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What is bankruptcy?
Bankruptcy is a legal proceeding where a person or company who is having difficulty meeting financial obligations can obtain a fresh start. The right to file for bankruptcy is provided by federal law, and all bankruptcy proceedings are handled in federal bankruptcy court. Filing bankruptcy generally stops most creditors from seeking to collect debts. The goal of most debtors is to obtain a discharge order from the bankruptcy judge. The discharge order has the effect of releasing the debtor from many forms of debt that were incurred prior to the bankruptcy filing.
When should bankruptcy be considered?
The amount of unpaid bills is such that repayment is unlikely or impossible in the foreseeable future.
A secured creditor is threatening foreclosure or repossession.
An unsecured creditor has commenced or threatened a lawsuit.
Creditors and/or collection agencies are making frequent calls to collect on unpaid bills.
The debtor’s credit report is irretrievably damaged.
To stop execution on a judgment or to stop wage garnishment [note that wage garnishment in North Carolina is limited to creditors collecting taxes, domestic support obligations and student loans].
What are the different types of bankruptcy?
Chapter 7. A debtor’s non-exempt assets are liquidated and many unsecured debts are discharged. Chapter 7 is sometimes referred to as straight bankruptcy.
Chapter 13. A debtor retains his or her assets but proposes a payment plan through which creditors are paid part or all of what is owed over a period of 3 to 5 years. Chapter 13 is sometimes referred to as a wage-earner plan or debt-adjustment plan.
Chapter 11. Generally utilized for corporate reorganization or for individual reorganizations where the debtor is over the chapter 13 debt limits.
Chapter 12. Family farmer reorganization.
How much is the debtor required to repay in chapter 13?
It depends on numerous factors. The amount paid to unsecured, nonpriority creditors ranges between 0% to100% with interest depending on the case.
What are examples of clearly permissible expenses in chapter 13?
- 401(k) loan repayments.
- Charitable contributions such as tithes and offerings will generally be allowed if the debtor has at least a minimal history of such payments.
Is the debtor required to undergo a credit counseling program before a case is filed?
Debtors are normally required to undergo a credit briefing prior to filing for bankruptcy. This briefing generally takes no more than 90 minutes and can be conducted via the internet [For debtors filing their bankruptcy case through my office lacking access to a high speed internet connection, there is such a computer available for use at no additional cost]. Additionally, all debtors must undergo a debtor education program prior to the entry of the debtor’s discharge.
Does the debtor have to appear in court after filing for bankruptcy?
All debtors are generally required to appear at a meeting of creditors (also known as a 341 meeting) 20-40 days after their petition is filed. At the meeting a court appointed trustee will question the debtor in order to determine if the debtor was truthful on his petition and schedules. In chapter 7 cases the trustee will also be attempting to determine if liquidation of the debtor’s assets is appropriate among other things. In chapter 13 cases the trustee is often concerned with whether the debtor’s plan of reorganization complies with the applicable provisions of the bankruptcy code. There are situations where it is necessary to appear before a bankruptcy judge.
What if I previously filed for bankruptcy?
If the prior case was filed more than 8 years ago then it is not likely to have an impact on any new case. If the prior case was filed less than 8 years ago then there may be relevance in terms of the availability of a discharge or a stay against creditor action.
Are spouses required to file for bankruptcy together?
No. Married persons are permitted to file jointly or individually.
What effect does bankruptcy have on a codebtor?
A non-filing codebtor remains liable to pay the debt. However, by filing a chapter 13 case a debtor can protect a non-filing codebtor from legal action if the debt is a consumer debt.
What are examples of debts that cannot be discharged in chapter 13 bankruptcy?
Domestic support obligations.
Certain taxes.
Student loans unless repayment is found by the bankruptcy court to constitute an undue hardship on the debtor.
Criminal fines and restitution.
Debts arising from driving under the influence.
Debts found to have been incurred through fraud or defalcation of fiduciary duty.
Restitution or damages awarded in a civil action as a result or a willful or malicious injury by the debtor that caused personal injury to an individual or the death of an individual.
Debts where the creditor was not scheduled, listed or notified with regards to the chapter 13 case.
What are some examples of debts that cannot be discharged in a chapter 7 bankruptcy?
- Domestic support obligations.
- Certain taxes and debts incurred to pay nondischargeable taxes.
- Student loans unless repayment is found by the bankruptcy court to constitute an undue hardship on the debtor.
- Criminal fines and restitution.
- Debts arising from driving under the influence.
- Obligations incurred as part of a divorce or separation.
- Debts found to have been incurred through fraud, defalcation of fiduciary duty and willful and malicious injury.
- Certain homeowner association dues.
- Debts associated with violations of security laws.
Why might a chapter 7 bankruptcy discharge be denied?
- The debtor falsified his or her schedules or otherwise committed perjury in connection with the bankruptcy case.
- A debtor whose debts are primarily consumer in nature and whose family income exceeds the median is required to complete a “means test” form. If, under standards contained in the bankruptcy code, the debtor is found to have a certain amount left over that could be paid to unsecured creditors, the bankruptcy court may decide that a discharge is not appropriate unless there are extenuating circumstances.
- The debtor transferred away assets in the one year prior to filing with the intention of hindering delaying or defrauding a creditor.
- The debtor has failed to provide a satisfactory explanation for a loss of assets or otherwise failed to cooperate with the bankruptcy trustee.
What are the North Carolina exemptions?
**If a debtor has lived in North Carolina for less than 2.5 years then he/she may not be eligible to claim the North Carolina exemptions and may be required to claim the federal bankruptcy exemptions or the exemptions of some other state.**
Exemptions for cases filed on or after January 1, 2006:
- Homestead. $18,500 in value in real or personal property used as a residence or burial plot. An widow or widower over the age of 65 may be entitled to an enhanced exemption.
- Motor Vehicle. $3,500.
- Household goods. $5,000 plus $1,000 for each dependent.
- Tools of trade. $2,000.
- Life insurance policies where a spouse or child is the beneficiary.
- Professionally prescribed health aids.
- Personal injury compensation is exempted except for related legal, health or funeral expenses.
- Individual retirement plans. In addition to the IRA exemption, most 401k plans and other ERISA qualified plans are excluded from the bankruptcy estate.
- 529 plans not to exceed $25,000. If funds were contributed within 12 months of filing then the contributions must have been made in the ordinary course of the debtor's financial affairs and must have been consistent with the debtor's past pattern of contributions.
- Alimony, support, etc. to the extent that the funds are necessary for the support of the debtor and/or the debtor's dependents.
- Tenancy by entirety. Real property held as entireties is exempted in the absence of joint, unsecured creditors.
- Wages. Wages earned in the 60 days prior to bankruptcy are exempted if necessary for the support of the debtor and/or the debtor's dependants.
- Recent purchases. Personal property purchased in the 90 days prior to filing may not necessarily be exempted.
- Other exemptions. The above list is not comprehensive. There are a number of other very significant exemptions available under federal and state law.
What liens can be avoided in bankruptcy?
- Certain judgment liens [except arising from domestic support obligations].
- Nonpossessory, nonpurchase money security interest in certain household goods that the debtor has exempted.
- Wholly unsecured mortgages can be avoided in chapter 13.
What are some alternatives to bankruptcy?
- Doing nothing. This may be an appropriate strategy where the debts are small and / or where the debtor is elderly, judgment proof and likely to remain so.
- Negotiating. Creditors are sometimes willing to settle on delinquent debt for a percentage of the balance owed. The creditor typically requires that the settlement be paid in a lump sum. There may be tax consequences as the forgiven debt is treated as income unless the taxpayer is insolvent. There are companies in the business of “debt adjusting” that will represent you in such negotiations with creditors. These companies are always overpriced, often ineffective and on occasion, unscrupulous.
- Credit counseling. Credit counselors are funded by creditors and will often set up a debt management plan to pay back unsecured consumer debts. Often times a credit counselor is able to negotiate reduced interest rates and late fees.
- Offer in compromise. For individuals who have primarily tax debts, offer in compromise with the federal or state taxing authorities is a very legitimate alternative.
- Foreclosure assistance services. There is nothing positive to say about companies that prey upon homeowners whose homes are in foreclosure.
How should a debtor prepare for bankruptcy?
- Hire an attorney.
- Withdraw funds from a bank or credit union to whom the debtor owes money.
- Stop incurring additional debt.
- Continue to pay on certain debts that will survive the bankruptcy.
- Stop paying debts that will be discharged in bankruptcy.
- Stop repaying debts to family members and/or friends.
- Retain all pay stubs received over the past six months from all employers, credit statements and demand letters.
- Prepare all tax returns that are not filed.
Is a debtor required to list all creditors and assets on the bankruptcy schedules?
Yes.
How long does the process take?
A chapter 7 no-asset case where no adversary proceedings are filed generally takes about 100 days.
A chapter 13 case normally takes 3-5 years.
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