bankruptcy case for themselves or for their small business, they are under considerable strain.  They’re not feeling either healthy or energetic, and one of the reasons for that is they haven’t been sleeping well.    Having counseled with tens of thousands of debtors, I have a lot of empathy for the enormous burden of worry people feel, knowing that it’s keeping them up at night and hurting their health. 

That’s why I was very interested in a May 23rd feature in the Travel section of USA Today about hotels.  Marketing managers at hotels are coming to realize that, while a hotel can have great amenities, what they’re really all about is a great night’s sleep. Several resort hotels and spas are focusing on helping their guests achieve just that.  At a special suite at the Hotel Monaco in Chicago, guests can find neck pillows, bamboo sheets, sleep masks, a gentle waterfall, and a sound machine.  The Four Seasons Hotel Westlake Village near Los Angeles launched a “Sleep Well” program, with acupuncture, meditation sessions, ear plugs, foot warmers, and even teddy bears.  SpaTerre at La Playa Resort in Naples, Florida, adds a sunset beach ritual and relaxation massage sessions.  The manager there advises guests to lock their cell phones in the safe and check email no more than once daily.  At Kimpton’s 70 Park Avenue hotel in New York City, guests can call a “pillow librarian” to request one of 15 different types of pillows to induce rest, such as one filled with buckwheat hulls that’s supposed to stimulate acupressure points.

As I work with my clients, preparing to guide them through the bankruptcy court process or helping them negotiate with home lenders and other creditors, I help them understand the options that apply in their situation.  The clients, in turn, need to make some very critical business and personal decisions.  They’re trying to absorb new terminology: Chapter 13, Chapter 11, Chapter 7, short sales, deed in lieu of foreclosure, on and on.  At the very simplest level, clients need to locate and organize all their financial records.  In short, there’s a lot to handle. If ever there was a time for focus and sharp thinking, this is it.  But, without sleep, nobody can get focused.

As a bankruptcy attorney for so many years, I know that when it comes to bankruptcy, it’s the “Now what?” stage that really matters.  That’s the part where the clients put the legalities of bankruptcy behind them and begin to rebuild their lives.  But, in order to get to that more hopeful “Now what?” stage, my clients must muster all their strength to get through the “Now”.  Perhaps, along with all my law books, I should stock a “pillow library” in each of my four bankruptcy law offices.

When most people think about the bankruptcy system helping people gain relief from debts, the first two kinds of debt they usually bring to mind are credit card debt and mortgages.  But, as a bankruptcy attorney in Indiana, I very often find myself dealing with student loan debts along with those others.  And, as I've written in earlier blogs, student loans can pose the greatest problem of all.  That's because it is very, very rare for student loans to be discharged in bankruptcy. 

To understand what's going on today with student loans, you need to remember that student loans for college started out being government loans.  Then, about 15 years ago, private lenders started getting into the student loan business, issuing federally backed loans.  The capital for all those loans came from selling securities to investors backed by the loans.  Now what's been happening with the credit crunch and so many people having difficulty paying back the loans, there's not very much of a market for the loan-backed securities.  Many companies are actually getting out of the business.  So, there is less money available for students, and the fees for servicing the loans are higher.

Meanwhile, what many parents had been doing was taking out home equity loans to help pay for their children's college. I don't need to tell you that it's a lot harder now to qualify for a home equity loan.  What's more, the value of many homes has fallen to the point that there's very little equity to borrow against!  It's a real squeeze, getting money for college.

Where I come into all this in my Indiana bankruptcy law practice is that my work involves helping people make a plan to handle all their debts.  Depending upon their situation, I am usually able to help them negotiate a plan of repayment with their mortgage lender and perhaps with other creditors and avoid or at least defer filing bankruptcy.  Or, they will file Chapter 13 (repayment plan) bankruptcy and pay off all their loans, including student loans, over time, under bankruptcy court supervision.  If neither of these two options is available, debtors can file Chapter 7 bankruptcy, under which many of the debts will be discharged by the court (probably not including the student loans).

The work I do is aimed at providing a fresh financial start for people whose circumstances have become impossible for them to deal with alone.  Since I know that student loans, with almost no exceptions, will need to be paid back, I try to help people get smart about student loans well before trouble looms.

By now, unfortunately, we’re all used to reading and listening to news about bankruptcy across the U.S.. From major corporations down to the little folk, there’s no scarcity of stories about financial failure.  Of course, as both a small business bankruptcy attorney and a consumer bankruptcy specialist in Indiana, I see the up close and personal version of such bankruptcy stories every working day.

As sad as many of these stories are, I couldn’t help chuckling at the following “riddle” I received in an email passed along to me by a friend:

What company has a little more than 600 employees and has the following statistics:

 19  have been accused of writing bad checks.
117 have directly or indirectly been involved in the bankruptcies of at least two businesses. 
 71  cannot get a credit card due to bad credit ratings.
 21  are defendants in lawsuits.
  8  have been arrested for shoplifting.

(I wasn’t really prepared for this answer!)  It’s the 615-member British House of Commons, “the same group that cranks out hundreds of new laws each year to keep the rest of us in line,” adds the writer.

Now, I must say here that, though I have dealt with literally tens of thousands of bankruptcy filings over the past quarter century, almost never have I found the rest of the statistics listed in the email about the House of Commons members to be true of my clients:
  7  have been arrested for fraud.
 29  have been accused of spouse abuse.
   3  have done time for assault.
   4  have been arrested on drug-related charges.
 84  have been arrested for drunk driving in the past year.

Fact is, most of my Indiana bankruptcy clients, both the individuals filing Chapter 7 or Chapter 13 bankruptcy, or the business owners filing Chapter 11 or Chapter 13 cases, have simply been overwhelmed by forces beyond their control.  The safety net provided by Indiana bankruptcy law gives these people a chance at a fresh financial start.  

In an earlier blog I discussed some of the similarities between the bankruptcies of Sharper Image and ATA Airlines.  I explained that, as a business bankruptcy attorney in Indiana, I always read up on factors that lead companies to struggle financially.  I want to take away from these accounts lessons that can help me advise my own bankruptcy clients. 

Both Sharper Image and ATA originally chose to file Chapter 11 bankruptcy.  Typically Chapter 11 is filed by a company wants to try to reorganize its business and become profitable again.  In a Chapter 11 situation, the management of the company continues to run the day-to-day operations, but the bankruptcy court must approve all significant business decisions.  The creditors cannot interfere with the company's operations, and the business is given time to negotiate a plan with the creditors to pay off at least part of the debts. (This situation is in contrast to a Chapter 7 bankruptcy filing, in which a company stops operating entirely.  In a Chapter 7, the court appoints a bankruptcy trustee to liquidate the company's assets and use the money to pay off the debts. )

As a customer of Sharper Image, you would not experience anything other than "business as usual" when entering one of their stores or ordering online or through a catalog in the days and weeks following the filing.  Same thing with ATA - originally!  In the two years following ATA's original filing of Chapter 11, you would have been able to fly from Indianapolis to your destination and back without seeing any difference in the service. 

It remains to be seen how Sharper Image's saga will play out.  Unfortunately, ATA's reorganization plan was not enough to save the company.  A few weeks ago, all operations were suspended at ATA, all service cancelled, all employees let go, and ATA turned to the bankruptcy courts for help in a liquidation plan.  

So, looking at these two companies, which is a better choice - Chapter 7 or Chapter 11? Chapter 7 is for businesses that can see no financial future; the business is so far in debt that there is no need for a restructuring plan.  Should business owners at least consider filing Chapter 11 and try every possible way to keep the business running?  Yes,  assuming the owners think they have a chance, with the help of the bankruptcy court and a lot of hard work and hard decision-making, to pull out of their rut.  That's probably what the decision-makers at ATA thought two years ago, but sadly, timing was bad and their problems proved too much to handle.

Most of my business bankruptcy clients have companies much. much smaller than either ATA or Sharper Image.  But I make sure to discuss all possible strategies with each owner.  Bankruptcy law is there to offer a safety net, and it's important to consider all the different ways in which that safety net can help.

Always an avid reader of news from around the world, I was a little amused by a recent feature story about a man in Perth, Australia who says he’s putting “his entire life” up for auction on the Internet. Ian Usher is in the process of a divorce.  (I’ve written often in this bankruptcy blog about the fact that divorce is one of the three main drivers of bankruptcy, along with job layoffs and extended medical illness).  Apparently, though, while this 44 year old has just gone through a divorce, he’s not anywhere near filing bankruptcy; in fact, he’s hoping to net half a million dollars from selling what he calls his “life package”, which includes his three bedroom home, his car, his dogs, his motorcycle, jet skis, spa, sky-diving kit, and giant TV screen. All these possessions, Ian says, cause him too much pain, reminding him of the wonderful past he shared with his ex-wife.  As if all this isn’t curious enough, it gets “curiouser.”   Usher is selling his job!  Usher works at a rug store, and his employer has agreed to take whoever buys Ian’s life as an employee on a two week trial basis.

As a bankruptcy attorney with four offices around Indiana, I don’t think I’m in a position to pick up and move to Perth, but I learned that if I were interested in buying Usher’s “life”, bidding on eBay starts June 22, starting at just one Australian dollar.

On a less sensational note, this story reminded me that online auctions have indeed become one method for selling assets in Chapter 7 personal bankruptcy and in business bankruptcy situations.  Since the goal of such liquidations is to raise as much money as possible to repay creditors, the auctioning of assets, whether via computer public auction, or private sales, needs to be done under the approval of the bankruptcy court trustee.  Unlike Ian Usher, who has not turned to the bankruptcy system for protection and who is therefore free to sell whatever he has, to anyone he likes, at whatever price he chooses to accept, a bankruptcy filer must work within the relatively complex rules dictated by state and federal law. 

Best completed with the professional guidance of a bankruptcy attorney, the bankruptcy process is serious medicine for serious situations.  And dispensing that “medicine” is how I have spent every day of my professional life for the last twenty five years.

Here's a question I, as a bankruptcy attorney, hear all the time:  Does filing bankruptcy help avoid foreclosure? And here's the answer:  Yes and no.  Filing a Chapter 7 bankruptcy triggers the "automatic stay" I've been writing about in former blogs.  The stay is sort of a "time out" period for creditors, when no collection efforts can be made, and that includes foreclosing on a home.  And, no, it's not permanent.  What the automatic stay does is buy time, time to take one of the following steps:

First, in the right circumstances, a debtor could "catch up" by bringing his house payments current, perhaps over a five-year period of time.  Obviously, the homeowner needs to prove he or she is now in a position to resume regular payments.  But, even if a Chapter 13 bankruptcy isn't feasible, the bankruptcy automatic stay almost always buys time to strategize and plan, time to consider those four tactics I spoke about in an earlier blog:  mortgage modification, repayment plan, deed in lieu of foreclosure, and short sale.  And, almost always, the stay buys time to stop an immediate sale of the home, keeping the wolves at bay.

Having spent my entire career working on behalf of consumers and small business owners and helping them cope with financial challenges, I always come back to the same message.  I say the same things to everyone I talk to about bankruptcy, whether I'm seeing people in my office in Columbus, Indiana, or whether it's in Anderson, Bloomington, or Indianapolis:  If finances are a serious challenge,
1. Face up to your situation.  2. Get help.  3. Get help early!

Just ten short years ago, singer and songwriter Toni Braxton was singing a sad tune as she filed Chapter 7 bankruptcy in Los Angeles.  Toni's fans were shocked, because her albums had enjoyed such success, but it was that very success that led to problems.  Braxton filed a lawsuit against her recording company, because she felt the terms of her contract were no longer fair.  The LaFace company countersued, and the only way Toni could halt the endless legal battles was to declare bankruptcy.  While waiting for the negotiations to end, Toni played Belle in Disney's Beauty and The Beast on Broadway. 

As an Indianapolis bankruptcy lawyer, I enjoy learning about famous people who were able to move past the dark periods in their careers and go forward to achieve success.  While my Indiana bankruptcy clients are very rarely stars, Toni Braxton's story brings out a message I try to convey to all my clients:  Bankruptcy is not the end of everything; in fact, it signals a fresh beginning and a new chance at personal and business success.

 In the years following her bankruptcy, Toni Braxton recorded seven new albums, earning no fewer than six Grammy Awards.  She appeared in a movie and in a TV sitcom.  And this very month, almost exactly ten years after her 1998 "downer", Toni is appearing in her own Las Vegas spectacular, complete with her own band, amazing costumes and tens of backup singers and dancers.  Rags to riches?  Not exactly.  Hers is more like a riches to rags to riches story.

Personal and business matters are intertwined for most small business owners, I find.  The owners, and in many cases their family members along with them, live and breathe the business.  As a bankruptcy lawyer in Indianapolis and ithree other Indiana cities, I learn over and over how difficult it is for the owners of small businesses to perceive where business stops and personal life begins.  And, as I in turn reveal to them, if the business is a sole proprietorship, their perception is legal reality - their business is just an extension of them!  If the business is in trouble and needs to be liquidated, it's the owner who files bankruptcy, because the assets and liabilities are those of the owner.

But if the business is held in the form of a corporation, a partnership, or a limited liability company (LLC), that business is a separate legal entity and can file Chapter 7 or Chapter 11 bankruptcy in its own right, without the owner himself or herself filing.

Understand, though, a Chapter 7 business bankruptcy is different from a Chapter 7 bankruptcy filed by an individual.  The bankruptcy court can discharge debts of an individual and give that individual a fresh start.  Businesses don't get their debts discharged.  What the Chapter 7 bankruptcy can provide is an orderly liquidation under the direction of a bankruptcy trustee, at no cost to shareholders.  Creditors are paid to the extent assets are available.  If there are any assets available after that, the money can help pay any individual taxes for which the owners may be personally liable.

A Chapter 13 small business bankruptcy is also different from an individual Chapter 13 bankruptcy.  The purpose here would be to buy time for the owners to sell the business as a going concern, or at least sell the assets without going down to fire sale price levels.  The proceeds could be used to pay salaries or taxes after the creditors are paid.  If the business has substantial assets, a Chapter 13 bankruptcy could be a viable choice.

No matter the legal form of the business, bankruptcy is a very bitter pill for many small business owners, whose pride is so vested in the success of their "baby", to swallow.  But bankruptcy is one area in which it may prove a blessing to have the business act as a legal entity separate from its owners.

Two weeks ago, debt relief was the topic of an article in the "Your Money" section of the New York Times, and I was quoted along with nine other experts on consumer debt from different parts of the country.  The feature by Jane Birnbaum of NY Times, titled "Debt Relief Can Cause Headaches of its Own", focused on debt management repayment plans.

An important point made in the write-up was one I want to emphasize: debt management plans are not the same as debt settlement plans. In cases where all that's needed for a borrower to dig out of debt is some belt-tightening and budgeting, a debt management repayment plan negotiates reduced interest rates, but the balances remain the same.  In debt settlement, creditors agree to a lump sum payment of a reduced amount and accept that as payment in full.  As a bankruptcy lawyer in Indiana, I am sometimes able to negotiate debt settlements on behalf of clients, and that is one of the many options I discuss with them before we select a strategy to handle their debts.

There are more than a thousand debt settlement companies nationwide, and the Times article quotes several experts who warn that many of these companies exploit debtors by taking monthly fees from clients' bank accounts, promising to negotiate a settlement when borrowers have saved enough for a lump sum settlement.  Meanwhile, the balances shoot up for those debtors who took the advice of the debt settlement company to stop making monthly payments (due to penalties and higher interest rates), and sometimes the creditors begin to attach debtors' wages!  Several of the experts advise consumers to deal only with settlement companies that charge after settlement is complete.  Deanne Loonin, a lawyer with the National Consumer Law Center in Boston, goes even further in talking about debt settlement companies.  "It's possible there are honest ones, but I assume they aren't until proven otherwise."

SInce I have been practicing bankruptcy law in Indiana for almost twenty-five years, the Times reporter wanted my comments about debt settlement.  Did I recommend debt settlement as an option, and in which situations, they wanted to know.  I responded that many consumers who don't understand the bankruptcy process  seize at any alternative.  I explained that others explore bankruptcy, only to find they cannot qualify for a Chapter 7 bankruptcy.

You can read the entire article in the February 9th issue of "Your Money" in the New York Times.  But there's one main thought I want to leave with the readers of my blog. When people first come to the realization that their debt is getting out of hand - that is when they should begin to explore all their options.  The message is simple: the earlier in the process you get qualified advice, the greater the number of options you'll have to choose from.  Debt settlement companies, for better or worse, can offer only that one service of debt settlement.  My role is not only as bankruptcy attorney, but also as a consumer debt counselor.  My task is to help you explore all the options - debt management repayment plans, debt settlement, and bankruptcy.  Basically, your debt is a legal issue, and only a lawyer is qualified to advise on legal issues.

There’s an old joke about a washing machine repairman who, with just one push of a button on the back of the appliance, was able to get the machine back into perfect working order.  The bill he presented to the homeowner: $601.00.   Aghast, the woman asked, “$601.00 just for coming out here and pressing a button?”  “Well,” explained the repairman with a little smile, “my pressing the button only cost you $1.00.  But knowing which button to press?  That’s what costs $600.00!”

I’ve written before about why, in the vast majority of cases, it does not make good sense to file bankruptcy in Indiana without the help of a bankruptcy attorney.  Just to reinforce that point, here’s a case where specialized knowledge made all the difference in the world to a person filing not just one, but two bankruptcy cases back to back!

By way of background, bankruptcy law states that a person cannot receive a bankruptcy discharge within a certain number of years of receiving a prior chapter 7 bankruptcy discharge.  But, in this particular situation, the goal was not getting a discharge, but getting the automatic stay of collection activity.  It took a skilled and experienced bankruptcy attorney to design a plan that would accomplish that goal within both the spirit and the letter of the law.

In this true story the debtor (whom I’ll call Bud) had two kinds of debt, each quite substantial.  One type was “non dischargeable”, a combination of student loans and back taxes owed for the preceding three years.  The second type consisted of unsecured debt.  Neither a Chapter 7 nor a Chapter 13 bankruptcy filing alone would have given Bud a fighting chance to get back on his feet.  Instead, with the advice of his bankruptcy attorney, he filed a Chapter 7 case first, then some months later, a Chapter 13 bankruptcy.  (U.S. bankruptcy attorneys call this a Chapter 20.)

The result was a discharge of many of the unsecured debts, so that Bud was able to make Chapter 13 payments and still keep up with repaying the taxes and student loans, while utilizing the benefits of Chapter 13 law.. One knowledgeable attorney, knowing “which button to push” – and in what order - made the difference here between a hopeless situation and a plan that allowed our friend Bud to rebuild his life.

In talking with dozens of people each week in my different Indiana bankruptcy law offices, I find they have lots of questions about how hard it might be for them to open a new credit card or to obtain a car loan after they’ve filed.  Every so often, people will remember to ask what difficulties they might have opening new accounts at a bank after filing a Chapter 7 or Chapter 13 bankruptcy.

The answer to that question can be quite reassuring for most bankruptcy debtors.  In general, unless you’re asking a bank for a loan, it will not check with the credit bureaus.  Instead, the bank is likely to check with a company that tracks checking activities, such as Chex Systems or Telecheck, to see if any of their member banks have suffered losses because you bounced a lot of checks or because you have a record of fraudulent activities.

So, while the bank might be able to find out that you had a bankruptcy discharge, they probably would consider that irrelevant.  What would be important to the bank is that you were not in the habit of bouncing checks, or worse, have any history of committing fraud.

By the way, you can actually go online to order a copy of your Chex System report at https://www.consumerdebit.com/consumerinfo/us/en/index.htm.

Since, as a consumer bankruptcy specialist in Indiana, I offer full service advice to debtors, helping clients rebuild their credit after bankruptcy is part of the “fresh start” process that bankruptcy is all about!

In the process of reading different news and feature items on the Internet, I'm always looking for stories about bankruptcy cases.  As a bankruptcy attorney in Indiana, I particularly like tales of bankruptcy court cases in other states.  This one story from Virginia caught my eye, since it relates to a topic I've been writing about recently in this blog.

You might recall me discussing retirement plan money, including money in 401K plans, SEPs, and SIMPLE plans, and even in IRAs.  The important point I made is that, not only does money grow tax-free inside retirement plans, but that retirement plan money is exempt from creditors under bankruptcy law.  (I explained that the reasoning is that retirement accounts are meant to help provide financial security in people's later years.)

Well, in this true story about a bankruptcy case in Virginia, the client was being hounded by creditors and decided to file a Chapter 7 bankruptcy.  Basically this man had three things going for him - he had $15,000 equity in his home, he had military pension money coming in each month, and he had a 401K plan through his employer.  The fellow was resigned to losing his home.  (He didn't have $15,000 to pay towards his debts and was sure the home would be sold by the bankruptcy trustee and the proceeds used to pay the creditors.)

Well, you recall that 401K money is protected from creditors as long as it is inside the retirement plan account.  So the big challenge, once this man had filed a Chapter 7 bankruptcy, was getting hold of $15,000 to pay towards his debts, because otherwise his house would have been sold to free up that $15,000 in equity.  Acting on good advice from his bankruptcy attorney, what this guy did was request a "hardship withdrawal" from his 401K plan.  (Many, but not all, 401K plans have a hardship withdrawal feature.)  That 401K withdrawal money went to pay the creditors (some had to be set aside to pay the tax that was now due on the withdrawal itself).  Now, having $15,000 to use towards paying his mortgage debt, the man was allowed by the bankruptcy court to keep his house.  The bulk of the 401K money stayed where it was, as did his military pension.

As a consumer bankruptcy specialist, I see two "morals" in this true story from Virginia.  First of all, bankruptcy law is very careful to preserve retirement plan savings for people's later years.  If bankruptcy is to mean a fresh start on life, a person's retirement years must be considered in the mix.  Second, as is almost always the case, for this man obtaining - and following - professional advice when filing bankruptcy really paid off.

What happens when someone files bankruptcy in Indiana?  In former blogs, I’ve emphasized how important it is for me, as an Indiana bankruptcy attorney, to design a strategy that fits each individual situation.  However, there is a typical time line when a Chapter 7 bankruptcy is filed. 

The process starts with the filing of the official petition with the Indiana bankruptcy court.  A complete statement of financial affairs and other forms go along with this petition. Just as soon as this step is complete, almost all creditors are prevented from any collection activities.  That is called the automatic stay.   

Usually no longer than 20-40 days after the filing, the bankruptcy trustee appointed by the court will hold a first meeting of creditors. The person who filed bankruptcy attends that meeting and is asked questions by the trustee. This step takes only five or six minures in most routine bankruptcy cases.

The creditors then have the next 60 days to convince the courts that their debt should be excluded from the bankruptcy. The trustee will review the person’s assets, income, and expenses and see if there is enough money after living expenses to pay something on the debt. 

For many people filing a Chapter 7 bankruptcy, the court will give them a discharge of some or all of the debt within four to five months after the filing date.  During those months the trustee takes control of any property, sells whatever assets the person is not allowed to keep, and uses the money to pay creditors.  Don't worry, though.  In almost all cases the debtors lose little to no property.  In the meantime, any wages the bankrupt person earns after the filing are his or hers to keep towards living expenses.