A Comprehensive Guide To Bankruptcy
The purpose of this Overview is to answer the questions asked most frequently by our clients and to provide an overview of the bankruptcy process. The information contained herein will help you decide whether to file bankruptcy or not. In this Overview, we strike a balance between removing all of the complexities of the law without over-simplifying it. Reading and studying this Overview is just the first step in educating yourself. The next step is a consultation with our attorney to discuss your particular situation. This information pertains specifically to our practice in the Eastern District of North Carolina (EDNC), but is generally accurate for the Middle and Western Districts as well.
WHAT IS BANKRUPTCY?
Bankruptcy is a proceeding under federal law whereby you are granted partial or complete relief from the payment of your debts. This initial relief is provided in the form of an “automatic stay” issued immediately upon the filing of the bankruptcy petition which, with a few narrow exceptions, stops all creditor collection activities, such as garnishments, repossessions, foreclosures, civil actions, and harassing telephone calls. Think of the automatic stay as a STOP sign that requires creditors to cease actions, whether in court or out of court, to collect debts against you. If you have been a debtor in a bankruptcy that was dismissed within the last year, a motion to keep this automatic stay from expiring in 30 days from the date you file the bankruptcy may be necessary.
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.” Debts that are not discharged are set out at Pages 14-16.
WHAT ARE THE TYPES OF BANKRUPTCY?
For individual debtors there are four types of bankruptcy proceedings available: Chapter 7, Chapter 11, Chapter 12 and Chapter 13. Chapter 11 can be very expensive and rarely more advantageous to an individual than Chapter 13. Chapter 12 is for family farmers and fisherman. They are not discussed in this Overview. Explanations of Chapter 7 and Chapter 13 are set out below.
WHO CAN FILE BANKRUPTCY?
An individual, a partnership or a corporation may file a Chapter 7 bankruptcy. Only individuals may file a Chapter 13 bankruptcy. The information contained herein is for the individual debtor. If you are married, you can file by yourself or file a joint petition with your spouse.
Chapter 7 is often referred to as “liquidation” or “straight bankruptcy”. In a Chapter 7 proceeding, you are relieved from the responsibility to pay your debts (“discharged”), with certain exceptions. In exchange for having debts eliminated, you subject your property that is not protected or “exempt” to possible liquidation by the Chapter 7 trustee. The property that you exempt is free from the claims of all your pre-bankruptcy creditors. If you have nonexempt assets, the trustee can sell them to pay on your debts. In more than 95% of the cases that we file, all of our client’s property is exempt, so the client loses no property. Such cases are called “no asset” cases because no assets are sold by the trustee. More detailed explanations of the exemptions are set out in this Overview at Pages 10-14. The exceptions to discharge are set out at Pages 14-17.
There is a “means test” imposed upon individuals whose debts are primarily consumer debts. The means test may prevent them from filing Chapter 7, if it reveals that you have the ability to pay a reasonable portion of your debts. The means test is discussed at Pages 19-27.
Chapter 13 is often referred to as a “wage earner plan,” pursuant to which the debtor makes a monthly payment into a chapter 13 plan for thirty-six months (shortest) to sixty months (longest). Determining the amount of the Chapter 13 plan payment is complicated. Some general rules follow:
1. The term (length) of the plan, called the Applicable Commitment Period (“ACP”), can be no greater than sixty (60) months. If the debtor’s income is above median income, then the plan can be no shorter than sixty (60) month, unless all unsecured debts are paid in full in less than sixty (60) months. If the debtor’s income is below median income, then the plan can be no shorter than thirty-six (36) months, unless unsecured debts are paid in full in less than thirty-six (36) months.
2. The amount paid over the term of the plan must be enough to pay certain debts in full. These include the following:
a. Income tax less than three years old.
b. Property tax less than one year old.
c. Business trust fund taxes (withholding taxes and sales taxes), no matter how old.
d. Back child support and alimony.
e. If you are filing to stop a foreclosure, the amount necessary to bring the loan current over the length of the plan. In cases in which you are stopping a foreclosure, the future mortgage payments are added to the plan payment, as well.
f. The payment of all secured debts, such as vehicle loans, that you propose to pay “through the plan.” More details on payment of secured debts in a Chapter 13 case are set out at Pages 9-10.
g. The balance of your attorney’s fees not paid prior to filing.
h. A commission to the chapter 13 trustee (ranges between 5% and 8%) to compensate him for the services his office provides.
3. The amount paid to other creditors (general unsecured creditors) depends upon a complex calculation based on your income for the six months prior to filing the bankruptcy, your expenses (some real and some based on charts set out under the law), any known or virtually certain future changes in your income and expenses, and the amount of non-exempt assets, if any, that you own. [See Page 27, discussion of disposable income.]
4. In many Chapter 13 cases, the unsecured creditors receive no funds through the plan.
With certain exceptions, at the end of the Chapter 13 plan any amounts still owing on your unsecured debts are discharged. The exceptions are set out at Pages 16-17.
A case filed under Chapter 11 of the United States Bankruptcy Code is frequently referred to as a “reorganization” bankruptcy. It is available to individuals, corporations and partnerships.
The person or business in Chapter 11 usually remains in possession of their assets, and continues to operate their business. The person or business in Chapter 11 is a fiduciary for the creditors, and is expected to propose a plan to the court, which would allow the creditors to be paid as much or more than the creditors would receive in a liquidation.
Once a Chapter 11 plan is submitted to the bankruptcy court for approval, creditors are given a chance to vote on the approval of the plan. If a creditor objects to their treatment under a plan, the debtor can attempt to “cram down” a plan on the creditor and get the plan confirmed despite creditor opposition. Once the plan is accepted by the court, the debtor and creditors are bound to the terms of repayment.
WHAT HAPPENS TO MY PROPERTY 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 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 answer the first question. The section of this Overview on exemptions at Pages 10-14 answers the second question.
WHAT HAPPENS IF A CREDITOR HAS COLLATERAL SECURING THE PAYMENT OF DEBT?
A consensual secured debt is simply a debt in which the creditor has a lien on some item of property to “secure” your payment of a loan pursuant to a contract. The most common types of consensual secured debts are a mortgage on real estate and a car loan. Outside bankruptcy, a secured creditor has two avenues of recovering its debt. First, it can foreclose and repossess and sell the collateral, if the loan is in default. Secondly, it can recover from you on your personal liability through a civil action. 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 these basic principles leave you with the options set out below.
CHAPTER 7 OPTIONS FOR CONSENSUAL 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 loan contract. We call this the “be-current-and-stay-current” right to retention.
Keeping your real property even though you are slightly behind on the payments is still very possible. However, you will be on your own in negotiating with the mortgage company to avoid a foreclosure. We prefer that our clients be current with their mortgage payments when they file, unless they intend to let the property go.
If your vehicle loan contains a “bankruptcy default clause,” the law provides that the vehicle lender can repossess the vehicle, even though you are current with your payments, unless you sign a reaffirmation agreement. Does this mean that you should reaffirm the debt? Janvier Law Firm, PLLC, thinks this:
a. Lenders prefer collecting monthly payments over repossessing vehicles so it is not likely that a creditor will in fact repossess a vehicle when you are current with your payments. However, Janvier Law Firm, PLLC, can’t predict with 100% accuracy what a particular lender will do. To be absolutely sure you can keep the vehicle that secures a debt secured by the vehicle, you must sign a reaffirmation agreement.
b. The reason that you might not want to reaffirm a debt is that the reaffirmation reinstates your personal liability on the debt. If you later default on the debt, you will be liable on the debt, despite the fact you filed bankruptcy.
c. The reasons you might want to reaffirm the debt is you avoid the danger of repossession arising out of the bankruptcy default clause, and the creditor is more likely to report your future payments with the credit reporting agencies.
2. 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 redemption 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 FMCC $15,000.00 secured by a vehicle which has a retail value of 10,000, you can pay FMCC $10,000 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 high, in some cases redemption loans can save a debtor money.
4. Your final option is to give the property back to the creditor, i.e., “surrender” the 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.
TREATMENT OF INVOLUNTARY SECURED DEBTS IN A CHAPTER 7
Sometimes a creditor obtains a lien on property without the debtor’s consent by operation of statutory law. The most common examples are federal and state tax liens, judgment liens on real estate, and mechanic’s and materialmen’s liens. These liens pass through the Chapter 7 bankruptcy unaffected, with one exception. If a creditor has sued a debtor and obtained a judgment against the debtor, that judgment attaches as a lien against any real estate owned by the debtor in the county in which the judgment is filed. If that real estate is claimed as exempt by the debtor (See Page 11), the lien can be removed from the property to the extent that it prevents the debtor from retaining the benefit of the exemption. This right to avoid judgment liens applies in both Chapter 7 and Chapter 13.
TREATMENT OF INVOLUNTARY SECURED DEBTS IN A CHAPTER 13
The treatment of involuntary secured debts in Chapter 13 differs from the treatment of them in Chapter 7. As explained above, except for avoidable judgment liens, these debts pass through Chapter 7 unaffected. A Chapter 13 debtor has the same right to avoid judgment liens that impair his exempt interest in property, but the treatment of other involuntary secured debts differ as set out below.
A Chapter 13 plan must provide for the payment of these secured debts over the term of the Chapter 13 with interest or for surrender of the property to the creditor. The following example involving a federal tax lien best explains the Chapter 13 treatment of these secured debts and how that treatment differs to the treatment in a Chapter 7.
The debtor has $10,000.00 equity in a residence and $5,000.00 of other assets. She owes the IRS $35,000.00 on income taxes for 2013. The IRS assessed the tax liability on December 1, 2014, and filed a tax lien on December 1, 2015. The IRS lien is a “blanket lien”, which means that it is a lien upon all the debtor’s assets. If the debtor chooses to file Chapter 7 bankruptcy, the lien will survive the bankruptcy and remain attached to the debtor’s assets, but the debtor would not be required to make any payments on the tax debts. The IRS retains the right to sell the debtor’s residence, but instances, in which the IRS actually sells someone’s residence, is extremely rare. If the debtor attempts to sell her residence or refinance the loan on it before the tax lien expires, she will not be able to do so without paying the IRS. Tax liens expire ten years after the tax lien has been assessed, so the lien will expire around December 1, 2025.
If a debtor opts instead to file a Chapter 13, she must pay the value of the tax lien through the plan at the IRS’s interest rate. The value of the tax lien is equal to the value of the debtor’s equity in his or her assets. Since that value is $15,000.00, the debtor must pay $15,000.00 at 4.0% interest (the current IRS interest rate) over sixty months. The payment will be $275.33 per month for sixty months.
The determination of whether a Chapter 7 or Chapter 13 is the better option depends on many factors other than the treatment of the tax lien, but looking at that issue alone, the determination of which chapter is better depends on these factors:
1. The debtor expects to live in the residence for many more years, and sees no need to refinance the loan. [Chapter 7 – because the debtor can “outlive” the tax lien, which will expire in the year 2025.]
2. The debtor expects to sell the residence within five years and based on the increasing value of the homes in the neighborhood and paying down the mortgage, she expects to have $50,000.00 in equity on the residence at that time. [Chapter 13 – because the debtor will have to pay the tax debt in full which will have grown to $42,000.00 by that time. The payments to extinguish the tax lien in Chapter 13 would total only $16,519.80.]
This is the type of in depth analysis that Janvier Law Firm, PLLC, routinely engages to insure that our clients are properly informed of their options to make decisions that are best for them. There is no firm superior to Janvier Law Firm, PLLC, in helping clients deal with tax debt.
CHAPTER 13 TREATMENT OF CONSENSUAL SECURED DEBTS
In Chapter 13 cases secured claims are handled in one of three basic ways. In the first, which we call the “cure and maintain” method, your past due payments on secured debts are paid (“cured”) from your monthly bankruptcy plan payments (“through the plan”), and future payments (payments that come due after filing bankruptcy) are kept current (“maintained”) at the contracted payment amount. If the loan is secured by a first mortgage on your principle residence upon which your payments are not up to date, the future contractual payments are made through the bankruptcy payments. Otherwise, you may make the future payments directly to the creditor. When the bankruptcy plan has terminated, 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 when the collateral is worth less than the amount of the debt, when the number of payments left on a debt is less than the length of the plan, or when the contractual interest rate is high. The following example illustrates the “strip-down/stretch-out/cram-down” method.
You have a car loan with 30 payments of $416.39 remaining, an interest rate is 12.25% and a pay-off of $12,000.00. The car has high mileage and is worth only $10,000.00 at retail. You can strip-down the creditor claim to the value of its collateral ($10,000.00), stretch-out the payments to 60 months and pay the present value of the claim at a reduced interest rate ( “cram-down”) (generally prime rate plus 2.0%, which is currently 6.25%). Using this method, the monthly car payments through the plan will be $193.48.
The ability to “refinance” your secured loans through this method lets you reduce the monthly payments and sometimes is the only way to have enough cash flow to keep all of your property.
There are 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 within 910 days (approximately 2.5 years) prior to filing the bankruptcy, and the loan relates to the original purchase of the vehicle, then the debt cannot be stripped down to the value of the vehicle. You can still stretch out the term of payments and reduce the interest rate, but you can’t reduce the amount of the debt.
Properly treating these “910-vehicle claims” is a very important aspect of a 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; and
3. Whether you purchased it for you own personal vehicle or for someone else’s use.
You should bring a copy of your vehicle purchase agreement and loan paperwork when you come to consult with us.
The final method of dealing with a secured debt is to agree to surrender the collateral to the creditor.
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 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. In most cases, your exemptions will be those provided under the provisions of the Bankruptcy Code. For debtors who have been domiciled in North Carolina for 2+ years the exemptions PER PERSON are as follows:
You may exempt up to $35,000.00 total equity in property you or a dependent are using as 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 $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 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. The debtor or his dependent must still be using the property as a residence on the day the petition is filed. Property that used to be your residence does not qualify for the exemption. You must still be using it as your residence when you file. This requirement can make the timing in the filing of a bankruptcy crucial. “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. Wild Card
A wildcard exemption is available to exempt any property. The amount of the wildcard exemption is affected 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 a $32,000.00 exemption in your residence, you have a $3,000.00 wildcard exemption. This exemption is usually used to claim as exempt equity in a car above $3,500.00, tax refunds not yet received, and bank accounts that are not otherwise exempt.
6. Life Insurance
Cash surrender value of life insurance policies owned by the debtor insuring his or her life in which his or her spouse and/or children are named beneficiaries are totally exempt. This exemption is very technical. The policy must insure the debtor, not someone else. The beneficiary must be either the debtor’s spouse or children. The children do not have to be minors. If a debtor has substantial cash surrender value in an insurance policy and the beneficiary is not a spouse or child, changing the beneficiary is proper bankruptcy planning.
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. Workman’s Compensation and Compensation for Injuries
Compensation for personal injuries or the death of a person upon whom the debtor was dependent for support.
If you have received or are about to receive such compensation, you will need to discuss with Janvier Law Firm, PLLC, several issues, including the need to segregate the funds into a separate account and whether you are due any legal bills or medical bills in connection with the compensation.
9. Compensation from Private Disability Policies
You can exempt compensation from private disability policies or annuities.
10. College Savings Accounts
The protection of §529 College Savings Accounts are provided by both the Bankruptcy Code and North Carolina law in a manner that overlaps. Under the Bankruptcy Code, funds placed into an account more than 720 days prior to filing the bankruptcy are protected, if the beneficiary of the account is the debtor’s child, stepchild, grandchild or step grandchild. The first $6,425.00 placed into an account for such beneficiaries more than 365 days but, less than 720 days, prior to filing the bankruptcy, is also protected.
Under North Carolina law, if the beneficiary of the 529 account is the debtor’s child, $25,000.00 is exempt, so long as the funds will actually be used for the child’s college expenses, and provided that funds placed in the account within twelve (12) months of the filing are exempt only if the contributions were made in the ordinary course of the debtor’s financial affairs and were consistent with his or her previous pattern of contributions.
Translation: If there have been no contributions within 720 days (approximately 2 years), all of the funds in the account are protected. If there is $25,000.00 or less in the account, no contributions have been made within the last year, and the beneficiary is your child, the funds are protected. All other situations require further analysis by Janvier Law Firm, PLLC.
11. Retirement Benefits
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 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.
12. Government Benefits
Veterans Administration, Social Security and AFDC benefits are exempt. If you have received or are about to receive a large award of back benefits from Social Security, the best action is to segregate the funds from other funds, so that they can be traced.
13. Wages and Salary
Your earnings for personal services rendered within 60 days of filing the bankruptcy which are necessary for the support of you and your family are exempt. Such earnings remain exempt even though, they have been deposited in a bank account.
14. Alimony and Child Support
Alimony, support, separate maintenance, and child support payments are exempt to the extent they are reasonably necessary for the support of the debtor or a dependent of the debtor.
15. Tenants By The Entirety
Any real estate (not just a residence) owned by a husband and wife jointly,
is exempt from any creditor who has a claim against just the husband or the wife. It is not exempt from 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 are exempt.
If your property exceeds the amount of exemptions, and you are not willing to risk losing it, your option is Chapter 13 bankruptcy.
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 the debt). Those debts are as follows:
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. Certain tax debts are dischargeable. [We will analyze your particular situation in our face-to-face consultation.]
4. 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.)
5. Consumer debt for more than $675.00 for luxury goods or services to a single creditor, incurred within 90 days of filing the petition.
6. Cash advances of more than $950.00 under an open-end credit plan made within 60 days of filing bankruptcy.
7. Alimony and child support, and marital debts arising out of a separation agreement or court order.
8. Damages for willful and malicious injury.
9. Certain governmental penalties and fines.
10. Educational loans, except in cases of prolonged and severe hardship. However, undue hardship is a very difficult standard to meet.
11. Any debt for death or personal injury caused by the unlawful operation of a motor vehicle, vessel or aircraft while intoxicated.
12. Loans from retirement accounts and federal thrift savings accounts.
13. 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.
14. A debt for fraud or defalcation (dishonesty) while acting in a fiduciary (position of trust) capacity, and debts incurred through embezzlement or larceny.
1. Any debt not listed in the schedule of creditors. Therefore, it is
important to list all your creditors.
2. Withholding and sales 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.)
6. Consumer debt for more than $675.00 for luxury goods or services to a single creditor, incurred within ninety (90) days of filing the petition.
7. Cash advances of more than $950.00 under an open-end credit plan made within 60 days of filing bankruptcy.
8. A debt for fraud or defalcation (dishonesty) while acting in a fiduciary (position of trust) capacity, and debts incurred through embezzlement or larceny.
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. Restitution or criminal fine included in a sentence upon conviction of a crime.
12. Secured debts paid under the “cure and maintain” method. (See Page 9).
13. Restitution or damages awarded in a civil action against you as a result of willful or malicious injury that caused personal injury to an individual or the death of an individual.
IS IT POSSIBLE TO BE DENIED A DISCHARGE OF ALL MY DEBTS?
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 filing the current bankruptcy.
2. You have been granted a discharge in a prior Chapter 13 bankruptcy filed less than six (6) years prior to filing 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:
a. make a false oath, claim or account (i.e., lie about your property, debts, or financial affairs);
b. give, offer, receive or attempt to obtain money, property or advantage, or a promise thereof, as a result of taking action or agreeing not to take certain action in connection with your case; or
c. 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 proceeding 5 years.
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 before the current bankruptcy.
2. You have been granted a discharge in a prior Chapter 13 filed less than 2 years before 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 preceding 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 CO-SIGNED 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, 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 me 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.
WHAT IS THE MEANS TEST?
Creditors complained for years that people choose to file chapter 7 bankruptcy even though they have the “means” to pay some reasonable portion of their debt. In 1984, their lobbying efforts caused a provision to be added to law allowing a court to dismiss a case, if it determines that the debtor’s ability to pay his debts, along with other factors, demonstrates a “substantial abuse” of the bankruptcy law. This vague provision was unevenly applied throughout the country, much to the displeasure of creditors. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was enacted with an elaborate means test, designed to make it more difficult for debtors with substantial income to obtain a discharge under chapter 7. A comprehensive explanation of the means test is too complicated to cover in this Overview. The basics are set out below.
Do not be alarmed is you don’t understand the rules or if some of them don’t make common sense. Most importantly, do not let the means test issue prevent you from seeking debt relief if you truly need it. You wouldn’t turn your back on an important medical procedure because you don’t understand the science or medicine. You rely upon the medical professionals. If you need debt relief, rely upon a certified bankruptcy specialist, like those here at Janvier Law Firm, PLLC. Some clients want to read and learn as much about the law and the process as possible. Others, not so much. The details set out below are for those debtors who want more information.
Primarily Consumer Debts:
The means test does not apply unless the debtor’s debt is primarily consumer debts. 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. Some student loans are not consumer debts. In determining whether a particular debtor’s debts are “primarily consumer debts”, the court will look at the totality of your circumstances, such as total consumer debts compared to non-consumer debts, and the financial circumstances and events that led to the filing of the bankruptcy.
Income Requirements and Calculations:
The means test does not apply to an individual or married couple unless 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 sizes from 1 to 5. Add $8,400.00 for each person in excess of five. The amounts are updated every six months. The amounts below are in effect from May 1, 2018 to October 31, 2018.
The determination of the CMI is not calculated from your current income, but rather 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 CMI. The rules on calculating CMI are complicated and are not covered in this basic overview. When you consult with us, it is mandatory that you provide us with accurate information and documentation concerning your income for the prior six months, as well as a prediction of future income. For some clients, the calculation of CMI is the most important and complicated aspect of their bankruptcy.
1. If your CMI exceeds the median income, you can pass the means test by establishing that when your allowable expenses are subtracted from your CMI, you have insufficient funds upon which to pay a significant amount on your debts. Some of the expenses are your actual expenses. Others are a set amount borrowed from IRS guidelines used in tax installment plans. [Don’t let the use of IRS guidelines confuse you. They apply in all cases, whether the debtor owes taxes or not.] Whether you spend more or less in that category, you get the set amount. The specific rules on determining these expenses are quite complicated and are not covered in this basic overview.
2. Even if the deduction of the expenses set out at paragraph 3 are not enough to set you 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.
Below are categories of expenses in which the amounts you are allowed to deduct are set by certain IRS standards as follows:
Food, Clothing, Etc. Expense for food, clothing, housekeeping supplies, personal care products and services are based on household size as follows:
For each person over 6, add $357.00.
Out-of-pocket health care expenses:$52.00 for each person under 65; and $114.00 for each person 65 or older. These are minimum allowances. You can claim more expenses but you must be able to document the expenses.
This expense does not include health insurance. It is allowed as a separate item.
Housing: The allowance for housing is the greater of the housing allowance under the IRS standards for the household size or the mortgage payments (including taxes, insurances, homeowner association dues, and second mortgages). The IRS allowances for specific counties in this area are as follows:
Utilities Housing and Utilities Expenses: The utility expenses are based on household size and vary upon the county in which you live. The expenses for Wake, Johnston, Durham, Franklin and Harnett Counties are as follows:
Transportation Expenses: Allowable Transportation Expenses fall into two categories, operation and ownership.
Operation Expense: Each household is entitled to an operation expense for up to two vehicles. The allowance is $196.00 per vehicle per month, for a maximum of $392.00. If the debtors own only one vehicle, they get the operation expense for only that one vehicle. If they own two or more vehicles, they get the operation expense for only two vehicles.
Ownership Expense: You are also entitled to an ownership allowance for up to two vehicles per household, but only for a vehicle in which you have a secured loan payment or lease payment. If the vehicle is paid for, you are not allowed to take an ownership allowance. The ownership allowance is $497.00 per vehicle and is not capped by the amount of the payment. For example, if your vehicle payment is $300.00 per month, you still get the $497.00 allowance.
For many potential debtors, passing the means test hinges upon having a car ownership allowance. Keep this in mind if you are considering filing bankruptcy. The bankruptcy law prevents Janvier Law Firm, PLLC, from advising you to incur debt in contemplation of filing bankruptcy, and this information must not be considered to be such advice. The North Carolina Code of Professional Responsibility obligates Janvier Law Firm, PLLC, to provide complete and competent advice to our clients. This information is provided to fulfill that obligation.
Other Allowances: The remaining allowances are your actual expenses. There are several other categories of expenses. The most common are set out bellow:
Taxes: CMI starts with your gross pay, so to calculate your ability to pay, the means test allows you to deduct your federal, state, and local taxes. We start with the taxes being withheld from your paychecks, but then adjust that amount for any over-withholding or under-withholding. For example, if you are having $1,000.00 per month withheld from your check but anticipate a tax refund of $2,400.00, the deduction will be $800.00. It is important for you to provide us with the previous two years’ tax returns, so that we can properly calculate this tax deduction.
Insurance: You are entitled to deduct the following insurance:
a. Health insurance, including dental, and vision insurance;
b. Disability insurance;
c. Term life insurance on the debtor and his or her spouse, if it is a joint filing; and
d. Health savings accounts. This amount must be reduced by any amount taken under the other medical deductions set out herein.
Involuntary Payroll Deductions: You may deduct any amounts deducted from your paycheck for which you have no choice, such as retirement contributions, union dues, and uniform costs.
Except for state and federal employees, these expenses are not very common in North Carolina. The mandatory 6% withheld from State employees for the Teachers and State Employees Retirement System is an involuntary deduction and may be deducted. Most retirement deductions are voluntary and not deductible in the chapter 7 means test. The rule is different in chapter 13. See Page 27.
Childcare and Education Expense: You may deduct the amount you pay for childcare, such as babysitting, daycare, nursery, preschool, and after-school care. These expenses are not capped. You may also deduct the monthly educational expenses of your dependents through the age of 18 to attend a private or public, elementary, or secondary school. However, this deduction is capped at $160.42 per month per child.
Continuing Cash Charitable Contributions: You can deduct cash charitable contributions to your church, other religious organizations, and charities. Contributions of property (clothing, furniture, etc.) to Goodwill, Salvation Army, or similar contributions are not deductible on the means test. The courts are skeptical of “Conversions on the road to Bankruptcy Court.” It may be important to establish that your deduction on the means test is consistent with your past practices.
Ongoing Child Support and Alimony: The allowance for child support and alimony is derived from the IRS guidelines which provide for the allowance “if the alimony and child support are court ordered, reasonable in amount, and being paid.” Technically, if the support is being paid pursuant to an agreement that was not incorporated into a court order, the payments do not meet the terms for allowance under the IRS guidelines. However, Janvier Law Firm, PLLC, has not experienced any problems with deducting child support and alimony payments that are not court ordered.
Continuing Contributions for the Care of Members of Household of Members of Immediate Family:
To be deductible, the payments must be:
a. Reasonable and necessary for the care and support of the recipient;
b. The recipient must be elderly, chronically ill, or disabled; or
c. The recipient must be a member of your household or a member of your immediate family.
If you are sending money to your 70-year-old mother, so that she can have enough money to live, the payments are deductible on the means test. If you are sending money to your 30-year old daughter who is a single mom and struggling financially, the payments are not deductible.
Payment of Past-Due Taxes, Child Support or Alimony: If you owe arrearages (past-due) on child support and/or alimony or income taxes on a tax return that was due less than three years prior to filing the bankruptcy, or trust-fund taxes from a business (withholding and sales tax), you may deduct the amount that it will take to pay the taxes over 60 (sixty) months. For example, if you owe $12,000.00 in taxes for 2015 and 2016, and $6,000.00 for 2013, you can deduct $200.00 per month ($12,000.00 ÷ 60 = $200.00). The 2013 taxes are not deductible on the means test.
Ongoing Payments on Secured Debts: For each secured debt, presumptively you are entitled to deduct the total payments due on that debt over the 60 months following the filing of the bankruptcy divided by 60. [For example, if you have 30 payments remaining on a third vehicle in the amount of $400.00, you may deduct $200.00 in the means test ($400.00 x 30 = $12,000.00; $12,000.00 ÷ 60 = $200.00)]. If you do not intend to keep the property, but plan to stop paying and let it go, you are not entitled to the deduction. Additionally, the reasonableness of any secured payment is subject to challenge under the “totality of financial circumstances”, which we will discuss, if it applies to your case.
You are not allowed to “double dip” so if the payment is on your residence or on one of the vehicles for which you have taken a $497.00 ownership allowance, you must deduct the standard allowance for the deduction.
I AM CONFUSED BY ALL THESE NUMBERS. HOW DO I DETERMINE IF I PASS THE MEANS TEST?
The most appropriate answer is to provide Janvier Law Firm, PLLC, with the information, and we will help you make the determination. If you want to try it at home, you subtract the allowable deductions from CMI. If the difference is less than $128.33, you pass the means test, no matter how small your debt. If the amount is greater than $214.17, you fail the means test, no matter how large your debt. If your unsecured non-priority debt is between $30,800.00 and $51,400.00, you pass the means test if you can pay less than 25% of the debt over sixty months. Is it clear now? I didn’t think so. You need to consult with us.
IF I AM MARRIED AND FILE ALONE, WHAT IMPACT DOES MY SPOUSE’S INCOME HAVE ON THE MEANS TEST?
This question is the most complicated of all means test questions. The purpose of the means test if to prevent a debtor who has the ability to pay a reasonable portion of his or her debts, as explained in the previous section from obtaining relief in chapter 7.
The spouse of a debtor has no obligation to pay the debtor’s debts. However, the income of the spouse does impact the ability of the debtor to pay debts. Therefore, unless the spouses are separated, the spouse’s income and separate expenses do play a role in the means test calculations. The Bankruptcy Code provides that the debtor’s CMI includes any amount paid by the spouse on a regular basis for the household expenses of the debtor or the debtor’s dependents. The means test form filed with the court requires you to report your spouse’s average gross income for the six-month means test period, and then subtract from this amount all amounts paid from that income for purposes other than the household expenses of you and your dependents. This will include taxes, retirement deductions, savings, child support, alimony, payment on the spouse’s separate debts, and assistance to family members, other than you and your dependents. This list is not exhaustive. These deductions are called “marital adjustments”.
The major lesson is that it will be very difficult to file a bankruptcy for one spouse without obtaining information from and the cooperation of the other spouse. At Janvier Law Firm, PLLC, we have litigated numerous cases dealing with the complexities of the marital adjustment, and we will apply our knowledge and experience in helping you obtain debt relief.
ARE THERE RESTRICTIONS TO FILING CHAPTER 13?
Chapter 13 is available only to an individual, and that individual can’t have more than $394,725.00 in non-contingent, liquidated unsecured debt or more than $1,184,200.00 in non-contingent, liquidated unsecured debt. An explanation of non-contingent and liquidated debt exceeds the scope of this Overview. Janvier Law Firm, PLLC, has extensive experience in this area of the law. If your eligibility for chapter 13 is an issue, we are able to analyze the facts and the law to provide you with proper guidance.
IF I FILE CHAPTER 13, IS THERE ALSO A MEANS TEST?
If you file chapter 13, a calculation similar to the means test is performed as one factor in determining how much, if any, of your unsecured debt you must pay into the chapter 13 plan. It is called the “disposable income test”. It is the same calculation performed in the chapter 7 means test, with these differences:
1. The six-month average CMI may be increased or decreased for any known or virtually certain changes in your income.
2. Allowable deductions in determining ability to pay may be adjusted due to any known or virtually certain changes.
3. Child support received, which is included in CMI in a chapter 7, is not included in CMI in a chapter 13.
4. Contributions made through payroll deductions for a retirement account are deductible in chapter 13 (not in chapter 7).
5. Payments on retirement loans made through payroll deduction are deductible in chapter 13 (not chapter 7).
WHAT EFFECT WILL BANKRUPTCY HAVE ON MY UTILITY ACCOUNTS AND UTILITY SERVICE?
In most cases, utility accounts and utility services (electricity, water, & telephone) pass through bankruptcy unaffected. From a purely technical standpoint, most every person who files bankruptcy owes a balance on a utility bill. Even if the most recent bill has been paid, the debtor has received service that has not been billed. This is a debt that can be included in and discharged in bankruptcy. Furthermore, the utility company can’t disconnect your service for failure to pay for the pre-petition service. However, the law requires you to put up a deposit with the utility to provide adequate assurance of your payment of future service within twenty (20) days of filing the bankruptcy. Under guidelines set out by the North Carolina Utilities Commission, that amount is usually twice the average monthly bill. Our clients who are current with their electricity bills find that their cash flow deteriorates by including utility bills in their bankruptcy petitions, because the amount of the deposit exceeds the amount needed to pay the next bill. The path of least resistance is not to list the utility company as a creditor in your bankruptcy. This is a rare exception to the requirement to include all of your creditors in your bankruptcy filing.
If your utility services have been terminated, upon filing of the bankruptcy, the utility company must restore your service immediately. However, you must provide the deposit within twenty (20) days, or your service may be disconnected again.
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 that 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 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:
If you are not making more money than you need for your current living expenses, Chapter 13 is generally not a realistic option. It may be an option only if you file a “liquidating” Chapter 13 in which you sell property to pay your debts.
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 three to five years.
If you have an asset worth more than 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 $50,000.00 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 foreclosure, Chapter 13 may be the only way to do so.
Fees are generally higher to file a Chapter 13 (the standard fee is $5,000.00). The standard fees for the normal Chapter 7 is $1,500.00 – $3,500.00. However, we usually require the entire fee to be paid in advance in Chapter 7 cases. In Chapter 13 cases, we usually require only a portion of the fees to be paid prior to the filing of the bankruptcy, with most of the fee paid through your Chapter 13 plan. For a more complete discussion of the fees. See Pages 31-32.
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:
a. 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 (See Page 10), you can keep the vehicle by paying that value rather that the full amount of the debt.
b. On some secured debts, if the interest rate is high, you can reduce the interest rate.
c. 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, quit making payments on it, and discharge it.
d. Certain claims can be discharged in Chapter 13 that can’t be discharged in Chapter 7. For example, certain marital or equitable distribution debts can be discharged in Chapter 13, but not in Chapter 7. William E. Brewer, Jr. of Janvier Law Firm, PLLC, established in a landmark 2008 case that debts arising from the 10% early withdrawal penalty can be discharged in Chapter 13. These penalties survive Chapter 7.
The lesson in all of this is that you must consult with an experienced bankruptcy attorney, not a paralegal, who will fully analyze your situation and help you make the right decision.
HOW IS JANVIER LAW FIRM, PLLC, DIFFERENT FROM OTHER BANKRUPTCY ATTORNEYS?
Unlike some other bankruptcy law firms, Janvier Law Firm, PLLC, gives each and every client a 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 fully inform you of each and all those options. Most, but not all consultations are free.
If there is a fee for a consultation, it will be discussed and agreed upon prior to the appointment.
Consultation fees are usually $300.00 – $500.00 and incurred by clients with complex situations, including ownership of a business, or multiple properties, having a prior bankruptcy dismissed, or being involved in complex or contentious litigation, such as a divorce case. There are several reasons for the consultation fees.
1. Janvier Law Firm, PLLC, is experienced at handling the more difficult cases (we get referrals from other lawyers to handle many of them) and wants to be compensated for the benefit we provide our clients that other lawyers do not provide.
2. Analyzing and devising a strategy to deal with these difficult cases take time, and as the saying goes “time is money.”
3. In some of these complex situations, bankruptcy is not the best solution of the client. If it is not, the client needs to know it and know why. It is not a good business plan for Janvier Law Firm, PLLC, to spend a couple hours analyzing a client’s situation for free and to then tell him or her not to hire us to file bankruptcy.
In addition to the consultation, Janvier Law Firm, PLLC, believes that an attorney should be with you when you are signing your bankruptcy petition and schedules under penalty of perjury. The goal 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 can be so serious.
Janvier Law Firm, PLLC, provides a number of other services that other bankruptcy attorneys do no routinely provide or that 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 Janvier Law Firm, PLLC.
WHAT DO YOU CHARGE AND WHEN MUST FEES BE PAID?
Our presumptive base attorney fee for the normal “consumer” Chapter 7 bankruptcy is $2,400.00. The exact amount depends upon the complexity of the case. For very simple cases, the fee may be as low as $1,400.00. Complex cases can be as expensive as $5,000.00. 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 a $500.00, non-refundable retainer toward your attorney’s fees. We will accept payments in installments, but the full amount must be paid before the bankruptcy petition is filed.
In a Chapter 13 consumer case our court has approved a standard fee of $5,000.00. The filing and credit counseling fees total $335.00. In very complex cases the fee may be higher, and in some very simple cases the fee may be lower. A portion of the fee is paid before filing, and the balance is paid through the Chapter 13 plan. The amount that we charge prior to filing (we call it the “up-front fee”) will vary from case to case. It may be less if special circumstances dictate a smaller upfront fee, and may be more for particularly difficult cases.
In Chapter 13 cases the filing fees and the upfront fees are paid before the petition is filed. As in Chapter 7 cases, we require that the $500.00, non-refundable retainer, be paid before we will process the paperwork necessary to file.
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 to review and sign the bankruptcy petition and schedules, which we prepare from the information you provided on the Bankruptcy Forms that you complete and the documentation you have provided to us.
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 $500.00 nonrefundable 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 on deposit, because the bank may take funds from your account to pay your debt to it.
HOW DO I GO ABOUT FILING BANKRUPTCY?
If you want to get a jump start on filing, first you consult with one of our attorneys and complete the Bankruptcy Forms. We can provide you a hard copy, email them to you, or you can download a copy from the website. (link is Bankruptcy Forms). We need you to provide all the information requested on these Bankruptcy Forms, so that we can prepare the bankruptcy petition and schedules that are filed with the Bankruptcy Court. Every blank NEEDS to be filled in. If the answer is no or none put “no” or “none” or if the question is not applicable to you put “N/A”.
We recommend that you obtain a copy of your credit report from Equifax. Experian, or TransUnion or, with your cooperation, we will obtain one for you. 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 a good back-up to your own memory and records. Equifax has a service on-line at www.annualcreditreport.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 a member of our staff 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 our paralegals have to spend time gathering information you should have provided, the fee will be higher.
After you have returned the completed Bankruptcy Forms and paid the non-refundable retainer, our paralegal 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 that we have current telephone numbers and/or current contact information so that we are able to reach you. When you are ready to pay your balance, or have paid all fees, call the office and ask to speak to your assigned paralegal 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 certified check or money order. You have not filed a bankruptcy until you have come in for your signing appointment. It is your responsibility to call us to set up that appointment.
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 non-profit 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 to a local credit counseling service that provides the counseling on the internet at a cost of $25.00 per case. They bill us for the services and you reimburse us. If you do not have access to the internet, we will provide access to you at our office.
You must also complete an instructional course in personal financial management after you file bankruptcy as a condition of your discharge. In Chapter 13 cases, this course is provided by the Chapter 13 trustee as part of his services. In Chapter 7 cases, the course is done online at a cost of $12.00.
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 on the first day of the month after the petition is filed and all subsequent payments required by your plan.
2. You must maintain collision insurance on any vehicle less than 7 years old or on which there is a lien.
3. You may not dispose of any non-exempt property worth more than $7,500.00 without approval of the trustee and an order of the court.
4. You may not purchase additional property or incur additional debt in excess of $7,500.00 without approval from the trustee and an order of the court.
A hearing called a “341 creditors meeting” is conducted between three to five weeks after we file the petition. For residents of Wake, Johnston, Harnett, Franklin, Granville and Vance counties the hearing is held at 300 Fayetteville Street, Raleigh, NC 27602. In Chapter 13 cases, the debtor education class is conducted in the morning and the 341 creditors meeting is in the afternoon. It is mandatory that you appear at both the debtor education class and 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 40 or 70 other cases, so you could be at the hearing from one hour to eight hours, depending upon when your case is called so you need to plan to take the whole day off from work.
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.
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 as 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 when deciding whether 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, chapter 7 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 in excess of $7,500.00 without the approval of the court. 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 reestablish 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 makes 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. We believe 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. If bankruptcy is the only way or the best way to get control of them, you should not reject it on some unrealistic view of the difference in your credit score based on whether you file bankruptcy or not.
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.
You may not be discriminated against in obtaining a future student loan on the grounds that you have filed a bankruptcy.
If you have lost your driver’s license due to having an unpaid debt or judgment imposed against you for a car accident in which you were uninsured, your license must be restored immediately upon filing bankruptcy.
CAN OR SHOULD I PAY OFF DEBTS PRIOR TO FILING BANKRUPTCY?
Upon learning that all debts must be listed on the bankruptcy petition, some clients ask, “Can I pay off a debt?” The reason for doing so is obvious – if the debt is paid off, there is no debt to list. If you have a Capital One card with a zero balance, Capital One is not a creditor for bankruptcy purposes. A creditor is someone or some entity to who you owe money. In deciding whether it is wise to pay off a debt, you should be aware of the following:
1. As explained in the previous section, just because a bank or credit provider is not listed does not mean that it will not become aware of your bankruptcy. Terminating your credit privileges will remain a possibility.
2. The amount you pay to eliminate the debt will likely not be worth the benefit of access to the future credit. Think of it as a credit application fee. Would you pay $550.00 to have access to a $3,000.00 credit card? That is what you are doing if you pay off a $550.00 balance on a card with a $3,000.00 credit limit.
3. Payments of more than $600.00 to an unsecured creditor within 90 days of filing this bankruptcy are considered “preferential payments.” The chapter 7 trustee has the right to recover preferential payments from the creditor.
MAY OR SHOULD I LEAVE SOME OF MY DEBTS OFF MY BANKRUPTCY PETITION?
You should not leave any debts off your petition for three reasons. First, when you file a petition, you certify under penalty of perjury that you have provided accurate information, including the listing of your debts. Secondly, if you are omitting a creditor under the belief that you can still have access to the credit, that belief is probably wrong. Most banks and credit providers monitor bankruptcy filings on a routine basis, and through monitoring, will discover that you have filed, and pull your credit. Finally, leaving off a creditor to have access to future credit is usually a bad bargain. For example, suppose you owe Capital One $2,000.00 on a card with 18% interest and a $3,000.00 credit limit, with a minimum payment of $50.00. With interest you will pay $3,000.00 to pay off the $2,000.00 debt. What do you get in return for $3,000.00? Access to $1,000.00. That’s a bad bargain.
Some clients have medical bills to their current medical providers and are afraid that they will be cut off from necessary medical treatment if they list the medical debt. The experience of Janvier Law Firm, PLLC, over many years is that the fears are unfounded. If you have such concerns, we will discuss that with you at the consultation.
Leaving a debt off your bankruptcy should not be confused with the right and necessity to continue to pay certain debts that you list on your bankruptcy schedules. If you have a car loan and want to keep your car, you list the car loan on the petition, but you keep making the payment. Some debtors incorrectly describe this as, “I didn’t want to include my car loan in the bankruptcy.” The correct description is that the car loan was included, but that the debtor kept the payments current to avoid the repossessing of the car. [See Pages 5-6 and 9-10].
CAN I TRANSFER OR GIVE AWAY PROPERTY PRIOR TO FILING BANKRUPTCY?
If only it were that easy to protect your assets from your creditors. Obviously, you can’t just give property away or “sell” it for substantially less than it is worth, and then file bankruptcy. The specific rules are as follows:
1. If within two (2) years prior to filing bankruptcy you give property away or sell it for less than it’s reasonable equivalent value, the trustee can sue the recipient to either get the property back or get fair value for the property. If you were insolvent (your debts exceeded your assets) when you made the transfer, the trustee retains the right to recover from the recipient even through you had no intent to hinder, delay or defraud your creditors.
2. If within four (4) years of the filing of a bankruptcy, you transfer property with an actual intent to hinder, delay or defraud your creditors, the trustee may recover the property or its value from the recipient.
3. Charitable and religious contributions are not subject to these rules if the contributions are less than 15% of your gross income for the year.
4. If you make a transfer with the intent to hinder, delay or defraud a creditor within one year of filing a chapter 7, you may be denied a discharge of your debts.
CAN I PAY DEBTS TO FAMILY MEMBERS AND FRIENDS?
The right of a trustee to recover preferential payments mentioned at Page 37 is of greatest concern when the payment is to a friend or family member. It is not uncommon for people in financial stress to borrow from friends and family members and pay them back when they are able. Disclosing the amounts and dates of these payments to Janvier Law Firm, PLLC, is important, so that we can inform you of the possibility of a chapter 7 trustee seeking to recover the payments from the recipient. In general, total payments in excess of $600.00 to a family member within the year or to a friend within 90 days prior to filing bankruptcy are preferential. If your debts are not primarily consumer debts, the total payments must be in excess of $6,425.00. If you have made preferential payments to friends or family, we must discuss them to implement a strategy to eliminate or reduce the negative impact of your bankruptcy upon them.
DOES JANVIER LAW FIRM, PLLC, PROVIDE LEGAL SERVICES OTHER THAN BANKRUPTCY?
Janvier Law Firm, PLLC, primarily files bankruptcies for individuals and businesses, but provide other legal services to financially burdened clients for whom bankruptcy is not the best option. Those services include:
1. Negotiating settlements of debts, but only if bankruptcy is not a viable or preferable option.
2. Negotiating “work-outs” for business clients.
Counseling clients on the proper actions they can take to shelter assets or income from creditors outside bankruptcy.