No matter how hard one may work and plan, sometimes life can take an unexpected turn resulting in financial burdens. You may be able to obtain relief under the new bankruptcy laws allowing you to start over and get out from under what seems like insurmountable debt. A decision to file for bankruptcy should be made only after determining that bankruptcy is the best way to deal with your financial problems. This information sheet is intended to provide you with a basic understanding of the bankruptcy process, and it is not meant to explain every aspect of the bankruptcy code. If you still have questions after reading this information, or if you want to learn more specifically about the relief bankruptcy could offer in your particular circumstances, you should speak with an attorney who is experienced in bankruptcy, preferably an attorney certified by the state's bar in consumer bankruptcy.
WHAT IS BANKRUPTCY?
Bankruptcy is a legal proceeding in which a person who cannot afford to pay his or her debt can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. As a general rule, filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law. In most cases, if your creditors continue to contact you after they learn of your bankruptcy filing, the Bankruptcy Court can punish these creditors for violating various bankruptcy laws.
WHAT CAN BANKRUPTCY DO FOR ME?
Bankruptcy may make it possible for you to:
- Eliminate the legal obligation to pay most or all of your debts. This is called a "discharge" of debts. It is designed to give you a fresh financial start. When the debt is discharged, the debtor has no further legal obligation to pay the debt.
- Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. However, bankruptcy does not automatically eliminate mortgages and other liens on your property without payment.
- Prevent repossession of an automobile or other property, or force a secured creditor to return to you such property after it has been repossessed.
- Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
- Restore or prevent termination of certain types of utility service.
- Lower the monthly payments and interest rates on certain debts, including secured debts such as automobile loans.
- Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you actually owe them.
WHAT BANKRUPTCY CANNOT DO
The United States Bankruptcy Code provides that some debts are "non-dischargeable." This means that even after your bankruptcy case is completed, you will remain legally liable for repayment of the unpaid amount of such debts. These debts include, but are not limited to, child support, alimony, certain other debts related to divorce proceedings, most student loans, court restitution orders, criminal fines, certain taxes, and debts incurred through fraud or misrepresentation. Whether certain debts are "non-dischargeable" depends on the nature of the debt and the type of bankruptcy proceeding that is filed.
Bankruptcy may not protect cosigners on your debts. In other words, when a relative or friend has cosigned on a loan, and you discharge your liability for that debt in bankruptcy, the cosigner may still have to repay all or part of the debt. In addition, as a general rule, bankruptcy does not discharge debts that arise after the bankruptcy petition has been filed with the court.
In bankruptcy, it usually is not possible to eliminate certain rights of "secured" creditors. A "secured" creditor is one that has taken a mortgage or other lien on your property as collateral for a loan. Common examples of secured creditors are those who have made an automobile loan and noted a lien on the certificate of title to the automobile or those that have extended a mortgage loan and obtained a deed of trust placing an lien on the real property. In other words, you generally cannot keep property that secures your debt to a secured creditor unless you continue to pay the underlying debt.However, you can force secured creditors to accept payments over time in a Chapter 13 bankruptcy proceeding, and bankruptcy can eliminate your obligation to pay any additional money or deficiency if the collateral is taken back (surrendered or repossessed) by the secured creditor.
WHAT DIFFERENT TYPES OF BANKRUPTCY CASES SHOULD I CONSIDER?
Most individuals filing bankruptcy file under either Chapter 7 or Chapter 13. Either type of bankruptcy case may be filed individually or by a married couple filing jointly. The attorney will explain the types of bankruptcy during a free consultation and review the information and facts you provide to counsel you on the relief that the bankruptcy laws can provide for you.
- Chapter 7 is often referred to as "straight" bankruptcy or "liquidation." The debtor is unable to repay debts and most, and in some cases all, debts are canceled or "discharged." The debtor must disclose all debts and all property, both real and personal. The debtor's property is valued and certain dollar amounts of property can be protected from unsecured creditors through allowed "exemptions." If the debtor has property with values in excess of the allowed "exemptions," this property, if any, will be sold by a trustee in order to generate proceeds to pay the creditors. For individuals, much or all of their property may be exempt from sale by the trustee.
- Chapter 11 is often referred to as "business reorganization," and it is used primarily by businesses and a few individuals whose debts are very large.
- Chapter 12 is reserved for family farmers and fishermen.
- Chapter 13 is often referred to as a "wage earner's plan" or a "reorganization." It requires a debtor to file a plan to repay some or all debts, from future income, subject to court approval. The plan payment must be calculated and may provide for payment of all or a portion of debts, depending on the circumstances. The plan payment is made to a trustee in a series of monthly payments running for a period of 36 to 60 months; the trustee, in turn, disburses the funds due to your creditors. Upon successful completion of the plan, the debtor's personal liability for debts listed in the bankruptcy plan are usually discharged.
Chapter 7 ("Straight" Bankruptcy or Liquidation)
In a bankruptcy case under Chapter 7, you file a bankruptcy petition asking the Court to discharge or wipe out your debts. The basic idea in a Chapter 7 bankruptcy is to wipe out or discharge your debts in exchange for you giving up any "non-exempt" property that you may own. Again, North Carolina law provides that certain property can be kept from your creditors. In most Chapter 7 case, all of the debtor's property is exempt. However, your situation may differ from that in the typical Chapter 7 case. If you own any "non-exempt" property, the Chapter 7 trustee can sell this property and use the sale proceeds to pay your creditors.
If you wish to keep property that serves as collateral for a secured creditor, such as a mortgage holder, and you have fallen behind in making your regular monthly payments to such creditor, Chapter 7 may not be the best alternative for you. That is because Chapter 7 bankruptcy does not eliminate the right of secured creditors to repossess their collateral if you are behind on your payments when you file your bankruptcy petition with the court. However, a Chapter 7 case will usually discharge or wipe out your personal liability to such creditor if the repossession and sale of the collateral does not satisfy the debt in full.
Chapter 13 (Reorganization)
In a Chapter 13 case, you file a Chapter 13 plan showing how you will pay off some or all of your past-due and current debts over a period of three to five years. The most important thing about a Chapter 13 case is that it will allow you to keep valuable property - especially your home and your car - which might otherwise be lost, if you can afford to make the payments that the bankruptcy laws require you to make to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some additional payment to catch up the amount that you have fallen behind. However, in most Chapter 13 cases, the debtors' Chapter 13 plan payments are dramatically less than the payments that were being demanded by their creditors prior to filing Chapter 13.
A Chapter 13 bankruptcy proceeding will usually be the most beneficial for individuals who own a home, have fallen behind in their mortgage payments, and are in danger of losing their home because of financial problems. In addition, it generally benefits those individuals who are behind on their debt payments and can afford to pay back most or all of their secured debts and at least a portion of their unsecured debts if they are given some additional time to do so. It can also benefit individuals who can afford to pay their creditors from their income over time, but who have valuable property that is not "exempt" and which would be sold by a Chapter 7 trustee. However, Chapter 13 debtors must have enough income to pay for recurring living expenses for necessities (i.e., rent, food, clothing, utilities, insurance, etc.) plus the Chapter 13 plan payments that are required to be made to their creditors by the bankruptcy laws.
WHAT DOES IT COST TO FILE FOR BANKRUPTCY?
The Bankruptcy Court now charges a filing fee of $306.00 for a Chapter 7 case and $281.00 for a Chapter 13 case, regardless of whether the petition is filed individually by one person or jointly by a husband and wife. This filing fee is paid to your attorney, and the attorney pays this fee to the Bankruptcy Court when the petition is electronically filed with the Court. If you hire an attorney, then you will also have to pay the attorney's fees that you agree to pay. In the Western District of North Carolina, the bankruptcy judges have approved some standard attorney's fees for Chapter 13 cases. These fees set limits on the amount that can be charged by bankruptcy attorneys without first requesting Court approval. The Court will generally deny requests to charge fees in excess of these limits unless unusual circumstances justify payment of such additional fees. Furthermore, local bankruptcy rules in the Western District of North Carolina require bankruptcy attorneys to provide each potential client with full and complete disclosure of information regarding fees that may be charged to the client if a bankruptcy case is filed on their behalf. This safeguard ensures that you will be aware of all potential fees, and you always have a right to petition the Bankruptcy Court to disallow fees charged by your attorney.
WHAT PROPERTY CAN I KEEP?
In a Chapter 7 case, you can keep all property that the law says is "exempt" from the claims of your unsecured creditors. The United States Bankruptcy Code and various state laws specify the types of property and the corresponding property values that are exempt or protected from the claims of unsecured creditors. If you have been a resident of North Carolina for the entire two-year period immediately preceding the filing of your bankruptcy petition, then North Carolina exemption laws apply. These exemptions are as follows:
- Up to $35,000.00 in equity (fair market value in excess of debt secured by the property) in an individual's residence (if a husband and wife own property together, then this exemption is doubled).
- If the exemption in Paragraph 1 above is not fully used (i.e., the debtor does not own their residence or has little or no equity at all in their residence that he or she does own), then an individual is allowed a "wild-card" exemption that he or she can use to protect equity of up to $5,000.00 in any property of his or her choice.
- Up to $3,500.00 in equity in any one automobile (if a husband and wife own an automobile jointly, then they can combine their exemptions and protect up to $7,000.00 in equity in a jointly owned automobile).
- Up to $5,000.00 in equity in household goods (again, this exemption is doubled for a husband and wife), plus $1,000.00 per dependent (up to a maximum of four dependents). In other words, for a husband and wife with four children, their household goods are protected up to a total value of $14,000.00.
- Up to $2,000.00 in equity in tools or equipment used in an individual's trade or business.
- Certain other property including, but not limited to, certain personal injury proceeds, certain life insurance policies, certain retirement plans, and social security benefits.
In determining whether property is exempt, you must keep a few things in mind. The value of your property is not the amount that you paid for it, but it is what the property is worth now if you sold it. This may be substantially less than what you paid for the property, especially if the property is an automobile or furniture or other property that usually depreciates over time. It is also important to remember that exemptions are used to protect your equity in property. This means that you count your exemptions against the full value of the property minus any money that you owe on debt that is secured by the property. For example, if you own a $100,000 home in North Carolina with a $85,000 mortgage, then you have $15,000 equity in this property, and this equity would be exempt if the North Carolina exemption laws were applicable.
While your exemptions allow you to keep property from your creditors, even in a Chapter 7 bankruptcy proceeding, your exemptions do not prevent your secured creditors from repossessing their collateral, after obtaining Court permission in most cases, if you are behind in your payments and you file a Chapter 7 bankruptcy petition. In a Chapter 13 bankruptcy proceeding, you can retain property that serves as collateral for your debts, even if you are behind in your payments to the secured creditors, as long as you can afford to make the Chapter 13 plan payments that are required by various provisions of the United States Bankruptcy Code.
WHAT WILL HAPPEN TO MY HOME AND CAR IF I FILE BANKRUPTCY?
In most cases, you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt and you continue to make all of your mortgage and car loan required payments in a timely fashion. In other words, even if you own property that is not fully exempt, you will be able to keep it if you pay its non-exempt value to creditors in a Chapter 13 bankruptcy proceeding through your monthly payments to the Chapter 13 Trustee. However, some of your creditors may have a security interest in your home, automobile, or other personal property. This means that you gave such creditors a mortgage on your real estate or agreed to put up other property as collateral for the loan. In most cases, bankruptcy does not make these security interests go away. If you do not pay your secured creditors on these debts, then these creditors may be able to take and sell the collateral during or after the bankruptcy case. There are several ways that you can keep collateral or mortgaged property after you file bankruptcy. If you are current in making your regular monthly payments to the secured creditor, you can continue to make the regular monthly payments to the creditor and abide by all terms of your loan agreement with that creditor. If you are behind in your regular monthly payments to a secured creditor and you file a Chapter 13 case, then you may be able to reduce the amount of monthly payment to be paid to the creditor through your Chapter 13 plan payments. Generally speaking, you probably will not be able to reduce the amount of your monthly payments to your mortgage company, but you may be able to catch up the payment arrears that you are behind over an extended period of time through your Chapter 13 plan payment. If you are behind in your regular monthly payments to a secured and you file a Chapter 7 case, then you have three options concerning the collateral. First, you can return the collateral to the secured creditor, and, in most cases, your personal liability to this creditor will be discharged or wiped out. Second, you can sign a new agreement (a reaffirmation agreement) with the creditor in which you agree to keep making regular monthly payments to the secured creditor until the debt is paid in full in exchange for the secured creditor's promise to allow you to keep possession of the collateral. If you sign such an agreement, your personal liability to that creditor is not discharged in your Chapter 7 bankruptcy case. Finally, you can pay the secured creditor the value of the property (often an automobile) that secures the creditor's claim in one lump-sum payment. Most Chapter 7 debtors do not have the ability to come up with a large lump-sum payment to a secured creditor. Therefore, this option is usually not a viable alternative for most Chapter 7 debtors. However, there are some financial institutions that provide services that may allow a Chapter 7 debtor to borrow money to finance such a lump-sum payment.
In certain circumstances, you may be able to challenge a debt that you owe to a creditor who has engaged in improper conduct. In addition, if you listed your household goods as collateral for a personal loan (other than a loan that you obtained to pay the purchase price of such household goods), then you may be able to keep your household goods while paying the creditor substantially less than the outstanding balance due on that loan. Finally, it is sometimes possible to void or wipe out liens on property that arise from judgments against you.
CAN I OWN ANYTHING AFTER BANKRUPTCY?
Many people believe that they cannot own any property for a period of time after filing for bankruptcy. This is not true. You can keep your exempt property and, as a general rule, you can keep any property that you obtain after the bankruptcy petition is filed with the Court. However, if you receive an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt. Again, in a Chapter 13 case, income that is earned after the petition is filed must be used to pay your Chapter 13 plan payments until your payments are completed in accordance with the terms of your Chapter 13 plan.
WILL BANKRUPTCY WIPE OUT ALL OF MY DEBTS?
As a general rule, most debts are wiped out or discharged in bankruptcy. However, the United States Bankruptcy Code provides that some debts may not be discharged in bankruptcy. Whether a debt is discharged or not depends on the nature of the debt and the type of bankruptcy proceeding (i.e., Chapter 7 or Chapter 13). Generally speaking, some types of debts that normally will not be discharged in bankruptcy include, but are not limited to, the following:
- Money owed for child support or alimony, criminal fines, and some taxes;
- Debts that are not listed in your bankruptcy petition;
- Loans that you obtained by knowingly giving false information to a creditor who reasonably relied on such information in making you the loan;
- Debts resulting from "willful and malicious" harm;
- Student loans owed to a school or a governmental body (in most cases); and
- Mortgages and other liens that are not paid in full in the bankruptcy case (but bankruptcy will often wipe out or discharge your personal obligation or liability to pay any additional money if the property is sold by the creditor).
WILL I HAVE TO GO TO COURT?
In most bankruptcy cases, you only have to go to a proceeding that is referred to as the "first meeting of creditors" to meet with the bankruptcy trustee and any creditor who chooses to appear at that meeting. Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about the information that is contained in your bankruptcy petition and about your financial situation. This is a fairly informal meeting, and there is no judge present. However, you should dress as if you were going to a court proceeding.
Occasionally, if you fail to make your Chapter 13 plan payments in a timely fashion or if you dispute a debt, then you may have to appear before a bankruptcy judge at a formal hearing. If you need to go to court, you will receive notice of the court hearing date and time from the Court and/or your attorney. For this reason, you should always keep your attorney advised of your current address and telephone number.
WILL BANKRUPTCY AFFECT MY CREDIT?
There is no clear answer to this question. Unfortunately, if you are behind on your payments to your creditors, your credit may already be adversely affected. In some cases, bankruptcy will not make things any worse.
The fact that you have filed a bankruptcy can appear on your credit record for up to ten years from the date that your bankruptcy petition was filed with the court.. Whether or not you will be able to obtain credit in the future is unpredictable, and it probably depends more on what good things you are able to do in terms of keeping a job, saving money, making timely payments on secured debts, etc., than the fact that you filed bankruptcy. In some cases, it may actually be easier to obtain future credit after filing bankruptcy because new creditors may feel that you are likely to be in a better position to pay your new debt. Creditors will also realize that you cannot discharge your debts in a subsequent bankruptcy case that is filed within a certain number of years after the filing of your previous bankruptcy petition. However, while your bankruptcy proceeding is still pending (i.e., until the Discharge Order and Final Decree is entered by the Court), you are prohibited from obtaining new credit without first obtaining permission from the Bankruptcy Court,).
WHAT ELSE SHOULD I KNOW?
Utility services. Public utilities, such as the electric company, cannot refuse service or terminate service because you have filed for bankruptcy. However, if you are behind in your payments to a utility company when you file your bankruptcy petition, then the utility can require you to pay a reasonable deposit for future service and you do have to pay bills for utility services that are provide after the bankruptcy petition is filed with the Court.
Discrimination. An employer or government agency cannot discriminate against you because you have filed for bankruptcy.
Driver's License. If you lost your driver's license solely because you could not afford to pay court-ordered damages caused by an accident, then filing bankruptcy may allow you to get your license back.
Co-signers. If someone has co-signed a loan with you and you file for bankruptcy, then the cosigner may have to pay whatever portion of the debt that you do not pay.
Calls and Letters from Creditors. After you file for bankruptcy, all of your creditors should stop calling or writing you demanding payment of your debts. If one of your creditors contacts you, you should inform that creditor that you have filed for bankruptcy and give that creditor your case number and the name and address of your attorney. If the creditor asks you to pay your bill after you have given the creditor this information, make a note of the time and content of the conversation and provide this information to your attorney. All letters or other correspondence that you receive from your creditors more than one month after you have filed for bankruptcy should be given to your attorney.
Accurate Information. All information that you provide to your bankruptcy attorney, the bankruptcy trustee, and the Bankruptcy Court must be "the truth, the whole truth, and nothing but the truth." Providing false information, or the intentional failure to provide complete information, in connection with your bankruptcy case can constitute a federal crime that results in a fine and/or a prison sentence. Much of the information that you provide in your bankruptcy petition and through your testimony, if any, to the trustee and the court may be investigated and verified by the trustee.