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.

But isn’t Bankruptcy Federal?

It is common that clients search for information about their case online.  They don’t want to “bother” their attorneys, they don’t trust their attorneys, or, sometimes, they do not have a bankruptcy attorney.  As a result, they search for “bankruptcy law” and whatever specific topic they are curious about: losing a house, rebuilding credit, keeping a car, ruining lives, etc.  Even if they enter a specific zip code or location, they still may find results from all over the United States, not just North Carolina or, more specifically, the Statesville or Charlotte division of the Western District of North Carolina.  They then read everything they can without realizing that bankruptcy is different from place to place.

Collum & Perry is located in Mooresville, North Carolina, just north of Charlotte.  For that reason, most of our cases are filed in the Western District of North Carolina, although we can also file cases in the Middle District of North Carolina, but North Carolina has four districts total.  Even within the Western District, we file cases in the Statesville Division, the Shelby Division and the Charlotte Division.  Each division has slightly different ways of doing things, each District has significantly different ways of doing things, and the differences from state to state are even more substantial.

For example, in North Carolina, there is a Bankruptcy Administrator (or BA).  The Western District’s BA is Linda Simpson. The BA oversees all of the Trustees in an effort to maintain the integrity of their work.  She also reviews and approves pre-filing credit counseling course and financial management courses.  In every other state, except Alabama, there is a US Trustee, who is part of the Justice Department.

Within North Carolina, there are differences between districts.  In the Western District of North Carolina, there is no confirmation hearing.  Clients are often comforted to hear that they will not have to attend Court or be in front of a judge.  However, in the other districts of North Carolina, there are confirmation hearings. While neither system is necessarily better, they are different.

Further, within the Western District of North Carolina, there are a number of divisions.  The Statesville Division of the Western District of North Carolina includes certain counties (Iredell, Wilkes, Alexandra, Catawba, Caldwell, Watauga, Ashe, and Allegany), the Charlotte Division has certain counties (Gaston, Mecklenburg, Union and Aneon), the Asheville Division has others (Transylvania, Henderson, Buncombe, Yancy, Mitchell, Avery, Madison and Haywood), and the Bryson City division captures the remaining (Swain, Graham, Cherokee, Clay, Macon and Jackson).  You can see a map here.  So, if a couple lives in zip code 28115, they will file in the Statesville division.  If they file a Chapter 13, Mr. Steven Tate will be their Chapter 13 Trustee.  If they filed a Chapter 7, they would have one of a number of different Trustees.  However, if a couple’s zip code were 28078, they would file in the Charlotte Division.  They would have Mr. Warren Tadlock as their Chapter 13 Trustee.  Someone in the Statesville Division would NEVER have the same Chapter 13 Trustee as someone in the Charlotte Division.  However,if someone files a Chapter 7 Trustee in the Statesville Division, Wayne Sigmon may be the Trustee and he is also the Trustee in Charlotte division cases.

A map of the districts in North Carolina. We are located in the Western District but also have attorneys who practice in the Middle District.

What’s the point?  Essentially, every Trustee has different approaches and requirements.  Every district has different local rules and regulation.  Each state has different laws that apply.  So, even though Bankruptcy law is Federal, the wide variety of differences make it very important to hire an attorney and ask your attorney to help you with any aspect of your bankruptcy case.  Online searching is great, but cannot replace a knowledgeable, experienced attorney who advocates for you and knows the local rules!  Here at Collum & Perry, our office strives to assist all of our clients in achieving the best possible result from what is otherwise an untenable situation.

How to have mortgage payments reported on your credit report post Chapter 7

When you receive a discharge in a Chapter 7, all of your in personem debt is discharged, with few exceptions.  When it comes to mortgages, a debt remains: debt on the house.  What this means is that you personally are not obligated to pay for the house, but if you stop paying, the lender can collect from the house itself, via foreclosure.  This is because the lender has a Deed of Trust, creating a lien on the home.  However, payments, whether they are on time, late, missed or delinquent, should not be reported on your credit report.  This can oftentimes create a stumbling block for rebuilding credit.

One solution the bank will suggest and that you might find online is to sign a reaffirmation agreement on a home.  However, WE NEVER recommend that a client sign a reaffirmation without a compelling reason (i.e., significant reduction in principle/interest) and find that our Judges often do not permit the signing of a reaffirmation agreement.  You can read more about reaffirmation agreements here.

So, what do you do?

  • Request a payment history for the mortgage company.  Your mortgage company is provided to supply this at least once each year pursuant to NCGS 45-94(d).
  • File a dispute, in writing, with each of the three credit bureaus.  You can read more on how to do this here.
  • The credit bureau is required to verify the reported information with the mortgage lender within 30 days.
  • At that point, the mortgage company can either:
    • Do nothing, in which case the credit bureau must accept the information provided by the client OR
    • Accurately report information.  This can be difficult to explain how payments are made but not reported.
  • Repeat this as often as needed.
  • Always keep the payment history so it can be provided when applying for new credit (on a car, another house, a refinance, etc.)