What is bankruptcy?

Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.

What can bankruptcy do for me?

Bankruptcy may make it possible for you to:

• Eliminate the legal obligation to pay most or all of your debts. This is called a "discharge" of debts. It is designed to give you a fresh financial start.
• Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)
• Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
• Stop debt collection harassment and similar creditor actions to collect a debt.
• Restore or prevent termination of a utility service such as electricity or water.
• Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.

What can bankruptcy not do for me?

Bankruptcy cannot, however, cure every financial problem. Nor is it the right step for every individual. In bankruptcy, it is usually not possible to:

• Eliminate certain rights of "secured" creditors. A "secured" creditor has taken a mortgage or other lien on property as collateral for the loan. Common examples are car loans, home mortgages and furniture purchases. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money if your property is taken. Nevertheless, you generally cannot keep the collateral unless you continue to pay for the value of the collateral.
• Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, certain other debts related to divorce, most student loans, court restitution orders, criminal fines, and some taxes.
• Protect cosigners on your debts. When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan.
• Discharge debts that arise after bankruptcy has been filed.

What different types of bankruptcy cases should I consider?

There are four types of bankruptcy cases provided under the law:

• Chapter 7 is known as "straight" bankruptcy or "liquidation." It requires a debtor to give up property that exceeds certain limits called "exemptions," so the property can be sold to pay creditors.
• Chapter 11, known as "reorganization," is used primarily by businesses and a few individual debtors whose debts are very large.
• Chapter 12 is reserved for family farmers.
• Chapter 13 is called "debt adjustment" or "wage earner's" plan. It requires a debtor to file a plan to pay debts (or parts of debts) from current income.

Most people filing bankruptcy will want to file under either Chapter 7 or Chapter 13. Either type of case may be filed individually or by a married couple filing jointly.

CHAPTER 7 (Straight Bankruptcy)
In a bankruptcy case under Chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a Chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for "exempt" property that the law allows you to keep. In most cases, all of your property will be exempt. But property that is not exempt is sold and the money distributed to your creditors.

If you want to keep property like a home or a car and are behind on the payments on a mortgage or car loan, a Chapter 7 case may not be the right choice for you. That is because a Chapter 7 does not eliminate the right of mortgage holders or car loan creditors ("secured" creditors) to take your property to cover your debt.

CHAPTER 13 (Reorganization/Debt Adjustment/Wage Earner's Plan)
In a Chapter 13 case, you file a "plan" showing how much you will pay off some of your past-due and current debts over three to five years. The most important thing about a Chapter 13 case is that it will allow you to keep valuable property-especially your home and car-which might otherwise be lost, if you can make the payments which bankruptcy law requires to be made to your creditors. If you are behind in your home payment, you can catch up the amount that you are behind but you must continue to make your regular house payment. If you are behind on your car loan, depending on several factors, your car payment might actually be reduced ("cram-down") or stretched out over several more months thereby reducing your payments. Each case requires analysis by an experienced practitioner to determine the best way for you to proceed.

You should consider filing a Chapter 13 case if you:

• own your home and are in danger of losing it because of money problems
• are behind on debt payments but can catch up if given some time
• have valuable property which is not exempt but you can afford to pay creditors from your income over time.

You will need enough income in a Chapter 13 case to pay for your necessary living expenses and to keep up with the required payments to the Chapter 13 Trustee as they come due.

What property can I keep?

In a Chapter 7 case, you can keep all of the property that the law says is "exempt" from the claims of your creditors. In determining whether property is exempt, you must keep a few things in mind. The value of the property is not the amount that you paid for it but what it is worth now. Remember that property generally depreciates over time and this is especially true for cars, furniture and other household items. These items may be worth substantially less than what you paid for them.

You also need only look at your equity in the property. This means that you count your exemptions against the full value minus any money that you owe on mortgages or liens. For example, if you own a house worth $78,000.00 with a $68,000.00 mortgage, you count your exemption against the $10,000.00, which is equity if you sell it. This same principle applies to cars, furniture, any secured debt that you may wish to claim as exempt.

While your exemptions allow you to keep property even in a Chapter 7 case, your exemptions do not make any difference to the right of a mortgage holder or car loan creditor to take the property to cover the debt if you are behind. In a Chapter 13 case, you can keep all of your property if your plan meets the requirements of the United States Bankruptcy Code. In a lot of cases, you will have to pay the mortgages or liens as if you didn't file bankruptcy.

In our district, we use the North Carolina exemptions as follows:

• $10,000.00 per person in real estate used as primary residence
• $1,500.00 in one motor vehicle
• $3,500.00 per person plus $750.00 for each dependent in household goods
• $750.00 in tools of the trade
• Personal injury proceeds and workers comp proceeds or claims
• Life insurance policies
• Pension plans, IRAs, employer sponsored retirement plans
• $3,500.00 per person in any property less what is used under real estate exemption

These exemptions generally cover the vast majority of most consumer cases so that rarely is property sold by the trustee to make payments to creditors.

What will happen to my home and car if I file for bankruptcy?

In most cases, you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt. Even if your property is not fully exempt, you will be able to keep it if you pay its non-exempt value to creditors in a Chapter 13 case.

However, some of your creditors may have a "security interest" in your home, automobile or other personal property. This means that you gave that creditor a mortgage on the home or put other property up as collateral for.