Indiana Bankruptcy Exemptions and Law
Having too much debt can be a traumatizing experience. Not only do you feel the hopelessness of knowing you can never pay all of your bills, but you may also by getting threatening calls from collections agencies or even be facing court action to garnish your earnings. There's a way out. Bankruptcy can help.
Why File for Bankruptcy?
Filing for bankruptcy can stop creditor harassment and give you the time you need to organize your debts to either create a payment plan to repay what you owe or discharge the debt entirely. When you exit bankruptcy, you may be nearly debt-free and ready to move on with your life. Additionally, Indiana provides special rules that let you protect some of your property from your creditors during bankruptcy.
The U.S. Bankruptcy Courts are federal courts governed by federal law. However, the U.S. Bankruptcy Code allows states to establish their own rules regarding the property their residents can keep when they file for bankruptcy. This is known as “exempt property."
Some states will let you choose between the federal bankruptcy exemptions provided in the Bankruptcy Code and state law exemptions, but Indiana requires you to use its rules when you file for bankruptcy in the state. We talk more about bankruptcy exemptions below. In order to understand what property you can keep, however, it's first important to understand how bankruptcy works.
Chapter 7 vs. Chapter 13 Bankruptcy
Almost every personal bankruptcy is filed under either Chapter 7 or Chapter 13 of the Bankruptcy Code. Filing for either will help you resolve your debt problems, but each chapter does it differently. Which one you should choose is often driven by your financial situation and whether you want to keep your assets.
Chapter 7 bankruptcy is often called a “liquidation bankruptcy" because if you file under that chapter you must turn over most of the assets that are not protected by an exemption to a bankruptcy trustee appointed by the court. The trustee will then sell your property to repay your creditors. In return for giving up your non-exempt assets, the court will usually discharge nearly all of your debts. To file under Chapter 7, your income must be below certain levels.
Chapter 13 will let you reorganize your debts so that you can pay them off over three to five years under a court-approved repayment plan. To file under Chapter 13, you need to show the court that you have enough income to make the payments under your plan.
The court can force your creditors to accept your Chapter 13 repayment plan and even force them to accept less than they are owed. If they have a choice, homeowners usually choose to file under Chapter 13 because they can usually keep their homes.
The Automatic Stay Protects You From Creditors
When you file for bankruptcy under either Chapter 7 or Chapter 13, the court will issue an automatic stay that should stop all efforts to collect debts from you. The automatic stay is a powerful tool that forces your creditors to work with you in the bankruptcy process by giving them no other options for collecting what you owe them.
The stay stops harassing phone calls, foreclosure actions, and even court cases against you. If one of your creditors knowingly violates the stay and contacts you directly, the judge can impose penalties on the creditor, including paying your attorneys' fees.
Secured vs. Unsecured Debt
Filing for bankruptcy will let you resolve your debt issues, but not all of your debt will be treated the same way. In most cases, your debts will be given one of two labels: secured or unsecured. How your debt is classified will often dictate what type of bankruptcy you choose and how much of your debt you can discharge.
Nearly everyone who files for bankruptcy has at least some unsecured debt. Debt is considered to be unsecured when you owe money to a person or organization and they have no right to seize your property if you fail to pay them. Unpaid credit card bills, medical bills, and court judgments are three of the most common types of unsecured debt.
You have secured debt when your creditor has the right to seize or repossess your property if you don't pay. Often, secured debt is created by a loan contract when you give a lender the right to seize your property if you don't repay the loan. Mortgages and auto loans are the most common types of secured debt.
Secured and Unsecured Debt in Chapter 7
In a Chapter 7 case, your unsecured creditors are usually paid from whatever the trustee was able to earn from selling your non-exempt property. Any unpaid unsecured debt will be discharged. However, some priority unsecured debt cannot be discharged, like child support and alimony.
Since most people filing for Chapter 7 bankruptcy have little property to sell, most unsecured creditors will only receive a small fraction of what they are owed, if they are paid at all.
Your secured creditors maintain their interest in your property during bankruptcy, so the court rarely discharges those debts. That leaves you with three options for your unsecured debt:
- Return the collateral to the creditor. This is often the simplest solution and in most circumstances, you will be free from making additional payments.
- Keep the property and work out a repayment plan with the creditor. This is possible when your Indiana exemption covers the equity you have in the property and you work out a new payment arrangement with your creditor.
- Pay off the loan and keep the collateral. This rarely happens because most people filing under Chapter 7 lack the assets to do so.
Secured and Unsecured Debt in Chapter 13
Chapter 13 lets you establish a payment plan to repay your secured creditors over three to five years. The court-approved plan will often force your secured creditors to restructure your loan to pay it in installments and force them to forgive some of your debts. If you want to keep your home in a Chapter 13 case, you will need to continue making payments to your lender outside of bankruptcy.
Unsecured creditors generally get a better deal when you file for Chapter 13 than when you file under Chapter 7. However, they are rarely paid what they are owed because the Chapter 13 plan usually pays those creditors with whatever disposable income is left over after the secured creditors have been paid. Any unsecured debt that is not paid by the time the plan is completed will be discharged by the court.
If you would like to file under Chapter 7, you will first need to show the court that your income is low enough to qualify. This is usually done by examining your finances and applying one of two means tests.
The first means test will look at your household income compared to the income of other similarly sized Indiana households. If your income is lower than the state median for households of the same size, you automatically qualify. For example, U.S. Census data showed that as of March 2020 the average three-person Indiana household earned a median income of $77,161. If your household has an income of less than that amount, you can file under Chapter 7.
For those who have incomes above the state median, there is an alternative method of qualifying for Chapter 7. The second test looks at your monthly income and expenses and applies a formula to determine whether you have enough disposable income each month to pay your debts. If you can show you have little to no disposable income left over at the end of the month, you can usually file for Chapter 7.
To file under Chapter 13, you will need to show that you have a steady income that will provide you with adequate funds to pay the necessary installments under your payment plan. You will also need to show that you have less than $419,275 in unsecured debt and less than $126 million in secured debt.
When you file for bankruptcy in Indiana, you will need to use Indiana's exemption law. You can keep any property that falls within one of the state exemptions to help you start over with your life after you complete your bankruptcy.
In Indiana, married couples who file for bankruptcy together are usually allowed to claim two of each exemption, effectively doubling the amount of the exemption.
Indiana's homestead exemption lets you protect up to $19,300 of the equity you have in your home. This exemption can also be applied to a trailer or other personal property where you reside. Married couples who own their home together can claim an exemption of up to $38,600 of the equity in their residence.
No Motor Vehicle Exemption
While most states will let you exempt the equity you have in a motor vehicle, Indiana does not specifically provide one. However, many residents use Indiana's generous wildcard exemption to protect their equity in a vehicle.
Indiana provides its residents with a $10,250 wildcard exemption that they can use on any property they own that is not real estate.
You can keep the smaller of 75% of your weekly wages or 30 times the minimum wage.
Personal Property Exemptions
The following personal property is exempt in Indiana:
- Up to $400 in intangible personal property, such as patents, copyrights, and licenses
- Health aids
- Your earned income tax credit
- Funds in a health savings account (HSA)
- Military uniforms, equipment, and firearms
- Up to $5,000 in education savings account contributions that were made more than two years before you filed for bankruptcy
No Tools of the Trade Exemption
Many states provide an exemption for the tools, books, and equipment you need to pursue your trade or business, but Indiana does not offer an exemption for those items.
Insurance Benefits Exemption
Indiana offers exemptions for the following benefits:
- The proceeds of life insurance policies
- The proceeds of accident insurance policies
- Fraternal benefit society benefits
Pension and Retirement Exemption
Most pension and retirement benefits are exempt, including:
- Tax-exempt retirement accounts such as 401(k)s, IRAs, and defined benefit plans
- Public employee pension benefits
- Teacher retirement benefits
- Police officer and firefighter pension benefits
Public Benefit Exemptions
The following public benefits are exempt in Indiana:
- Social Security benefits
- Unemployment benefits
- Workers' compensation, not including child support claims
- Property of a business partnership
- Spendthrift trust assets
Before you can file for bankruptcy, you will be required to take a credit counseling course. The course is designed to help you assess whether you can pay back your debts outside of bankruptcy. Additionally, if you are filing under Chapter 13, you may be required to prepare a repayment plan to submit to the court. When you file for bankruptcy, you must include a certificate showing you completed the course within 180 days of filing.
If you file for bankruptcy using an attorney, he or she will normally file on your behalf. However, if you are filing on your own (known as a “pro se" filing), you will start by downloading the correct forms for your bankruptcy court.
If you are unsure as to whether you reside in Indiana's northern or southern district you can search for “U.S. Bankruptcy Courts" in the federal court finder to locate the correct district.
Where Do I File for Bankruptcy in Indiana?
There are two federal court districts in Indiana and each has its own bankruptcy court.
The Northern District of Indiana operates bankruptcy courts in:
- South Bend: 401 South Michigan St., South Bend, IN 46601
- Fort Wayne: 1300 South Harrison St., Fort Wayne, IN 46802
- Hammond: 5400 Federal Plaza, Hammond, IN 46320
- Lafayette: 230 North Fourth St., Lafayette, IN 47901
The Southern District of Indiana operates bankruptcy courts in:
- Evansville: 101 Northwest Martin L. King Blvd., Evansville, IN 47708
- Indianapolis: 46 East Ohio Street, Indianapolis, IN 46204
- New Albany: 121 West Spring Street, New Albany, IN 47150
- Terre Haute: 921 Ohio Street, Terre Haute, IN 47807
It will cost you $338 to file for Chapter 7 bankruptcy and $313 to file under Chapter 13. If you can't pay the filing fee, you can ask the court to pay it in installments over 120 days. If you earn less than 150% of the poverty line, you can ask the court to waive the fee.
Since bankruptcy is a legal process, most people who file choose to be represented by an attorney. Unfortunately, it is difficult to give a “typical" price for a bankruptcy attorney in Indiana because fees can vary dramatically based on where you are located and the complexity of your case. But bankruptcy attorneys will generally charge between $795 and $1,400 for a straightforward Chapter 7 case. Chapter 13 cases are usually more complex and lawyers generally charge more to represent you in them. In a complex Chapter 13 case, attorneys' fees can sometimes run $5,000 or more.
Do You Need Help Filing for Bankruptcy in Indiana?
While you could try to save money and file for bankruptcy on your own, it can be a complex process and it is recommended that you find a local bankruptcy attorney to guide you through it. A lawyer will also represent your interests before the court and negotiate with creditors. An experienced bankruptcy lawyer will know how to work within the bankruptcy process to protect as many of your assets as possible.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.
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