Westhall, Gray, Connolly & Davis

An Overview of Bankruptcy


The purpose of this overview is to answer the questions about bankruptcy asked most frequently by our clients and to provide an overview of the bankruptcy process. This information will help you decide whether to file bankruptcy or not. In this overview, we have tried to find a balance between removing some of the complexities of the law without over-simplifying it. Reading and studying this overview is just the first step in educating you. The next step is a consultation with Mr. Gray or Ms. Davis to discuss your particular situation.

What is Bankruptcy?


Bankruptcy is a legal proceeding in a federal court that can grant complete or partial relief from the payment of your debts. This initial relief is provided in the form of an "automatic stay" issued automatically and immediately upon the filing of the bankruptcy petition which, with a few narrow exceptions, stops all creditor collection activities. The final relief comes at the end of the case when the bankruptcy court enters an order eliminating your responsibility to pay certain debts. This final order is called the "discharge."

What Types of Bankruptcy Are There?


For individual debtors there are four types of bankruptcy proceedings available: Chapter 7, Chapter 12 for family farmers, Chapter 13, and sometimes Chapter 11. Chapter 7 and Chapter 13 will be discussed in detail below. An overview of Chapter 12 and Chapter 11 are found below.

Who Can File Bankruptcy?


An individual, husband and wife, a partnership or any business association, such as a corporation or an LLC, may file a Chapter 7 bankruptcy. Only individuals may file a Chapter 13 bankruptcy. The information in this overview applies primarily to the individual debtor. If you are married, you can file by yourself or file together with your spouse. Prior bankruptcy filings may limit filing another bankruptcy proceeding. Let your attorney know about a prior bankruptcy.
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Chapter 7:


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 on 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. There is a "Means Test" imposed upon individuals that prevents them from filing Chapter 7 if the test reveals that they have the ability to pay their debts. The Means Test is discussed at pages 12-13.

Chapter 13:


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:

  1. The term of the plan can be no more than 60 months.
  2. The amount paid over the term of the plan must be enough to pay certain debts in full. These include the following:
    1. Income tax debt less than three years old.
    2. Personal property tax debt less than one year old.
    3. Business trust fund taxes (withholding taxes and sales taxes) no matter how old.
    4. Back child support and alimony.
    5. If you are filing to stop a foreclosure, the amount necessary to satisfy the past due payments.
    6. The payment of all secured debts, such as vehicle loans, that are paid as part of your Chapter 13 plan.
    7. Your attorney's fees not paid prior to filing.
  3. 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.
  4. 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 the amount you are behind over time. Chapter 7 does not offer this option.
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What Happens to My Property (Assets) in a Chapter 7?


In Chapter 7 cases, your right to keep your property is controlled by the answer to two questions. The first question is: "Does a secured creditor (creditor with collateral such as house or car) have the right to take the property because I have defaulted on the loan?" The second question is: "Can I claim the property as exempt?" If the answer to the first question is "no", and the answer to the second, "yes," then you can keep the property. The next two sections will help you answer the first question. The section of this overview on exemptions beginning on page 8 helps you answer the second question.

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.
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Chapter 7 Options for Secured Debts;
Reaffirmation Agreements; Redemption


In Chapter 7 cases, with two exceptions, explained later, you have the following four choices:
  1. 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.
  2. To be absolutely sure you can keep the personal property that secures a debt secured by personal property, 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 reason that you should not want to reaffirm a debt is that the reaffirmation reinstates your personal liability on the debt. This means if you later default on the debt, 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. Secondly, 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.
  3. 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.
  4. Your final option is to give the property back to the creditor ("surrender" the property) and have the debt discharged.
Exceptions:

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:
  1. When a creditor has a judgment or lien on property that restricts your exempt interest in that property.
  2. 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.
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Chapter 13 Treatment of Secured Debts:


In Chapter 13 cases, secured claims are handled in one of two basic ways. The first, which we call 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.

We call the other method 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 $127.20.

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.

Properly treating these "910-vehicle claims" is a very important aspect of your
Chapter 13 plan. It is important to know the following:
  1. When you purchased the vehicle.
  2. Whether you purchased it for personal or business use.
  3. 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.
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What Property Is 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. The property you can exempt is determined under North Carolina law if you have been domiciled here for at least two years. If not, the exemptions are determined under either the exemption available under the law of the state in which you were domiciled for the six months prior to the two-year period or under the exemptions provided in §522(d)(1) of the Bankruptcy Code. For debtors who have been domiciled in North Carolina for 2+ years, the exemptions PER PERSON are as follows:
  1. Residence
    You may exempt up to $18,500.00 total equity in your residence, including a mobile home and burial plots. If you and your husband or wife own the property jointly and file a joint petition, you can claim $37,000.00 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 $37,000.00 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 paragraph 14 below.
  2. Motor Vehicle
    You can claim up to $3,500.00 in equity in one motor vehicle.
  3. Household Goods
    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.
  4. Tools of Trade
    You can exempt $2,000.00 of equity in "tools of the trade."
  5. Wildcard
    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 $18,500 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 $13,500.00, you have a $5,000.00 wildcard exemption. If you claim $16,000.00 exemption in your residence, you have a $2,500.00 wildcard exemption This exemption is usually used to claim as exempt equity in a car above $3,500.00, money in the bank, tax refunds not yet received, and cash on hand.
  6. Life Insurance
    Life insurance policies insuring the life of the debtor in which his or her spouse and/or children are named beneficiaries are totally exempt.
  7. Health Aids
    You can claim an unlimited amount of professionally prescribed health aids for the debtor or a dependent of the debtor (e.g., wheel chair, hearing aid and the like).
  8. Compensation for Injuries
    Compensation for personal injuries and workman's compensation is exempt.
  9. College Savings Accounts
    Funds in a college savings plan qualified under §529 of the Internal Revenue Code, not to exceed $25,000, and only to the extent that the funds are for a child of the debtor and will actually be used for the child's college expenses. You may not exempt the funds placed in the savings plan within the year prior to filing unless they were regular contributions consistent with past pattern of contributions.
  10. Retirement Benefits
    There are no dollar limits here. IRA accounts, retirement benefits of North Carolina teachers, state employees, local government employees, and federa civil service employees are exempt. Individual retirement accounts are exempt. Retirement benefits of other states or governmental unit 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.
  11. Government Benefits
    Veterans Administration, Social Security and AFDC benefits are exempt.
  12. Wages
    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.
  13. Alimony and Child Support
    Alimony, support, separate maintenance and child support payments to the extent they are reasonably necessary for the support of the debtor or a dependent of the debtor remain exempt.
  14. 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.
  15. Other
    Other specific benefits and property are exempt.
If the value of your property exceeds the amount of exemptions, and you are not willing to risk losing it, your option is usually a Chapter 13 proceeding.
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What Debts Are Not Discharged?


As explained earlier, the basic purpose of bankruptcy is to obtain a discharge of your debts. However, some specific types of debts are not discharged (i.e., the bankruptcy does not relieve you of your obligation to pay). Those debts are as follows:
  1. In a CHAPTER 7 case:
    1. In some cases, debts not listed in the schedule of creditors. Therefore, it is important to list all your creditors.
    2. Certain taxes, including funds borrowed with which to pay such taxes.
    3. A claim based upon money, property, services, or credit obtained by fraud or false pretenses (e.g., a false financial statement used to obtain credit or charges incurred on a credit card when you had no intent to pay for the charge will be considered this type of debt).
    4. Consumer debt for more than $500.00 for luxury goods or services to a single creditor, incurred within 90 days of filing the petition.
    5. Cash advances of more than $750.00 under an open-end credit plan made within 70 days of filing bankruptcy.
    6. Alimony and child support, and marital debts arising out of a separation agreement or court order.
    7. Damages for willful and malicious injury.
    8. Certain governmental penalties and fines.
    9. Educational loans, except in cases of prolonged and severe hardship. However, undue hardship is a very difficult standard to meet.
    10. Any debt for death or personal injury caused by the unlawful operation of a motor vehicle, vessel or aircraft while intoxicated.
    11. Loans from retirement accounts and federal thrift savings accounts.
    12. Debts for violation of federal and state securities laws or common law fraud, deceit or manipulation in connection with the purchase or sale of a security.
    13. A debt for fraud or defalcation (dishonesty) while acting in a fiduciary (position of trust) capacity, embezzlement or larceny.
  2. In a CHAPTER 13 case:
    1. Any debt not listed in the schedule of creditors (to the extent that other creditors are paid). Therefore, it is important to list all your creditors.
    2. Withholding and sales taxes (business taxes).
    3. Tax debts in which the tax returns or tax reports were not filed or were filed late and less than 2 years prior to filing the bankruptcy.
    4. Tax debts in which you filed a fraudulent return or willfully attempted to evade the taxes.
    5. A claim based upon money, property, services, or credit obtained by fraud or false pretenses (e.g., a false financial statement used to obtain credit or charges incurred on a credit card when you had no intent to pay for the charge will be considered this type of debt).
    6. Consumer debt for more than $500.00 for luxury goods or services to a single creditor, incurred within 90 days of filing the petition.
    7. Cash advances of more than $750.00 under an open-end credit plan made within 70 days of filing bankruptcy.
    8. A debt for fraud or defalcation (dishonesty) while acting in a fiduciary (position of trust) capacity, embezzlement or larceny.
    9. Educational loans, except in cases of prolonged and severe hardship.
    10. Any debt for death or personal injury caused by the unlawful operation of a motor vehicle, vessel or aircraft while intoxicated.
    11. Restitution or criminal fine included in a sentence upon conviction of a crime.
    12. Secured debts paid under the "cure and maintain" method. (see above)
    13. Restitution or damages awarded in a claim against you as a result of willful or malicious injury to another entity or person.
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Is It Possible to be Denied a Discharge of All My Debts?


CHAPTER 7
You can be denied a discharge if the Court determines that you committed any of the following acts:
  1. You have been granted a discharge in a prior Chapter 7 bankruptcy filed less than eight years prior to the filing the current bankruptcy.
  2. You have been granted a discharge in a prior Chapter 13 bankruptcy filed within six years of the current bankruptcy.
  3. With the intent to delay or defraud a creditor or the bankruptcy court, you transfer, destroy, or conceal property within one year prior to filing bankruptcy or at any time after filing bankruptcy.
  4. Without justification, you conceal, destroy, falsify, or fail to keep books, records and documents related to your financial condition and business transactions.
  5. You knowingly and fraudulently in the bankruptcy proceeding:
    1. make a false oath, claim or account (i.e., lie about your property, debts, or financial affairs);
    2. give or receive money for taking certain action or agreeing not to take certain action;
    3. withhold books, records, documents or other records from the bankruptcy court.
  6. You fail to explain satisfactorily any loss of assets or deficiency of assets to meet your liabilities.
  7. You refuse to obey an order of the bankruptcy court, or refuse to answer a material question.
  8. You fail to complete an instructed course in personal financial management following the filing of the case.
  9. There is pending any proceeding in which: a) you may be found guilty of a felony; b) you may be liable for a debt arising from the violation of federal or state securities laws; or c) you may be liable for a debt arising from any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the proceding 5 years.
CHAPTER 13
You will not be granted a discharge in a Chapter 13 case under the following circumstances:
  1. You have been granted a discharge in a prior Chapter 7 filed less than 4 years prior to the current bankruptcy.
  2. You have been granted a discharge in a prior Chapter 13 filed less than 2 years prior to the current bankruptcy.
  3. You fail to complete an instructed course in personal financial management following the filing of the case.
  4. There is pending any proceeding in which: a) you may be found guilty of a felony; b) you may be liable for a debt arising from the violation of federal or state securities laws; or c) you may be liable for a debt arising from any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the proceding 5 years.
The lesson to be learned is that if you are open and honest with your creditors and the bankruptcy court, you will be granted your discharge.

What Effect Will Bankruptcy Have on 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 a Chapter 13 and the status of a co-debtor is important to you, we will need to discuss the circumstances of the debt in order for us to advise you of 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.
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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. Some issues involving the Means Test are:
  1. 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.
  2. 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 exceeds 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 $6,300.00 for each person in excess of six.

    1
    2
    3
    4+
    5
    6
    Medium
    Income
    $33,510.00
    $43,532.00
    $50,874.00
    $56,985.00
    $63,285.00
    $69,585.00


    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. It is mandatory that you 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.
  3. 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.
  4. Even if the deduction of the expenses set out at paragraph 3 are not enough to free you from debtors' prison, there is a final key to the debtors' prison known as "special circumstances" that may unlock the door. 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.
The following two examples illustrate the calculation.

Example 1:

John Smith is a single man who lives alone. He is unemployed from May 25, 2006, to July 20, 2006, and receives no benefits. He obtains a job on July 21, 2006, at an annual salary of $45,000.00. He files a Chapter 7 bankruptcy on December 15, 2006. His gross income from July 21 to November 30 is $15,500.00. To calculate John Smith's income under the bankruptcy law, multiply $15,500 by 2 (to convert the six months to annual amount). The result of $31,000.00 is less than the median income of $33,510.00, and John Smith "passes" the Means Test.

If John Smith waits until January 2, 2007 to file bankruptcy, his income for the six-month period from July 1 to December 31 will be approximately $19,250.00 ($38,500.00 on an annual basis). To determine if John "passes" the means test will require an analysis of his expenses under the rules set out in the Bankruptcy Code.

Example 2:

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 $60,000.00 per year. On April 30, 2006, he is in a serious automobile accident and is permanently disabled. He receives gross private disability income of $2,500.00 per month for 6 months (May – October). Effective December 1, 2006, he will start receiving social security disability benefits of $1,800.00 per month and his private disability will stop. If the Does file bankruptcy on December 15, 2006, their income from May 1 to October 31 is $33,000 ($5,500.00 x 6). On an annual basis, the debtors' income is $66,000, which exceeds the median income $56,985.00 for a household of 4. However, if they wait until February 1, 2007, to file, their income for the six months period of August 1 to January 31 is as follows:

Wife's Income:
$18,000.00
Husband's Income :
$ 7,500.00
 
$25,500.00

Remember social security is not included in CMI. The annual income is $51,000, and is below the median income.

From these two examples, the following lessons are learned:
  1. Calculating median income is technical and sometimes complicated.
  2. Timing can be crucial in passing the Means Test.
  3. The client must provide very reliable information about past income, and in some cases, a prediction of future income.
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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 (i.e.) 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 should 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 should 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 a Chapter 13 Reorganization or a Chapter 7 Bankruptcy?


You must ultimately decide for yourself whether filing bankruptcy is the proper action to take, and if so, which Chapter is better for you.

Some of the factors to consider are as follows:
  1. If you are not making more money than you need for your current living expenses, Chapter 13 is not a realistic option.
  2. 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.
  3. 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 $30,000.00 in equity and don't want to have it sold, Chapter 7 is not right for you.
  4. If you are trying to ward off a repossession or a foreclosure, Chapter 13 may be the only way to do so.
  5. Fees are generally higher to file a Chapter 13; the standard fee is $3,250.00. The standard fees for the normal Chapter 7 are $1,000.00-$1,500.00. However, we usually require the entire fee to 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 a more complete discussion of the fees, see below.
  6. 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:
    1. 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.
    2. On some secured debts, if the interest rate is high, you can reduce the interest rate.
    3. 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 and quit making payments on it.
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An Overview of Chapter 12 and Chapter 11


CHAPTER 12

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 reamortized, 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 a consultation with David Gray.

CHAPTER 11

Chapter 11 is generally referred to as business reorganization, although individuals whose debts are higher than the maximums allowed in Chapter 13 can file Chapter 11. Chapter 11 proceedings allow the restructuring of indebtedness by establishing a payment plan for the repayment of debts. There are no debt limits or time limits. 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 and time consuming, and involve more detail in preparing repayment plans to the creditors. For example, the initial court filing fee for a Chapter 11 is about 4 times that of Chapter 7 or Chapter 13. Creditors can have a much more active voice in Chapter 11s during the initial 180- day period 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 a consultation with David Gray.
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How Are David Gray and Sara Davis Different from Other Bankruptcy Attorneys?


Unlike some other bankruptcy law firms, each and every client will have a free consultation with an attorney, not a secretary or "paralegal." We believe that filing a bankruptcy is a very serious decision and that no one should take this step without first learning all of their options, and that a licensed attorney that specializes in bankruptcy is the best person to inform you fully of each and every option.

In addition to the consultation, we believe that an attorney should be with you when you are signing your bankruptcy petition and schedules under oath and penalty of perjury. This is to make sure that you understand all of the questions that you are answering and all of your responses, since the penalties for not disclosing information are so serious.

We provide a number of other services that other bankruptcy attorneys do not provide routinely, or for which others charge extra. You may find other attorneys that charge lower fees, but we do not believe that you will find any who offer the level of service, expertise, and individual attention provided by David Gray and Sara Davis.
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What Do You Charge and When Must It Be Paid?


Our base attorney fee for the normal "consumer" Chapter 7 bankruptcy is between $1000.00 and $1500.00. The exact amount 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.

DAVID GRAY IS THE CHAPTER 13 TRUSTEE FOR MANY OF THE COUNTIES IN WESTERN NORTH CAROLINA. HE AND SARA DAVIS ADMINISTER THE CHAPTER 13 PLANS IN THIS AREA, SO THEY CANNOT FILE A CHAPTER 13 CASE FOR YOU.

However, in a Chapter 13 consumer case, our court has approved a standard fee of $3,250.00. 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.

In Chapter 13 cases, the filing fees and any upfront fees are paid before the petition is filed.

In all cases there is a filing fee which is charged by the court. The filing fee in Chapter 7 is $299.00; in Chapter 13, $274.00. You must also pay for your pre-petition credit counseling, which costs $34 - $40 (depending on whether you get the counseling over the internet or in person with Consumer Credit Counseling Services) and your post-petition personal financial management instructional course, which costs $8.00 per person or $40 for individuals or a couple (depending on whether you get this course over the internet or in person with CCCS).
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When Do I Get Relief From My Creditors?


When you file a bankruptcy, the court sends out an order to all the creditors listed in your petition forbidding them from taking any action to collect the debt. They are not to call you at home or at work; however, up to the time that you file, creditors are free to pursue lawful collection efforts. The filing takes place when the bankruptcy petition is received by the Bankruptcy Clerk. The petition is sent to the Bankruptcy Clerk after you come to our office and review and sign the bankruptcy petition and schedules, which we prepare from the information forms that you complete.

If you are concerned about relief between now and filing the bankruptcy, our experience has been that when our clients have informed unsecured creditors that they have retained us to file bankruptcy, the creditors have stopped the harassing telephone calls. However, do not tell creditors that you have retained our services until you have paid us the required retainer. NEVER tell a secured creditor unless you are willing to have collateral repossessed.

Furthermore, do not tell a bank in which you have funds or deposits that you are filing bankruptcy, because the bank may take funds from your account to pay your debt to it.
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How Do I Go About Filing Bankruptcy?


If you know at this point that you want to file, contact our office to request a set of forms to fill out. We need you to provide all the information requested on these forms, so that we can prepare the bankruptcy petition and schedules that are filed with the Bankruptcy Court. Every blank should be filled in. If the answer is no or none, put "no" or "none." If the question is not applicable to you, put "N/A."

We recommend that you obtain a copy of your credit report from Equifax. You must understand that your credit report information is NOT a substitute for your own records and your memory, because there are many creditors who do not report to the credit bureaus and the bureau reports routinely contain errors. The credit report is good back-up to your own memory and records. Equifax has a service on-line at www.equifax.com or you can call them at 1-800-685-1111.

If you have questions about how to complete the forms, contact the office and we will assist you. If you need to consult further before deciding what to do, contact our office to set up an appointment. One factor we look at in determining the attorney fee is how you have filled out the forms. If we have to spend time gathering information you should have provided, the fee will be higher.

After you have returned the completed forms and paid the nonrefundable retainer, we will prepare the documents to be filed with the bankruptcy court. We often find it necessary to contact clients to clarify the information provided. Be sure to give us telephone numbers where we can reach you. When you are ready to pay your balance, or have paid all fees, call the office and ask to set up your signing appointment. At this time, we will request any additional information. Please note that any fees paid on the day of signing must be in cash, certified check or money order. You have not filed a bankruptcy until you have come in for your signing appointment.
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Do I Have To Do Debt Counseling Before I File Bankruptcy
and After I File?


You are not eligible to file a bankruptcy unless you receive an individual or group briefing from an approved nonprofit budget and counseling agency. That briefing must outline your opportunities for available credit counseling and assist you in performing a related budget analysis. It must occur within 180 days prior to your filing bankruptcy. It can take place on the internet or by phone. We refer our clients either to a local credit counseling service or an on-line company that provides the counseling on the internet.

You must also complete an instructional course in personal financial management after you file bankruptcy as a condition of your discharge.
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What Happens After the Bankruptcy Petition Is Filed?


As explained earlier, the filing of the petition serves as an automatic order to all creditors to stop any collection activity. The Bankruptcy Court notifies the creditors that you have filed bankruptcy. In a Chapter 13, the following requirements are imposed on you:
  1. You make the first plan payment within 15 days, of the date the petition was filed.
  2. You must maintain collision insurance on any vehicle less than 7 years old and on which there is a lien.
  3. You may not dispose of any non-exempt property worth more than $2,500 without approval of the trustee and an order of the court.
  4. You may not incur any new debt without approval of the trustee and an order of the court.
A hearing called a "341 creditors meeting" is conducted. It is mandatory that you appear at the hearing in Chapter 13 cases and at the hearing in Chapter 7 cases. We will appear at the hearing with you as your legal counsel. At this hearing the bankruptcy trustee will ask you a few questions under oath about your case, which usually takes less than five minutes. Creditors are also permitted to ask you questions at the hearing. However, in most cases they do not appear. Your case will be set for hearing at the same time as a number of other cases, so you could be at the hearing from one hour to three hours, depending upon when your case is called.

In Chapter 7 cases, unless there is something unusual about your case, you will not have to appear for any other hearings after the 341 creditors meeting. You will be given your discharge approximately 70 days after the hearing.
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What Effect Will Bankruptcy Have on My Credit?


There is no absolute answer to this question. Any blanket statement such as, "If you file bankruptcy, you can't get credit for seven years," is not correct. When you apply for credit, each creditor makes its own decision whether to extend credit or not. The fact that you have filed bankruptcy is obviously a factor that a creditor is going to consider along with other facts such as your income and the value of any security collateral.

Many creditors rely upon credit ratings from credit bureaus in making a decision to extend credit. The Fair Credit Reporting Act in general requires a credit bureau to delete adverse information from your file after seven (7) years. However, bankruptcy information remains on file for ten (10) years after you file the petition.

Some relative statements can be made:
  1. We used to believe that a successfully completed Chapter 13 proceeding has a smaller negative impact on your credit than a Chapter 7, because your creditors receive some payment on their debts. However, we now believe Chapter 7 may have less negative impact. In a Chapter 13, under our local bankruptcy rules, you cannot incur any debt without the approval of the court or the Chapter 13 trustee. Therefore, during the 3-5 years of the Chapter 13 plan, you can do little to re-establish your credit. By contrast, a Chapter 7 is over in 3 to 4 months, and you can begin taking steps to re-establish credit immediately. You cannot get a second discharge on any new debts in a Chapter 7 bankruptcy case filed within 8 years of the first case. Strangely enough, this fact, in combination with the fact that most or all of your debts have been erased, make you a good credit risk in the eyes of some creditors.
  2. In the long run, a bankruptcy may improve your ability to obtain credit. If you are in a situation in which you have accumulated more debts than you will ever be able to pay, then you may never be able to re-establish your credit absent some sort of debt relief. By wiping the slate clean with bankruptcy, you put yourself in the position to eventually re-establish your credit
  3. Our personal opinion is that too many clients are concerned with their ability to incur more debt in the future, when their focus should be on the best way to deal with their existing debts. Our advice is to get your current debts under control before concerning yourself with more credit.
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Can I Be Discriminated Against in Areas Other Than
Credit if I File Bankruptcy?


The federal, state, county, or municipal government may not discriminate against you with respect to the issuance of a license or permit because you have filed bankruptcy. No employer, government or private, can lawfully terminate your employment or discriminate with respect to your employment as a result of filing bankruptcy.

Utility companies (power company, telephone company, etc.) are put in a separate category than other creditors. They cannot discontinue service to you or refuse to provide you service because you file bankruptcy. They can require you to pay a reasonable security deposit for the payment of future service. Pursuant to regulation of the North Carolina Utilities Commission, security deposits may be set at an amount equal to twice the average monthly bill.

Finally, you may not be discriminated against in obtaining a future student loan on the grounds that you have filed a bankruptcy.
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