E is for Exemptions

E is for Exemptions

If I file, am I going to lose my house? My car? Everything?

Every client who contacts us is worried that she will lose EVERYTHING by filing bankruptcy.  This misconception is the biggest reason that people wait too long to contact a bankruptcy attorney, instead trying all sorts of alternatives that never work as well as planned.  One reason to schedule a free consultation with a bankruptcy attorney is to get advice and information regarding what, if any, property might be at risk in a bankruptcy filing.  At the consultation, an attorney will ask some questions about what you own (your assets) and offer you advice regarding what Chapter of Bankruptcy you should file based partially on what items can be protected and what cannot be protected.  “Protections” in bankruptcy are called “exemptions,” in reference to them covering certain assets that are exempted from creditors.  Most of North Carolina’s exemptions are listed in the North Carolina General Statutes, §1c-1601.  The chart below provides some of the most commonly used exemptions in North Carolina:

Exemptions are best analyzed by an attorney.

Exemptions used in bankruptcy cases to protect property from creditors. This is not comprehensive and there are additional exemptions available.

Whether or not you can use North Carolina exemptions depends on where you live now and where you have lived for the past 1,215 days. Different states allow different exemptions and there are also federal exemptions.

In most cases, all property can be protected.  However, there are times when there is not enough exemption to protect the full asset from creditors.  If that is the case, a bankruptcy attorney may suggest a Chapter 13 Bankruptcy, in which unsecured creditors are paid  the same amount as what cannot be protected.  For example, if someone has a vehicle worth $15,000.00 and they owe $8,000.00 on the vehicle, they have $7,000.00 of equity.  Using North Carolina exemptions, $3,500.00 of equity can be protected, leaving $3,500.00 of “exposed equity.”  In that case, an attorney may advise a client to file a Chapter 13, in which the creditors would be paid a total of $3,500.00 over up to five years (approximately $60.00/month).  While it’s not the same as discharging all debt, it is often a much better alternative than trying to pay off all of the creditors in full.

C is for Chapter in the ABCs of Bankruptcy

Most people do not have a thorough understanding of bankruptcy, primarily because most people want to avoid bankruptcy at all costs.  However, sometimes bankruptcy can be a necessity, a strategic move, or a fact of life.  For this reason, it is a good idea to have a basic understanding of the different types of consumer bankruptcy, who can file them, when they should be filed, and what the impact of filing is.  Every client who meets with any sort of debt counselor, especially a bankruptcy attorney, is required to receive certain notices under §362(b) of the bankruptcy code.  Part of these notices is an explanation of Chapter 7, Chapter 11, Chapter 12 and Chapter 13.

The very basic overview is that a Chapter 7 is “liquidation,” Chapter 11 is for “Reorganization” for businesses, individuals and railroads, Chapter 12 is for family farmers and fisherman, and Chapter 13 is for a person to pay back some of their debts.  If you find yourself in need of filing a bankruptcy, the basic overview may not be enough. This post is for you.

First, the very basic differences between the 4 Chapters available to Consumers:

Bankruptcy Chapters Statutory Differences

The differences between who is eligible for what chapter and the cost of filing.

As you can see, most people would probably want to avoid a Chapter 11 based on costs alone.  However, each Chapter of Bankruptcy provides a certain set of benefits:

An attorney can best advise you on the benefits of different bankruptcy Chapters.

Each Chapter of Bankruptcy offers different benefits, but the biggest difference is with the Chapter 7 benefits — often, the benefits offered by other Chapters are not needed in a Chapter 7.

 

So, with all these benefits, what is an attorney analyzing when considering which type of bankruptcy is best?  The answer is: everything about your financial situation, including your income, expenses, goals, and wants.  While this is NOT a substitute for legal advice (because a good attorney also considers the nuances of Bankruptcy law and factors not listed below), some considerations are as follows:

 

An attorney needs to know you and your needs to advise you on what Chapter to file.

Different Chapters of Bankruptcy are for people in varying situations.

Finally, each type of bankruptcy has its downsides.  A bankruptcy attorney will discuss these with you, but some of the basic drawbacks are below:

A good bankruptcy attorney will advise you of these drawbacks.

Each bankruptcy Chapter has its disadvantages.

No amount of charts and blog posts can compensate for the quality advice of a good bankruptcy attorney.  However, even the best attorneys have clients who cannot keep everything in mind.  The purpose of this post is to supplement advice from a qualified bankruptcy attorney, not supplant it.

B is for Business in the ABCs of Bankruptcy

It is not uncommon that potential clients call to request a free consultation for a “Business Bankruptcy.”  Our response is always to try to bring someone in so they can sit down with an attorney and discuss how businesses and bankruptcies intercept.  This is because “business bankruptcy” does not exist — there is no separate bankruptcy just for businesses!  Different types of bankruptcies are available and the best type to choose is determined by the structure of the entity and the goal of filing.  So, let’s break it down:

Is your business registered with the state?

A person can run a business without there being a corporation.   For example, someone who sells MaryKay, someone who mows lawns and someone who consults are all types of businesses that might not be a corporation.  In these cases, there is no separation between the person and the business, so the business’s assets, liabilities, income and expenses are inseparable from the person’s.  This sort of business can file any type of bankruptcy that a person can file, so a Chapter 7, Chapter 11 or Chapter 13.

Depending on the type of business, and whether the person wants to continue the business, a Chapter 7 may be the best answer.  For example, if the business is personal services (teaching piano, for example), then it likely has no real assets and is easy to close and reopen.  In this case, filing a Chapter 7 would allow all of the debt to be discharged and once the bankruptcy is complete, the business can start anew.  However, if the business were something like a landscaping company and there was substantial equipment and assets involved, along with some sort of reputation, a Chapter 13 or Chapter 11 may be preferred as a way to continue operating without concerns of the assets (or business itself) being sold by a Chapter 7 Trustee.

When your business exists in this manner, when you file the bankruptcy, it will not just be your business filing — you will file as well because you and the business are the same thing.

Is the business a Corporation or Partnership?

Businesses of all sorts find themselves needing bankruptcy

One notable business bankruptcy was filed by Chapter 11 Books, which filed a Chapter 11 bankruptcy to reorganize.

A Chapter 13 CANNOT be filed by a corporation or partnership, but Chapter 7 and Chapter 11 can.  Chapter 7 is for a business that is no longer going to operate. A Chapter 11 is for businesses that are going to reorganize and continue operating.

If the business is going to close, it may not even be necessary to file a Chapter 7, except in a few circumstances:  1) if there are assets to liquidate so creditors can receive some payments without the corporation’s officers having to worry about liabilities; 2) It tells the creditors, quite clearly, that the corporation is ceasing its operations and exactly what assets are available to be used to repay; and 3) It may shield owners of the corporation from future liability to shareholders and other creditors if the Trustee does not find any malfeasance.  Although unpaid corporate debts are not discharged at the close of a Chapter 7, the corporation must stop operating after the Chapter 7 and eliminates any reason for creditors to sue a corporation after the business files.

If you own a business and are thinking about bankruptcy, consider whether your business would have value if it were sold, if the business has assets that could be sold, if the business could operate without you and whether your debts are primarily related to your business.  Bankruptcy is overwhelming and can be even more so if a business is involved — talking to an attorney can help relieve pressure and provide clarity on how best to proceed.