Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills 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. 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.
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.
In Chapter 13, stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without repayment.)
In Chapter 13, prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
Restore or prevent termination of utility service.
Although there are five types of bankruptcy cases provided under the law, most people filing bankruptcy will want to file either Chapter 7 or Chapter 13. There also is a Chapter 11 for corporations, a Chapter 9 for municipalities, and a Chapter 12 for family farmers.
Chapter 7 is known as a “straight” bankruptcy or “liquidation.” It requires a debtor to give up any property that exceeds certain limits called “exemptions,” so that the property can be sold to pay creditors. However, most clients find that their property does not exceed the exemptions limitation. In addition, there is a “means test” that a person will have to pass in order to qualify for Chapter 7.
Chapter 13 is called “debt adjustment,” “reorganization,” or “wage earner plan.” It requires a debtor to file a plan to pay debts (or parts of debts) from current income.
Either Chapter 7 or Chapter 13 may be filed individually or by a married couple filing jointly.
G. Martin Hunter is familiar with North Carolina law and can review the list with you to give you a full understanding of the debts covered and not covered.
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. Even if your property is not fully exempt, you will be able to keep it, if you pay its non-exempt value to creditors in Chapter 13.
However, some of your creditors may have a “security interest” in your home, automobile, or other personal property. This means that you have that creditor a mortgage on the home or put your other property up as collateral for the debt. Bankruptcy does not make most of these security interests go away. If you don’t make the payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case.
There are several ways to keep collateral or mortgaged property after you file bankruptcy. You can agree to keep making your payments on the debt until it is paid in full, by signing a “reaffirmation agreement,” under which you agree to remain legally liable for the debt notwithstanding your bankruptcy filing. Or you can pay the creditor the amount that the property you want to keep is worth (this is called a “redemption.”) If you put up household goods as collateral for a loan (other than a loan to purchase the goods), you can usually keep your property without making any more payments on that debt.
Yes! Many people believe that they cannot own anything for a period of time after filing for bankruptcy. This is not true. You can keep your exempt property and anything you obtain after the bankruptcy is filed. However, if you receive an inheritance, a property settlement or life insurance benefits within 180 days after filing for bankruptcy, the money or property may have to be paid to your creditors.
In most bankruptcy cases, you only have to go to a proceeding called a “meeting of creditors” to meet with the bankruptcy trustee and any creditor who chooses to come. It is very unusual for a creditor to actually show up. Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and your financial situation.
Sometimes, if complications arise, you may have to appear before a judge at a hearing. If you need to go to court, you will receive notice of the court date and time of the hearing from the court as well as a letter from our firm.
There is no clear answer to this question. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse.
The fact that you have filed a bankruptcy can appear on your credit report for ten years under the federal Fair Credit Reporting Act. In a Chapter 13 proceeding, your bankruptcy usually only appears on your credit report for seven years.
But since bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit. Creditors know that you can only receive one Chapter 7 discharge once every eight years. If you have a steady job and you keep making your house and car payments on time, your chances of obtaining credit might, in fact, be better after filing bankruptcy than before the bankruptcy.
Your first step in a workout is to meet with your creditors. If your company has significant secured debt, negotiations often commence with the secured lenders. Next, negotiations take place with unsecured creditors as a way to convince them that a workout is their best opportunity for payment. At these meetings, you discuss the issues that created your company’s financial problems, its current revenues and debt structure, and your future initiatives to reorganize.
Following the creditor meetings, you and your attorney propose a workout agreement that typically includes:
A payment plan
Collection activity moratorium and forbearance by secured lenders
Creditor rights relating to your operations
Creditor protection that you, the debtor, will fulfill the obligations of the agreement
Counsel for all key parties negotiate extensively until they reach an agreement. Creditors are usually given a short time period to accept your plan. However, not all creditors may agree to your proposed workout and are free to pursue their own actions if they choose to do so.
Some debts are not dischargeable in a Chapter 7 bankruptcy. That means that after you receive your discharge, you will still owe the debt. The most common are:
Taxes that have been due for less than three years or with respect to which you filed a fraudulent return. Note this could include real property or personal property taxes.
Money or property that you obtained by false pretenses. This includes credit that you obtained by giving a false financial statement. Note that the creditor would have to file a lawsuit in the Bankruptcy Court called an “adversary proceeding” within 60 days of your meeting of creditors for this to be a possibility. If such an adversary proceeding is filed, you have the right to contest it, and it will go to a trial before the bankruptcy judge.
Debts arising from fraud, embezzlement, larceny or breach of a fiduciary duty. Note that the creditor would have to file an adversary proceeding.
Willful and malicious injury to another or the property of another. Note that the creditor would have to file an adversary proceeding.
Fines and penalties owed to governments.
Student loans unless there is an undue hardship (see information on student loans in the next FAQ)
Child support and alimony. Any domestic support obligation.
Any obligation owed to a condominium association or homeowners association that comes due after you file your bankruptcy case, as long as you continue to have possession of the property, or as long as the property is still in your name. If the mortgage holder delays in foreclosing, this could be an issue.
It is almost impossible to discharge student loans in bankruptcy. Under section 523(a)(8)(B) of the federal Bankruptcy Code, student loans can be discharged in bankruptcy only if the debtor can show that the debt would impose an “undue hardship” on the debtor. The phrase “undue hardship” is not defined in the Bankruptcy Code.
The federal courts in North Carolina are part of the Fourth Circuit. Decisions of the federal appeals court for the Fourth Circuit, based in Richmond, Va., are binding on bankruptcy cases in North Carolina.
The Fourth Circuit has adopted, as its standard, the “Brunner Test,” based on a case entitled Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2nd Cir. 1987). Under the “Brunner Test,” a debtor seeking to discharge a student loan would have to prove the following:
1. That the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans;
2. That additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
3. That the debtor has made good faith efforts to repay the loans.
The Fourth Circuit addressed the issue of “additional circumstances” in the case of In re Spence, 541 F3d 538 (4th Cir. 2008). In Spence, the Fourth Circuit concluded that “additional circumstances” weren’t enough to discharge Ms. Spence’s student loans. Ms. Spence was a single woman in her late 60s, who earned about $26,000 per year in a low-level job for E*Trade and owed about $166,000 in student loans. She also was a diabetic. She had a master’s degree and had completed the course work for her PhD, but not her dissertation, so she did not have the PhD degree. The Fourth Circuit held that her circumstances, though bad, were not bad enough to discharge her student loans.
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