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What you need to know about Chapter 7 Bankruptcy

If you’re considering filing Chapter 7 bankruptcy, here are a few things you need to know. Filing for relief under the Bankruptcy Code, including filing a Chapter 7 bankruptcy, can pose a number of advantages to individuals and businesses in financial difficulties. Two of the largest advantages are the discharge and the imposition of the “automatic stay” that prevents creditors from contacting or collecting against you. Although you may benefit from the “automatic stay” or one of the many other advantages you receive after filing for relief under the Bankruptcy Code, there are some disadvantages that may apply to your situation and of which your attorney will want to discuss with you first.

While no amount of information can replace a consultation with a bankruptcy attorney who can review your individual situation and make recommendations to you on the best way to navigate your financial difficulties, below are some important things to know about Chapter 7 bankruptcy before meeting with your attorney:

  1. Chapter 7 bankruptcy is also known as “liquidation” bankruptcy. That means the Court can discharge, or cancel your debts but the Trustee can also sell some of your property to repay creditors. This is also known as “straight” bankruptcy.
  2. Not all of your property can be sold by a Trustee in a Chapter 7 liquidation. Some property is “exempt”, meaning not accessible by the Trustee. Exempt assets are governed by state law, and your individual facts and circumstances may vary, but for most people they are able to exempt some (if not all) equity in their home, their cars, their bank accounts, their household furnishings, and their retirement accounts.
  3. Anyone who has not received a bankruptcy discharge in the past six to eight years (the time is dependent on which type of bankruptcy was filed) and is filing in good faith can file for Chapter 7 bankruptcy as well as anyone who does not qualify for Chapter 13.
  4. You will be asked to disclose all of the property you own; current income and monthly expenses; certain financial transactions that happened in the past few years; and all debts. You will also be required to claim your “exempt” property.
  5. Filing a Chapter 7 may impose certain restrictions on your assets, meaning you are not authorized to sell, give away, or otherwise dispose of any property that you own prior to filing Chapter 7 without Court permission, or until the Trustee can review your file and determine that your assets are exempt.
  6. The ultimate goal of a Chapter 7 bankruptcy is to obtain a discharge, which removes your obligation to have to repay debts. Certain debts are not dischargeable, and will survive a bankruptcy filing, including child support or alimony obligations, most tax debts that you’ve incurred, student loans, equitable distribution debts, or any loans that a creditor can show was made fraudulently.
  7. Loans to purchase property by using collateral – known as secured loans – such as a car or house – are treated differently. With a home, if you are current on your home payments when you file and remain current on your payments (in North Carolina), you can continue to keep the home. With a car, if you are current on your payments when you file, the creditor may ask for you to reaffirm the debt (to make it so the bankruptcy does not apply to the car loan). If you aren’t current, the creditor may repossess the property. Creditors can ask to have the automatic stay lifted in order to repossess or foreclose if you failed to stay current with payments.

Be sure to speak to your attorney in depth before filing Chapter 7 since you may qualify to file Chapter 13 instead. Chapter 13 bankruptcy has a separate list of advantages, some of which are the same and some of which are different than a Chapter 7 bankruptcy filing. Your particular facts and circumstances will dictate whether a Chapter 7 or a Chapter 13 would be more advantageous to you. Only your attorney can advise you on the best direction to take.

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What Do Each Of The Bankruptcy Chapter Numbers Mean?

bankruptcy numbers meaningBankruptcy is governed only by federal law. The federal laws of the United States are “codified” within books of various groups, almost like volumes, with each volume receiving a numerical title. For example, Veterans Benefits are addressed in Title 38 of the U.S. Code whereas Title 17 addresses Copyrights. Bankruptcy is found in Title 11 of the U.S. Code. Each title is further divided into Chapters. Under Title 11, the different Chapters refers to the different types of bankruptcy. Here are the types of bankruptcy addressed by each of the chapters within Title 11.

Chapters 1, 3 and 5 of the Bankruptcy Code deals with generic issues within all of Bankruptcy law, like definitions, how Trustee’s are selected, as well as who files claims in the cases and when, to name a few. Chapters 1, 3, and 5 are not Bankruptcy Chapters that someone can elect to file a petition under.

Chapter 7 Bankruptcy deals with basic liquidation of assets for both individuals and businesses. It is the simplest and/or quickest form of bankruptcy. It involves the liquidation of non-exempt assets by a Chapter 7 Trustee, with the goal of obtaining a discharge which acts as a legally binding document absolving the individual from having to pay back any debts that were not repaid from the liquidation of assets. However, there are certain exceptions to these general rules.

Chapter 9 Bankruptcy deals with the resolution of the debts of municipalities. For example, Detroit, MI filed Chapter 9 bankruptcy on July 18, 2013.

Chapter 11 Bankruptcy deals with the financial reorganization of businesses (corporations). It is sometimes used by individuals with substantial debts. Chapter 11 allows a company to continue doing business while adhering to a debt repayment plan (or “Plan of Reorganization”) agreed upon by the bankruptcy court. Most often this debt repayment plan involves a repayment of some, but not all, of the indebtedness owed by the company over a period of a few years, based upon the company’s ability to pay. Each Chapter 11 Plan of Reorganization is unique and molded to the needs of the debtor in that case.

Chapter 12 Bankruptcy deals with the rehabilitation of debts for family farmers and fishermen. In such cases, filing a petition stops collection actions by creditors. A trustee is appointed to evaluate and oversee the case, collect payments from the debtor, and disburse payments to creditors.

Chapter 13 Bankruptcy deals with the rehabilitation of debts for individuals with a source of regular income. Chapter 13 allows for the development of a repayment plan to repay all or part of the debts owed over a three to five year time period. This repayment plan is overseen by a Chapter 13 Trustee. The ultimate goal of a Chapter 13 is to receive a discharge, which acts as a legally binding document absolving the individual from having to pay back any debts that were not repaid (in whole or in part) in the plan. Chapter 13 has certain advantages over a Chapter 7, in that it can discharge certain debts that are excepted from discharge in a Chapter 7.

Chapter 15 Bankruptcy provides a mechanism for dealing with “cross-border” insolvency or debtors of foreign countries to resolve debts owed to creditors in the U. S.

Chapters 8, 10, and 14 are not published within the U.S. Code, and were reserved for Congress to toy with in the future. For more information on bankruptcy law, visit one of the links provided or contact our team today!

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Differences Between Personal Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

Chapter 7 and chapter 13 bankruptcies each have their own advantages and disadvantages. However the main difference between chapter 7 bankruptcy and chapter 13 bankruptcy for an individual or a couple is usually about the retention of property. The most common question asked is, “Will I get to keep my house” although some wish to know whether they keep their vehicle or other assets. The answer to this depends on a number of factors, including the exemptions a person can claim, the equity that exists in the asset, and whether the bankruptcy petition is filed under chapter 7 or 13.

In Chapter 13 bankruptcy, the debtor files a repayment plan to pay all or a portion of the person’s debts owed over a given period of time. The repayment amount depends upon a number of factors, including the debtor’s income or earnings, how much property is owned, and the amount and type of debts owed. It is understood that, under Chapter 13 bankruptcy law, real property is often retained because the debtor is making the debts current, or paying off the debts, on properties they wish to keep.

Chapter 7 bankruptcy is different in that, although the court discharges most of the debts, the trustee can take any property the debtor had an ownership interest in that is not exempt under State or Federal law, sell it, then distribute the proceeds to creditors. The keyword is exemption and it is important to note that Federal bankruptcy exemptions are not available in North Carolina. The bankruptcy court will abide by the exemptions provided under North Carolina statute. Some of the exemptions that are most relevant to individuals are, as of this writing (5/7/2014):

  • The Homestead exemption which allows the debtor up to $35,000 in equity in real property. This amount can be claimed by each spouse, otherwise known as doubling, up to $70,000 in equity. If the debtor is 65 years or older, the allowable exemption is $60,000 as long as the property is deeded to tenants by entirety or jointly with rights of survivorship and the spouse is deceased.
  • Personal property exemption, such as furnishings, appliances and clothing, not to exceed $5000 for the debtor and $1000 for each dependent up to $4000 so long as the property was not purchased within 90 days of filing bankruptcy. *
  • One automobile in which the debtor’s interest does not exceed $3500.*
  • Cash value of insurance plans as described in Article X, Section 5 of the Constitution of North Carolina, of which a spouse or a dependent is the beneficiary.
  • Retirement benefits, annuities, and trusts as described in section 408 of the Internal Revenue Code.
  • Up to $2000 worth of Implements, tools, professional books, or tools of the trade used for work so long as these were purchased more than 90 days prior to filing bankruptcy.*
  • A “wild card” of any unused portion of the Homestead exemption, with a maximum of $5,000, to be applied to anything the debtor desires. Most individuals use this “wild card” exemption to protect cash, bank accounts, nonexempt equity in automobiles (or a second automobile) or any other item owned by the debtor, so long as it is worth less than the “wild card” amount, in the aggregate.

 

*It is important to note that any property on which you still owe is subject to repossession if payments are not kept current in a Chapter 7 context. Any amounts described above are subject to change.

The list of exemptions for North Carolinians can be found at N.C. Gen. Stat. § 1C-1601 (a). Due to the complexity of Federal bankruptcy and State collection laws and its propensity for constant change, it is highly recommended that you seek the legal advice of a bankruptcy attorney at IMGT. Contact us today to schedule your consultation with one of our attorneys.

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