BANKRUPTCY OVERVIEW
THE BREWER LAW FIRM
William E. Brewer, Jr.
wbrewer@williambrewer.com
William F. Braziel, III
billy@williambrewer.com
Attorneys at Law
Address:
311 E. Edenton Street
Raleigh, NC 27601
Telephone: (919) 832-2288
Facsimile: (919) 834-2011
Website: www.debtrelief.com
We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.
The purpose of this overview is to answer the questions about bankruptcy 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. Bankruptcy has always been complex and was made more complex by the
enactment of new provisions to he Bankruptcy Code in 2005 pursuant to the
Bankruptcy Abuse Prevention Act of 2005 (BAPCPA). Additionally, BAPCPA is poorly
drafted and contains numerous provisions that are unclear. In this overview, we have
tried to find a balance between removing some of the complexities of the law without
over-simplifying it. Reading and studying this overview is just the first step in
educating you. The next step is a consultation with one of our attorneys to discuss your
particular situation.
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 automatically and immediately upon the filing of
the bankruptcy petition which, with a few narrow exceptions, stops all creditor
collection activities. If you have been a debtor in a bankruptcy that was dismissed
within the last year, we may have to file a motion to keep this automatic stay from
expiring in 30 days from the date you file the bankruptcy. 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."
WHAT TYPES OF BANKRUPTCY ARE THERE?
For individual debtors there are four types of bankruptcy proceedings available:
Chapter 7, Chapter 11, Chapter 12 and Chapter 13. Chapter 11 is very expensive and
rarely more advantageous to a client as compared to 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. If you have filed a bankruptcy petition that you voluntarily
dismissed in the last six months, depending on the circumstances of the dismissal, you
may not be able to file until six months from the date of dismissal has elapsed.
CHAPTER 7:
Chapter 7 is often referred to as "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 your debts wiped out, you must give up any
property that is not protected or “exempted” from 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
90% of the cases that we file, all our client's property is exempt, so the client gives up no
property. Such cases are called "no asset" cases because no assets are turned over to the
trustee. More detailed explanations of the exemptions and "exceptions to discharge" are
set out in this overview. There is a “means test” imposed upon individuals that
prevents them from filing Chapter 7 if the test reveals that they have the ability to pay
their debts. The means test is discussed at page 14-16.
CHAPTER 13:
Chapter 13 is often referred to as a "wage earner plan." The concept behind a
Chapter 13 bankruptcy is that you and your spouse, if any, have sufficient income to
pay all of your current living expenses (e.g., rent, food, utilities, transportation, clothes,
etc.) and have money left over to apply to your debts. You submit a Chapter 13 plan in
which you set out a budget detailing your take-home pay and monthly living expenses.
You pay the excess income to the bankruptcy trustee who then pays the money to your
creditors. Determining the amount of the Chapter 13 plan payment is complicated,
especially after the enactment of BAPCPA. Some general rules follow:
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1.
The term of the plan can be no more than 60 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.
b.
c.
d.
e.
f.
g.
Income tax debt less than three years old.
Property tax debt less than one year old.
Business trust fund taxes (withholding taxes and sales taxes) no
matter how old.
Back child support and alimony.
If you are filing to stop a foreclosure, the amount necessary to bring
the loan current.
The payment of all secured debts, such as vehicle loans, that you
proposed to pay “through the plan.”
Your attorney’s fees not paid prior to filing.
3.
Under BAPCPA, the amount of general unsecured debt you must pay
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) and the amount of non-exempt
assets, if any, that you own.
4.
In the Chapter 13 cases that we have filed under BAPCPA, the vast
majority of them require no payment to unsecured creditors.
With certain exceptions at the end of the Chapter 13 plan, any amounts still owing on
your unsecured debts are forgiven. On certain debts, Chapter 13 allows you to lower
the amount of your loans or give you a lower interest rate on certain loans. If you have
a secured loan like a mortgage, deed of trust, or car loan that you are behind on,
Chapter 13 allows you to catch up the amount you are behind over time. Chapter 7
does not offer this option.
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 will
help you answer the first question. The section of this overview on exemptions
beginning on page 7 helps you answer the second question.
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WHAT HAPPENS IF A CREDITOR HAS COLLATERAL
SECURING THE PAYMENT OF DEBT?
A secured debt is simply a debt in which the creditor has a lien on some item of
property to "secure" your payment of the debt. The most common types of secured
debts are a mortgage on a home and a lien on a car. Before bankruptcy, a secured
creditor has two avenues of recovering its debt. First, it can recover by repossessing
and selling the collateral. Secondly, it can recover from you on your personal liability.
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 this basic principal leaves you with the options set out
below.
CHAPTER 7 OPTIONS FOR 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
contract. We call this the “be-current-and-stay-current” right to retention.
2.
Prior to BAPCPA, you also had the “be-current-and-stay-current” right to
retain personal property, such as vehicles. Now, to be absolutely sure you
can keep the personal property that secures a debt secured by personal
property, you must also sign a reaffirmation agreement. The new law
under BAPCPA is not clear, but most experts think that the creditor can
repossess the collateral unless you enter into a agreement reaffirming the
debt within 65 to 85 days after you file the bankruptcy. We believe, it is
not likely that a creditor will in fact repossess collateral when you are
current with your payments, but there are no guarantees. We have had
some success in selected cases obtaining an order from the bankruptcy
court disapproving reaffirmation agreements, but allowing the debtors to
keep the collateral, so long as they make the payments.
The reason that you should not want to reaffirm a debt is that the
reaffirmation reinstates your personal liability on the debt. This means if
you later default on the debt, you will be liable on the debt despite the fact
you filed bankruptcy. The decision on whether to reaffirm a debt may be
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the most important one you make in connection with your bankruptcy.
We can advise you, but the final decision is yours. 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 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 GMAC $15,000.00 secured by a vehicle which has a retail value of
10,000, you can pay GMAC $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 you money.
4.
Your final option is to give the property back to the creditor (“surrender”
the property) and have the debt discharged.
Exceptions:
There are two circumstances in which you can keep the property in
Chapter 7 even if you don't maintain your payments. These exceptions are:
1.
When a creditor has a judgment or lien on property that impairs your
exempt interest in that property.
2.
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 nonpossessory, 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.
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CHAPTER 13 TREATMENT OF SECURED DEBTS:
In Chapter 13 cases secured claims are handled in one of two basic ways. The
first, which we call the "cure and maintain" method, your past due payments on
secured debts are paid from your monthly bankruptcy plan payments ("through the
plan"), and future payments (payments that come due after filing bankruptcy) are paid
directly to the creditor ("outside the plan"). 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 either when the collateral is worth less than the amount of the debt, or
when the number of payments left on a debt is less than the length of the plan. The
following example illustrate the "strip-down/stretch-out/cram-down" method.
For example, if you have a car loan with 30 payments of $233.00. The interest
rate is 12.25% and the pay-off on the loan is $6,000.00. The car has high mileage and is
worth only $4,000.00. You can strip-down the creditor claim to the value of its
collateral ($4,000.00), stretch-out the payments to 36 months and pay the present value
of the claim at a reduced interest rate ("cram-down"). Such that the monthly car
payments through the plan might be $127.20.
The ability to "refinance" your secured loans through this second method
permitted by Chapter 13 bankruptcy lets you reduce the monthly payments and
sometimes is the only way to have enough cash flow to keep all of your property.
BAPCPA places 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
incurred within 910 days (approximately 2.5 years) prior to filing the bankruptcy and
the debt is a purchase money debt, then the debt cannot be stripped down to the value
of the vehicles. The prohibition of strip-down applies to other collateral if the debt was
incurred within one year prior to filing the bankruptcy.
Properly treating these “910-vehicle claims” is a very important aspect of your
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.
3.
Whether all of the debt relates to the purchase of the vehicle or whether
some portion of the debt relates to paying off an old loan.
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You must bring a copy of your vehicle purchase agreement and loan paperwork when
you come to consult with us.
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 free himself of that burden
and 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 twoyear 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:
1.
Residence
You may exempt up to $35,000.00 total equity in 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.
"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.
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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 $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, money in the bank, tax refunds not yet received, and cash on hand.
6.
Life Insurance
Life insurance policies insuring the life of the debtor in which his or her spouse
and/or children named beneficiaries are totally exempt.
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.
Compensation for Injuries
Compensation for personal injuries and workman's compensation is exempt.
9.
College Savings Accounts
Funds in a college savings plan qualified under §529 of the Internal Revenue Code, not
exceed $25,000, and only to the extent the funds are for a child of the debtor and will
actually be used for the child’s college expenses. You may not exempt the funds placed
in the savings plan within the year prior to filing unless they were regular contributions
consistent with past pattern of contributions.
10.
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
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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.
11.
Government Benefits
Veterans Administration, Social Security and AFDC benefits are exempt.
12.
Wages
Your earnings for personal services rendered within 60 days of filing the
bankruptcy which are necessary for the support of you and your family such earnings
remain exempt even though, they have been deposited in a bank account.
13.
Alimony and Child Support
Alimony, support, separate maintenance and child support payments to the
extent they are reasonably necessary for the support of the debtor or a dependant of the
debtor.
14.
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
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.
15.
Other
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). Those debts are as follows:
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CHAPTER 7:
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.
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, will be considered this type of debt).
5.
Consumer debt for more than $500.00 for luxury goods or services to a
single creditor, incurred within 90 days of filing the petition.
6.
Cash advances of more than $750.00 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, embezzlement or larceny.
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CHAPTER 13:
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, will be considered this type of debt).
6.
Consumer debt for more than $500.00 for luxury goods or services to a
single creditor, incurred within 90 days of filing the petition.
7.
Cash advances of more than $750.00 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, 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 5)
13.
Restitution for damages awarded in a civil action against you as a result of
willful or malicious injury to or the deceit of an individual.
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IS IT POSSIBLE TO BE DENIED A DISCHARGE
OF ALL MY DEBTS?
CHAPTER 7:
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 ago prior to the filing the current bankruptcy.
2.
You have been granted a discharge in a prior Chapter 13 bankruptcy filed
within six years of 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.
b.
c.
make a false oath, claim or account (i.e., lie about your
property, debts, or financial affairs);
give or receive money for taking certain action or agreeing
not to take certain action; and
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
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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.
CHAPTER 13:
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 prior to the current bankruptcy.
2.
You have been granted a discharge in a prior Chapter 13 filed less than 2
years prior to 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
proceeding 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 COSIGNED 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.
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WHAT IS THE MEANS TEST?
Effective October 17, 2005, Congress amended the bankruptcy law to impose
new income-related requirements for an individual or a married couple who file
Chapter 7. You can think of the means test as a debtors’ prison, erected by creditors
and designed to lock you in debt and either keep you from filing bankruptcy or force
you into a Chapter 13 payment plan. However, there are keys that unlock the door to
the prison. Our experience has been that few clients are prevented from filing Chapter 7
due to the means test. The keys that unlock the prison and allow you to “pass” the
means test are as follows:
1.
First, the means test does not apply unless more than 50% of your total
debt is consumer debt. 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.
2.
Secondly, the means test does not apply to an individual or married
couple if 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 size from 1 to 6. Add $6,300.00 for each person in excess
of six.
Size
Median
Income
1
2
3
4
5
6
$37,892.00
$48,710.00
$54,310.00
$65,036.00
$72,536.00
$80,036.00
The determination of the CMI is not calculated from your current income, but rather is
based on 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 median income. The rules
on calculating CMI is complicated and is not covered in this basic overview. It is
mandatory that you be able to provide us with accurate information and documentation
concerning your income for the prior six months, as well as a prediction of future
income.
3.
Even if your CMI exceeds the median income, you can pass the means test
by establishing that your expenses leave you with insufficient funds upon
which to pay a significant amount on your debts. The rules on
determining these expenses are quite complicated and are not covered in
this basic overview.
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4.
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.
The following two examples illustrate the calculation:
Example 1:
John Smith is a single man who lives alone. He is unemployed from May 25,
2011 to July 20, 2011 and receives no benefits. He obtains a job on July 21, 2011 at
an annual salary of $50,000.00. He files a Chapter 7 bankruptcy on December 15,
2011. His gross income from July 21 to November 30 is $16,700.00. To calculate
John Smith’s income under the bankruptcy law, multiply $16,700 by 2 (to convert
the six months to annual amount). The result of $33,400.00 is less than the
median income of $37,892.00, and John Smith “passes” the means test.
If John Smith waits until January 2, 2012 to file bankruptcy, his income for the
six-month period from July 1 to December 31 will be approximately $23,800.00
($47,600.00 on an annual basis). To determine if John “passes” the means test, it
will require an analysis of his expenses under the rules set out in the Bankruptcy
Code.
Example 2:
Joe and Jane Doe have 2 children. Jane works for the State and earns a flat salary
of $36,000.00 ($3,000.00 per month). Joe was working for a telecom company and
was earning $60,000.00 per year. On April 30, 2011, he is in a serious automobile
accident and is permanently disabled. He receives gross private disability
income of $2,500.00 per month for 6 months (May – October). Effective
December 1, 2011 he will start receiving social security disability benefits of
$1,800.00 per month and his private disability will stop. If the Does’ file
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bankruptcy on December 15, 2011, their income from May 1, 2006 to October 31
is $33,000.00 ($5,500.00 + 6). On an annual basis the debtors’ income is
$66,000.00, which exceeds the median income $56,985.00 for a household of 4.
However, if they wait until February 1, 2012 to file, their income for the six
months period of August 1 to January 31 is as follows:
Wife’s Income:
Husband’s Income :
$18,000.00
$ 7,500.00
$25,500.00
Remember social security is not included in CMI. The annual income is
$51,000.00, and is below the median income.
From these two examples, the following lessons are learned:
1.
Calculating median income is technical and sometimes complicated.
2.
Timing can be crucial in passing the means test.
3.
The client must provide very reliable information about past income, and
in some cases, a prediction of future income.
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 something to the electric company or coop on the
date he or she files bankruptcy. 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 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 general rule to include all of your creditors in your bankruptcy
filing.
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If your utility services have been terminated the filing the bankruptcy, the utility
company must restore your service immediately. However, you must provide the
deposit within 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 not a realistic option.
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 some period of time.
If you have a particular asset that is above 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 $30,000.00 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 a foreclosure, Chapter 13 may be
the only way to do so.
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Fees are generally higher to file a Chapter 13 (the standard fee is $3,000). The
standard fees for the normal Chapter 7 is $1,000.00 - $1,500.00. 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 page 17.
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.
b.
c.
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, you can keep the vehicle by
paying that value rather that the full amount of the debt.
On some secured debts, if the interest rate is high, you can reduce the
interest rate.
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 and quit
making payments on it.
HOW IS THE BREWER LAW FIRM DIFFERENT
FROM OTHER BANKRUPTCY ATTORNEYS?
Unlike some other bankruptcy law firms, The Brewer Law Firm gives each and
every client the right to a free 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.
In addition to the consultation, The Brewer Law Firm believes that an attorney
should be with you when you are signing your bankruptcy petition and schedules
under oath and penalty of perjury. This 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 are so serious.
The Brewer Law Firm provides a number of other services that other bankruptcy
attorneys do no provide routinely, 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
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the level of service, expertise, and individual attention provided by The Brewer Law
Firm.
WHAT DO YOU CHARGE AND WHEN MUST IT BE PAID?
Our presumptive base attorney fee for the normal "consumer" Chapter 7
bankruptcy is $1,500.00. The exact amount depends upon the complexity of the case.
For very simple cases, the fee may be as low as $1,200.00. Complex cases are much
more expensive. 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 $400.00, nonrefundable 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
$3,000.00. 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 is typically $600.00. It may be less if special
circumstances dictate a smaller upfront fee, and may be more for particularly difficult
cases or difficult clients.
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 $400.00, nonrefundable
retainer, be paid before we will process the paperwork necessary to file.
In all cases there is a filing fee in addition to our fee, which is charged by the
court. The filing fee in Chapter 7 is $348.00; in Chapter 13, $315.00, which includes your
pre-petition credit counseling which costs $34.00. In Chapter 7 cases you must pay for
your post-petition personal financial management instructional course, which costs
$8.00 per person, and this fee is also included in your Chapter 7 filing fees.
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
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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 $400.00 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 them.
HOW DO I GO ABOUT FILING BANKRUPTCY?
If you know at this point that you want to file, complete the Bankruptcy Forms
which we can provide to you or you can download them from our website. 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. 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 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 forms and paid the nonrefundable
retainer, one of our paralegals 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.
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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 nonprofit 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
$34.00 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 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 $8.00 per person.
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
and 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.
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A hearing called a "341 creditors meeting" is conducted between 20 and 40 days
after we file the petition. For residents of Wake, Johnston, Harnett, Franklin, Granville
and Vance counties the hearing is held at 300 Fayetteville Street, Room 208, 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 50 or 80 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 in making a decision
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, 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
$5000.00 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
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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.
Our personal opinion is 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.
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.
Finally, you may not be discriminated against in obtaining a future student loan
on the grounds that you have filed a bankruptcy.
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