Natalie Gray is a North Carolina Bar board-certified specialist in Bankruptcy Law. He has been representing clients in bankruptcy proceedings in Western North Carolina for over 40 years. She works to help individuals and businesses navigate through financial distress.
Natalie thinks that the motto “knowledge is power” is particularly applicable when it comes to understanding your options for dealing with debt. That is why all initial consultations are free.
During this consultation, we take the time to understand your specific situation and review your options. This is important because there are many misconceptions about your rights when dealing with creditors. If you are in financial trouble – or think you may be heading that way – setting up a risk-free consultation will allow you to face these difficult financial times with the confidence of knowing your options and your rights.
Unlike some other firms, each and every client will have a free consultation with an attorney, not a secretary or a paralegal. We know how serious your financial concerns are and a licensed attorney that specializes in bankruptcy is the best person to inform you fully of each and every option.
Chapter 7 is an ordinary bankruptcy, the proceeding most people think of when they think of bankruptcy. In a Chapter 7 proceeding, you are relieved from the responsibility to pay your debts (“discharged”), with certain exceptions. In exchange for having your debts eliminated, you must give up any assets that are not protected or “exempted” from the Chapter 7 trustee.
The assets that you exempt are free from the claims of all your pre-bankruptcy creditors. If you have nonexempt (unprotected) assets, the trustee can sell them to pay your debts. In more than 90% of the cases that we file, all our clients’ assets are exempt, so the client gives up no property. Such cases are called “no asset” cases because no assets are turned over to the trustee.
More detailed explanations of the exemptions and “exceptions to discharge” are set out in this overview.
Additionally, all individuals who file for Chapter 7 protection must comply with the “Means Test.” This “test” applies when your debts are primarily consumer debtors (not business debts) and prevents individuals who have the ability to pay their debts from filing Chapter 7. We have dedicated a separate page to explaining the Means Test.
Chapter 11s are restricted, if at all, only by normal lending market limits, except for individual Chapter 11s, which now somewhat resemble Chapter 13 proceedings. Chapter 11s usually are significantly more complicated than Chapter 7s, Chapter 12s, or Chapter 13s, and are therefore more expensive, take more time, and involve more detail in preparing repayment plans to the creditors.
For example, the initial court filing fee for a Chapter 11 is significantly more than that of Chapter 7 or Chapter 13. Creditors can have a much more active voice in Chapter 11s during the initial 180 day period and as the plan progresses.
There is a discharge in a Chapter 11, but it is more specifically developed for each case. Because each Chapter 11 plan is very different, more detailed and specific information should be provided in consultation with David Gray.
Chapter 12 is family farmer reorganization. This proceeding allows family farmers to reorganize their debts in a way similar to a Chapter 13 proceeding and plan. Additionally, a Chapter 12 proceeding allows mortgages to be re-amortized, if appropriate, to assist the farmer with current cash flow restrictions. Chapter 12 payment plans may last up to five years to pay unsecured creditors.
Secured creditors are paid as they might be paid under regular market lending. The attorney fee for a Chapter 12 is higher than fees in Chapter 7 or Chapter 13 cases, but usually not as high as the fee in a Chapter 11. A more detailed and specific description of the benefits and restrictions of Chapter 12 should be provided in consultation with David Gray.
Chapter 13 is a debt consolidation payment plan for individuals or husband and wife. The concept behind a Chapter 13 proceeding is that you and your spouse, if any, have sufficient income to pay all of your current living expenses (e.g., rent, food, utilities, transportation, clothes, etc.) and have money left over to apply to your debts.
You submit a Chapter 13 plan in which you set out a budget detailing your earnings and monthly living expenses. You pay the excess income through the Chapter 13 trustee, who then pays the money to your creditors. Determining the amount of the Chapter 13 plan payment is complicated. Some general rules follow:
- The term of the plan can be no more than 60 months.
- The amount paid over the term of the plan must be enough to pay certain debts in full. These include the following:
- Income tax debt less than three years old.
- Personal property tax debt less than one-year-old.
- Business trust fund taxes (withholding taxes and sales taxes) no matter how old.
- Back child support and alimony.
- If you are filing to stop a foreclosure, the amount necessary to satisfy the past due payments.
- The payment of all secured debts, such as vehicle loans, that are paid as part of your Chapter 13 plan.
- Your attorney’s fees not paid prior to filing.
- Under the Bankruptcy Code, the amount of general unsecured debt you must pay depends upon a calculation based on your income prior to filing and at the time of the filing, your expenses (some are limited by maximum allowances), and the amount of unprotected assets, if any, that you own and desire to keep.
- Payments to unsecured creditors in a Chapter 13 case can vary from 10% to 100%, based on income and assets.
With certain exceptions at the end of the Chapter 13 plan, any amounts still owing on your regular unsecured debts are forgiven. On certain debts, Chapter 13 allows you to lower the amount of your loans or gives you a lower interest rate on certain loans. If you have a secured loan like a mortgage, deed of trust, or car loan that you are behind on, Chapter 13 allows you to catch up on the amount you are behind over time.
How Much Does it Cost?
It is difficult to say how much any one bankruptcy case will cost. In each case, you will have to pay filing fees to the court and fees for certain financial management courses. The current court filing fees are listed below. The cost of the financial management courses typically ranges from $35.00 to $40.00.
In addition to these fees, you will have to pay your attorney. The attorney fee depends on the type of bankruptcy and the complexity of your case.
Bankruptcy Cases (Chapter 7, 11 & 12)
The base attorney fee for a Chapter 7 filing depends upon the complexity of the case. We will quote a fee after we have received the completed Chapter 7 information forms. If it becomes necessary for us to render non-routine services, we charge additional fees for those services. In Chapter 7 cases, we require that the attorney fee and the filing fee be paid in full before the bankruptcy petition is filed. We will prepare your bankruptcy petition and schedules after being paid the filing fee and a portion of the attorney fee. We will accept payments in installments, but the full amount must be paid before the bankruptcy petition is filed.
The attorney fee for a Chapter 11 or a Chapter 12 case will typically be higher due to the added complexity of these filings. We can only quote a fee after we have spoken with you about your particular situation. Please feel free to call us for a free consultation.
However, in a Chapter 13 consumer case, our court has approved a standard fee of $3,900.00. In very complex cases, the fee may be higher, and in some very simple cases, the fee may be lower. You and your Chapter 13 attorney will discuss the fee arrangement at the time of the initial consultation.
When people hear the word bankruptcy, sometimes negative images come to mind. In reality, the idea of debt relief and a “fresh start” is as old as the Old Testament. And this concept was so important to the founding fathers that they gave Congress the power to enact bankruptcy laws in the Constitution.
People find themselves considering bankruptcy for a variety of reasons. Some of the most common are – loss of employment, underemployment, medical expenses, divorce, and difficulties starting a business.
If you find that you are having difficulty paying for your normal living expenses while repaying your debts, you should consult a bankruptcy lawyer right away to determine the best course of action. For some individuals, filing bankruptcy does not make sense, but, for others, it can provide the fresh start that they need to get their finances back in order.
If you are having financial difficulties call our office today to set up a free consultation. Natalie Gray has been practicing law in the Asheville area for over forty years and he has extensive experience with personal and business bankruptcies. At Westall, Gray & Connolly, we can provide the advice that you need to make the best decisions for your financial future.
Is any property exempt?
Exempt property is simply property that you can keep and protect from your creditors when you file Chapter 7 bankruptcy. The basic purpose of bankruptcy is to allow a person who has become overburdened with debt to free himself or herself of that burden and get a “fresh start.” The law allows you to keep property to facilitate this fresh start. The exemptions are broken down into categories. If you have been domiciled in North Carolina for the last two years, the property you can exempt is determined under North Carolina law. If you have not been in North Carolina for the last two years, the exemptions are determined either by (1) the exemptions available under the law of the state in which you were domiciled for the six months prior to the two-year period or (2) under the exemptions provided in the Bankruptcy Code (11 U.S.C. §522(d)(1)). For debtors who have been domiciled in North Carolina for two or more years, the exemptions are as follows (per person):
You may exempt up to $35,000.00 total equity in your residence. This includes equity in a mobile home and in a burial plot. If you and your husband or wife own the property jointly and file a joint petition, you can claim up to $70,000.00 as exempt. Furthermore, an unmarried debtor who is age 65 or older is entitled to retain an aggregate interest in the property not to exceed $60,000.00 in value, so long as the property was previously co-owned by the debtor as a tenant by the entireties or as a joint tenant with rights of survivorship and the former co-owner of the property is deceased.
“Equity” is the value of the property less all debts or liens secured by it. In certain circumstances you may be able to exempt the entire value in a residence if you own it jointly with your spouse and have no joint creditors (See the information below on “Tenants by the Entirety”).
You can claim up to $3,500.00 in one motor vehicle.
You can claim exemptions of up to $5,000.00 for yourself, plus $1,000.00 for each dependent (not to exceed 4), in items such as household furniture, clothes, jewelry, etc. You value these items at a price at which you can sell them, not at their original cost or replacement value.
Tools of the Trade
You can exempt $2,000.00 of equity in “tools of the trade.”
A wildcard exemption is available to exempt any property. The amount of the wildcard exemption is effected by the amount, if any, you claim under the $35,000 residence exemption. The wildcard exemption is $5,000.00 and is claimed out of the unused portion of the residence exemption. For example, if the exemption you claim in a residence is less than $30,000.00, you have a $5,000.00 wildcard exemption. If you claim $32,000.00 exemption in your residence, you have a $3,000.00 wildcard exemption This exemption is usually used to exempt some of the following: equity in a car above $3,500.00, money in the bank, tax refunds not yet received, and cash on hand.
Life insurance policies insuring the life of the debtor in which his or her spouse and/or children are named beneficiaries are exempt.
Compensation for Injuries
Compensation for personal injuries and workman’s compensation is exempt.
There are no dollar limits here. IRA accounts, retirement benefits of North Carolina teachers, state employees, local government employees, and federal civil service employees are exempt. Individual retirement accounts are exempt. Retirement benefits of other states or governmental units of other states are exempt to the extent that they are exempt under the laws of that state. Your interest in an ERISA qualified retirement plan (401-K account, pension or profit-sharing plan) is also protected from your creditors.
Veterans Administration, Social Security and AFDC benefits are exempt.
Your earnings for personal services rendered within 60 days of filing the bankruptcy which are necessary for the support of you and your family remain exempt, even though they have been deposited in a bank account.
Alimony and Child Support
Tenants by the Entirety
This is not really an exemption, but any real estate (not just a residence) owned by a husband and wife jointly is not available to any creditor who has a claim against just the husband or wife. It is available to a creditor who has a joint claim against both the husband and wife. If you own real estate jointly with your spouse with a large amount of equity, it may be crucial to know what joint debts you have with your spouse.
Other specific benefits and property may be exempt.
Your Property and Bankruptcy
When you file for bankruptcy protection there are several factors that determine if you are able to keep all of your property. First, the type of bankruptcy matters. Second, whether a creditor has collateral securing your debt. Finally, whether your property is eligible for any “exemptions.” Please read on to find out more.
What Happens if a Creditor Has Collateral Securing the Payment of Debt?
A secured debt is simply a debt in which the creditor has a lien on some item of property to “secure” your payment of the debt. The most common types of secured debts are a mortgage on a home and a lien on a car. Before bankruptcy, a secured creditor has two avenues of recovering its debt. First, it can recover by repossessing and selling the collateral. Secondly, it can recover from you on your personal liability. The Chapter 7 discharge eliminates the creditor’s right to recover from you personally, but does not abolish the creditor’s right to take and sell the collateral if you fail to make your payments. Application of this basic principle leaves you with the options set out below.
Secured Debt in Chapter 7 Cases
In Chapter 7 cases, with two exceptions, explained later, you have the following four choices:
- If the collateral is real estate and your payments are current on the date that you file the Chapter 7, and your equity in the collateral is covered under the exemptions, you may keep the property so long as you continue to make the monthly payments and comply with the terms of your contract. We call this the “be-current-and-stay-current” right to retention.
- To be absolutely sure you can keep any personal property that secures a debt, you must also sign a reaffirmation agreement. Under the Bankruptcy Code, most experts think that the creditor can repossess the collateral unless you enter into an agreement reaffirming the debt within 65 to 85 days after you file the bankruptcy. We believe it is not likely that a creditor will in fact repossess collateral when you are current with your payments, but there are no guarantees. The decision of whether or not to reaffirm a debt is important.
- If you reaffirm a debt, this reinstates your personal liability on the debt. This means if you later default, you will be liable on the debt despite the fact that you filed bankruptcy. The decision on whether to reaffirm a debt may be the most important one you make in connection with your bankruptcy. We can advise you, but the final decision is yours.
- If your payments are not current, you can try to negotiate a reaffirmation agreement with the creditor that allows you to catch up your payments. There are two drawbacks to this option.
- First, you cannot be sure that you and the creditor will be able to agree upon terms that allow you to catch up your payments.
- Second, as explained above, the reaffirmation agreement reinstates your personal liability. If your payments on a mobile home loan, a mortgage, or a car loan are substantially behind or if the creditor has threatened to repossess or foreclose, you will need to file Chapter 13 to save the property.
- You may redeem the property by paying the creditor the value of the collateral. The value of a vehicle is the amount for which it would be sold at retail by a used car dealer in its current condition. For example, if you owe GMAC $15,000.00 secured by a vehicle which has a retail value of $10,000, you can pay GMAC $10,000.00 and keep the vehicle. There are redemption loan financers who lend money to Chapter 7 debtors to redeem vehicle loans. Even though their rates are somewhat high, in many cases redemption loans can save you money.
- Your final option is to give the property back to the creditor (“surrender” the property) and have the debt discharged.
There are two circumstances in which you can keep the property in Chapter 7 even if you don’t maintain your payments. These exceptions are:
- When a creditor has a judgment or lien on property that restricts your exempt interest in that property.
- When a creditor has a non-possessory, non-purchase-money security interest in exempt personal household items (televisions, furniture, clothes, jewelry, tools of the trade, or professionally prescribed health aids). “Non-possessory” simply means the creditor is not physically holding the property. “Non-purchase-money” means that the creditor neither sold you the collateral, nor lent you the money with which to buy it. The most common instance in which a creditor obtains a non-possessory, non-purchase-money security interest in household items is when someone borrows money from a finance company and lists certain household items as collateral for payment of the loan.
Secured Debt in Chapter 13 Cases
In Chapter 13 cases, secured claims are handled in one of two basic ways.
- First, the “cure and maintain” method, relates primarily to mortgage debts. Your past due payments are paid from your monthly plan payments (“through the plan”), and future payments (payments that come due after filing bankruptcy) are paid directly to the creditor. When the Chapter 13 plan is completed, you remain obligated to make any payments remaining due on these secured debts.
- Second, the “strip-down/stretch-out/cram-down” method. This method is used either when the collateral is worth less than the amount of the debt, or when the number of payments left on a debt is less than the length of the plan. The following example illustrates the “strip-down/stretch-out/cram-down” method.
For example, if you have a car loan with 30 payments of $233.00. The interest rate is 12.25% and the pay-off on the loan is $6,000.00. The car has high mileage and is worth only $4,000.00. You can strip-down the creditor claim to the value of its collateral ($4,000.00), stretch-out the payments to 36-60 months and pay the present value of the claim at a reduced interest rate (“cram-down”), such that the monthly car payments through the plan might be $120.00.
The ability to “refinance” your secured loans through this second method permitted by Chapter 13 lets you reduce the monthly payments and sometimes is the only way to have enough cash flow to keep all of your property.
The Bankruptcy Code places limitations on a Chapter 13 debtor’s ability to strip down certain secured debts. If the collateral is a motor vehicle acquired for personal use of the debtor incurred within 910 days (approximately 2.5 years) prior to filing the bankruptcy and the debt is a purchase money debt, then the debt cannot be stripped down to the value of the vehicle. The prohibition of strip-down applies to other collateral, usually electronics, appliances, and furniture, if the debt was incurred within one year prior to filing the bankruptcy.
- When you purchased the vehicle.
- Whether you purchased it for personal or business use.
- Whether all of the debt relates to the purchase of the vehicle or whether some portion of the debt relates to paying off an old loan. You must bring a copy of your vehicle purchase agreement and loan when you come to consult with us.
How Will Bankruptcy Affect Someone Who Cosigned a Loan with Me?
Another person who is jointly liable with you on a debt is known as a “co-debtor”. When you file bankruptcy, the co-debtor remains liable on the debt, unless the co-debtor is your spouse and you file a joint petition. If the co-debtor fails to maintain the payments on the debt, the failure to pay the debt will adversely affect his or her credit. In a Chapter 7 case, the creditor is free to pursue collection from the co-debtor immediately. In a Chapter 13 case, the creditor may be prevented from collecting from the co-debtor during the term of the Chapter 13 Plan. If you file aChapter 13 and the status of a co-debtor is important to you, you will need to discuss the circumstances of the debt in order to determine the likely impact on the co-debtor. It may be possible to put the debt in a special class to be paid in full to protect the co-debtor from collection activities.
What Should I Do if I Owe Money to my Bank or Credit Union?
If the bank or credit union at which you have checking or savings accounts is also a creditor (you have a loan, credit card account, or overdraft protection with the bank), then it is possible that the bank will put an “administrative freeze” on the funds in the account on the date the bankruptcy petition is filed. Such an administrative freeze will cause checks that have not cleared the bank to bounce. Therefore, you may want to open a new bank account with a bank where you do not owe any money prior to filing bankruptcy and cease checking activity in the old account several weeks prior to filing the petition. It is not necessary that you close the old account, but you may want to remove all but a few dollars from the account.
If your paycheck is automatically deposited to the account, you do not necessarily have to change the deposit. Funds that are deposited into the account after you file the bankruptcy cannot be frozen.
Should I File Chapter 13 or Chapter 7?
You must ultimately decide for yourself whether filing bankruptcy is the proper action to take, and if so, which Chapter is better for you.
Here are some factors to consider:
- If you are not making more money than you need for your current living expenses, Chapter 13 is not a realistic option.
- Chapter 7 has the advantage of wiping the slate clean and enabling you to embark on your “fresh start” immediately, whereas with Chapter 13 you will be making payments for some period of time.
- If you have a particular asset that is above the allowable exemption that you want to keep, then Chapter 13 may be the only alternative. For example, if you are single, own a residence with over $35,000.00 in equity and don’t want to have it sold, Chapter 7 is not right for you.
- If you are trying to ward off a repossession or a foreclosure, Chapter 13 may be the only way to do so.
- Fees are generally higher to file a Chapter 13; the standard fee is $3,900.00. The standard fees for the normalChapter 7 are $1,500.00-$2,500.00. However, the entire fee must generally be paid in advance in Chapter 7 cases. In Chapter 13 cases, most if not all of the fee is paid through your Chapter 13 plan. For more on fees, see ourOverview of Bankruptcy Costs.
- In certain circumstances, Chapter 13 is more advantageous because it allows you to keep secured property, such as houses and vehicles, by paying less. The three most prevalent circumstances are:
- If the retail replacement value of a vehicle is less than the amount of the debt and the claim is not a 910-vehicle claim, you can keep the vehicle by paying that value rather than the full amount of the debt.
- On some secured debts, if the interest rate is high, you can reduce the interest rate.
- If you have more than two mortgages on your residence, and the value of the residence is less than the amount owed on the first mortgage, you can “strip-off” the second mortgage and treat it as an unsecured claim. For example, if your residence is worth $220,000.00 and it is encumbered by a first mortgage with a balance of $225,000.00 and a second mortgage with a balance of $25,000.00, you can strip off the second mortgage.
What is the means test?
The Means Test is an income test that may serve as a gateway to bankruptcy. Our experience has been that few clients are prevented from filing Chapter 7 due to the Means Test. Even so, sometimes issues arise. Below, we briefly cover when the Means Test applies and issues that may come up.
Does the Means Test Apply?
- First, the Means Test does not apply unless more than 50% of your total debt is consumer debt. A consumer debt is a debt incurred primarily for a personal, family, or household purpose. Business debts, tax debts, and tort claims are not consumer debts.
- Secondly, the Means Test does not apply to an individual or married couple if the “Current Monthly Income” (CMI) of that individual or married couple is less than the median income of a household of the same size in North Carolina. The following chart sets out the median income for households in size from 1 to 6. Add $8,100.00 for each person in excess of six.
This chart outlines the median income by household size in North Carolina as of May 1, 2014.
|# of Earners||1||2||3||4||5||6|
Means Test Issues
How your income is calculated:
The determination of the CMI is not calculated from your current income, but rather is based on your average income received during the six-month period ending on the last day of the month prior to filing the bankruptcy. Furthermore, certain income, such as social security benefits, are not included in the calculation of median income. The rules on calculating CMI are complicated and are not covered in this basic overview. You must be able to provide us with accurate information and documentation concerning your income for the prior six months, as well as a prediction of future income.
Establishing that you have insufficient funds to pay your debts:
Even if your CMI exceeds the median income, you can pass the Means Test by establishing that your expenses leave you with insufficient funds upon which to pay a significant amount on your debts. The rules on determining these expenses are quite complicated and are not covered in this basic overview.
If you do not “pass” the means test after deducting the standard expenses from your income, a “special cirucmstances” exception may apply.
Special circumstances are those circumstances which justify additional expenses not included in the approved expenses set out on the Bankruptcy Code or which justify adjustments to the calculation of current monthly income. There must be no reasonable alternative to the additions or adjustments. Examples of special circumstances are a serious medical condition or a call to active duty in the Armed Forces. In order to establish special circumstances, you must itemize each additional expense or adjustment to income and provide both documentation for such expense or adjustment and a detailed explanation of the special circumstances that make such expense or adjustment to income necessary and reasonable. You must attest under oath to the accuracy of any information provided to demonstrate special circumstances.
John Smith is a single man who lives alone. He is unemployed from May 25, 2013, to July 30, 2013, and receives no benefits. He obtains a job on August 1, 2013, at an annual salary of $54,000.00. He files a Chapter 7 bankruptcy on December 15, 2013. His gross income from August 1 to November 30 is $18,000.00. To calculate John Smith’s income under the bankruptcy law, we need to take the following steps.
- Determine the 6 month period that we use to calculate John’s CMI. He filed in December 2013, so we look at the six month period that ended the month prior to the bankruptcy filing. In this case, we look to the income received from June – November 2013.
- Determine how much John earned in each of those months. He was unemployed in June and July, so he had no income for those two months. He has an annual salary of $54,000.00, which is $4,500.00 per month ($54,000/12 = $4,500). He was employed August, September, October, and November, so we multiply $4,500.00 x 4 months, which is $18,000.00. $0.00 from the first two months plus $18,000.00 from the last two months is $18,000.00 total for that six month period.
- Multiply by 2 to convert to an annual amount. $18,000.00 x 2 = $36,000.00.
- Compare to the median income for John’s household size. The median is $41,333.00. John’s annualized income is less than the median, so he “passes” the Means Test.
Waiting until January, means that the 6 month period we use to calculate John’s CMI will be July – December. John was receiving $4,500.00 per month for 5 of those months and $0.00 for 1 month. The total for that 6 month period is $4,500.00 x 5 = $22,500.00. We then multiply $22,500.00 x 2 to annualize John’s income. The annual amount is now $45,000.00. Now, John’s income is above the median, so to determine if John “passes” the Means Test we must analyze his expenses under the rules set out in the Bankruptcy Code.
Joe and Jane Doe have 2 children. Jane works for the State and earns a flat salary of $36,000.00 ($3,000.00 per month). Joe was working for a telecom company and was earning $78,000.00 per year. On April 30, 2013, he is in a serious automobile accident and is permanently disabled. He receives gross private disability income of $3,500.00 per month for 6 months (May – October). Effective December 1, 2013, he will start receiving social security disability benefits of $2,200.00 per month and his private disability will stop. If they file bankruptcy on November 15, 2013, their income from May 1 to October 31 is $39,000 (see calculation below). On an annual basis, the debtors’ income is $78,000, which exceeds the median income $67,116.00 for a household of 4. However, if they wait until February 1, 2014, to file, their income for the six months period of August 1 to January 31 will be below the median. The calculations are set forth below.
|May 1 – Oct. 31||Aug. 1 – Jan. 31|
|Wife’s Income||$18,000 ($3,000 x 6)||$18,000 ($3,000 x 6)|
|Husband’s Income||$21,000 ($3,500 x 6)||$10,500 ($3,500 x 3)|
|Total 6 month Income||$39,000||$28,500|
Remember social security is not included in CMI. The annual income is $57,000, and is below the median income.
From these two examples, the following lessons are learned:
- Calculating median income is technical and sometimes complicated.
- Timing can be crucial in passing the Means Test.
- The client must provide very reliable information about past income, and in some cases, a prediction of future income.