A fear someone new to the bankruptcy process might have is that the government will force the debtor to sell all their property, or seize it to pay off creditors, leaving the debtor with nothing to start rebuilding a life. While it is possible the bankruptcy trustee could take and dispose of some property to settle creditors’ claims, States recognize that taking every last piece of property from bankruptcy petitioners will make it significantly harder to create financial stability moving forward and more likely they will need to file for bankruptcy again. To that end, each State designates certain property in specified amounts as exempt from bankruptcy. In addition to being able to keep some property, collection efforts by creditors must immediately cease once the bankruptcy petition is filed, which helps to relieve the stress of constant phone calls and letters asking for payment.

A recent story out of Naples, Florida, highlights, in an extreme way, how laws around debt collection in bankruptcy and exempt property can allow bankruptcy petitioners to stay in their homes years after the original petition was filed. The man is known to be a prolific filer of bankruptcy petitions to the point a judge accused him of abusing the process and barred him from filing any new petitions for two years. While it is never advisable to abuse any legal process, this story serves as example of how the law protects bankruptcy petitioners from overzealous debt collection. An overview of the limitations on debt collection once the petition is filed and the property that is exempt from bankruptcy under Indiana law will appear below.

Collection

When you file for bankruptcy, you must include a list of known creditors and debt collectors to the bankruptcy court. The court will then directly notify these parties about your bankruptcy petition triggering a federal law that puts an “automatic stay” on all collections efforts.

What this means is that no person or entity is permitted to pursue any course of action to collect on debts owed prior to filing the bankruptcy petition, including phone calls, letters, and in-person contact. This automatic stay is in effect from the time you file for bankruptcy and until discharge is received. Further, once a creditor knows you are represented by an attorney, it must direct all communication to your legal representative. If a creditor continues any attempts to collect a debt or communicates with you once you have a lawyer, it could be in violation of the Fair Debt Collection Practices Act, and you should notify your attorney of these actions.

Exempt Property

As an aside, while federal law also has provisions that exempt or exclude certain property from that which can be used to satisfy outstanding debts, Indiana requires debtors to use its exemptions. However, some States allow debtors to choose which set of property exemptions they want applied to their case. Some of the more commonly used property exemptions allowed in Indiana include:

• A homestead exemption up to $17,500. This amount applies to the equity in the home, not the amount owed. This means if a debtor has equity in excess of this amount, they will likely have to sell the home, keep the $17,500, and use the remainder to pay creditors;
• Other real estate or tangible personal property up to $9,350;
• Intangible personal property, such as cash, up to $300; and
• For wages after required deductions, the greater of 30 times the federal minimum hourly wage per week or 75% of disposable earnings.

Contact a Bankruptcy Attorney

Filing bankruptcy to find relief from incessant phone calls or letters from debt collectors on delinquencies you have no ability to pay is one of the purposes behind bankruptcy. The process, however, is complex with laws from both the federal government and the State applying in certain areas that creates a challenging system best and most efficiently handled by a bankruptcy lawyer. Attorney Christopher L. Arrington, P.C., working in central Indiana, has experience representing clients in bankruptcy and is available to assist you. Contact him to schedule an appointment.