Q. Will I lose all my property when I file bankruptcy?

A. No. The vast majority of clients who file Chapter 7 in North Carolina keep all of their property. Individual debtors are entitled to claim equity in certain property as exempt. ("Equity" means value above and beyond mortgages.) Effective January 1, 2006, the exemption laws of North Carolina were amended to increase the exemptions available to North Carolina residents.

Each debtor who has lived in NC for the last two years can claim a homestead exemption of $35,000 of equity in their primary residence, including a mobile home. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 also made several changes to the homestead exemption laws of all 50 states:

1. 2 year domicile requirement. If the debtor did not live in one state for the last 2 years, then the exemptions of the state where the debtor was domiciled for the majority of a 180 day period before the 2 years (that is, between 2 and 2 1/2 years before filing) apply. However, since most exemption laws require that you be a resident of the state in which you claim the exemption, the previous state's exemptions would not apply. In that event, the bankruptcy "federal exemptions" apply. For the most part, the federal exemptions are more liberal than the North Carolina state exemption.
2. The value of the homestead is reduced to the extent of any additional value added to the homestead from sale, transfer or other disposition of non-exempt property made by the debtor within 10 years before the filing of bankruptcy with intent to defraud creditors. (If such additional value was accomplished with intent to defraud creditors).

3. Without regard to debtor's intent, any value added to the homestead in excess of $125,000 within 1,215 days (about 3 years, 4 months) of bankruptcy is excluded from any exemption.

4. An absolute $125,000 cap applies to the homestead if the debtor is a convicted felon and the bankruptcy filing is abusive; or the debtor owes debt arising out of violation of securities laws, fiduciary fraud, racketeering, crimes or intentional torts causing serious bodily injury or death.

Note: The above sub-paragraphs 2-4 are amendments to the Federal exemptions. Most cases will be determined by North Carolina exemption law.

An individual debtor can claim $35,000 in her residence, mobile home, co-operative or burial plot. This means a husband and wife with joint unsecured debt, such as credit cards or medical bills, but who have significant equity in their home, can claim, together, a total of $70,000 of equity in their home.

If the debtor is over the age of 65 and is widowed, and previously owned the residence jointly with her deceased spouse as tenants by the entirety, then the surviving spouse can claim $60,000 as exempt in the residence.

If husband and wife own their residence jointly as tenants by the entirety (which most married couples do in the state of North Carolina) and there are no joint unsecured debts or medical bills, then all equity in the residence can be claimed as exempt with no dollar limit.

2.  Each debtor can claim $5,000 in household goods, clothing, and personal effects, plus $1,000 per dependent, up to four dependents. Therefore, a married couple with four children can claim a total of $14,000 of equity in household goods, clothing, furniture, and personal effects.

3.  Each debtor can claim one motor vehicle with equity not to exceed $3,500, provided the vehicle is actually titled either individually or jointly in the debtor.

4.  Each debtor can exempt an interest in any property not to exceed $5,000 of any unused homestead exemption (so if a debtor only exempts a $30,000 homestead, she would still have a $5,000 "wildcard exemption" in any property.)

5.  Under NCGS.1-362, wages earned by a debtor within 60 days of the filing of the bankruptcy petition, including recent accounts receivable of a self-employed debtor, to the extent necessary to support the debtor's family, are exempt. (Note, there are some cases to the contrary in other federal districts.)

6.  IRAs, Roth IRAs, SEP-IRAs, 401-Ks, 403-Bs; government retirement; qualified pension plans; and social security benefits are all exempt under state and federal law. (An exception may be where the debtor is a sole participant in a pension plan.)

7.  All alimony and child support owed to a debtor is exempt under state law.

8.  All personal injury, recovery, and entitlement (except medical bills incurred as a result of the personal injury); private disability payments or annuities or wrongful death proceeds are exempt.

9.  Life insurance cash value is exempt, but not proceeds from life insurance.

10.  Each debtor can claim $2,000 in tools of trade, professional books or implements.

11.  Section 529 college plans (except unusual contributions within 12 months of filing bankruptcy) are exempt.

Click here to view a pie chart of the state law exemptions or, if you prefer, a copy of the ratified bill.

Q. What debts can I wipe out in my bankruptcy?

A. Generally, unless you have recently abused a credit card, or lied on a financial statement, your unsecured debts such as credit cards, unsecured loans, overdraft protection, guarantee of debt, and deficiencies on repossessed or foreclosed property will be dischargeable in a bankruptcy proceeding. (Medical bills would also be dischargeable; however, medical bills are deemed to be "joint liabilities" with a spouse. Therefore, if only one spouse files bankruptcy, the non-debtor spouse would still be liable for medical bills incurred during the marriage.) There are certain exceptions including domestic obligations (alimony, child support and property settlement); certain debts contained in a property settlement if pursuant to valid separation agreement or court order; debts arising from intentional infliction of personal injury; debts arising from drunk driving; educational loans; or debts obtained by false pretenses, fraud, or false written financial statement. Also discharged would be your personal liability on non-reaffirmed secured debt such as houses or cars, where you have surrendered the property and are exposed to a potential personal liability for the deficiency.

Taxes are generally not dischargeable. However, certain taxes assessed more than a few years before a bankruptcy may be dischargeable. "Trust taxes" such as withholding tax or sales tax are generally not dischargeable to the extent of personal liability.

Finally, if you desire to keep certain property against which there is a lien, such as a lien on a car title, you must either redeem the property, reaffirm the debt, or with the consent of the creditor, simply continue to pay for the car, as the lien is not extinguished by the filing of a bankruptcy petition. If the debt is "reaffirmed", then you would remain personally liable for the entire debt. (Generally, it is not necessary to reaffirm a mortgage on a house. The rare exception may be where the "events of default" under the deed of trust include the filing of a bankruptcy.)

Under BAPCPA the "superdischarge" of a Chapter 13 has been gutted such that a discharge for either a Chapter 7 or a Chapter 13 are virtually identical.

Q. Is it true that I can never get credit again?

A. No. Although a Chapter 13 is carried on your credit report for seven years (as is the general rule for all credit information) and a Chapter 7 is carried on your credit report for ten years, it has been my experience that you will get credit fairly quickly after the entry of your discharge. The discharge in a Chapter 7 normally is entered approximately 90-100 days after filing. The discharge in a Chapter 13 (and now in an Individual Chapter 11 in the absence of an early discharge order) is entered upon successful completion of the plan. Most of my Chapter 7 debtors are able to go out immediately and buy cars upon entry of their discharge. Of course, the interest rate you will pay for that car will depend upon your credit score (FICO) and will probably be in the double digits immediately after the entry of discharge. I typically advise my clients to pay more than the required monthly payment in order to reduce the principal amount of the loan. The result would be an effective reduction of the interest rate over the life of the loan.

You will receive credit cards very quickly after the entry of discharge. Again, the initial credit cards will be for lower limits, and at higher interest rates. However, I want all of my clients to use credit cards sparingly and always pay the card balance to $0 each month. If you exercise this discipline, you will have the freedom of using a credit card for identification and for limited charge purposes, but will usually avoid the higher interest rate if the card is paid in full each month. The good news is that the disciplined use of the credit card post-petition will help establish your credit history.

The general rule is that debtors will qualify for home loans two years after the entry of a bankruptcy discharge; however, I have had many bankers and credit managers tell me that one year of good credit history after bankruptcy discharge will qualify you for a home loan. I would rather be conservative and tell you that you can qualify for a home loan two years from the entry of a bankruptcy discharge, assuming, of course, other positive factors such as regular and sufficient income. Again, the interest rate you will pay for the home loan will be dependent upon your FICO (credit) score.

Finally, it has been my experience that a bankruptcy discharge will be a mere "speed bump" on your credit report if you have secured debt that you are paying in a regular fashion after bankruptcy. Many of my clients keep their homes and cars after bankruptcy and continue to make timely and regular payments on that mortgage debt. In doing so, they quickly re-establish their credit as those timely payments appear on their credit report. It is my experience that stable, future income will be the key to future credit. If you come into my office to file a bankruptcy and your only source of income is $400 a month Social Security Disability, your inability to get future credit will not be the fault of the bankruptcy discharge; rather, it will be your lack of income and failure to demonstrate ability to pay debt in the future.

Q. Can creditors continue to contact me after bankruptcy?

A. The filing of a bankruptcy proceeding results in the immediate and automatic issuance of a "automatic stay" which acts like a big stop sign preventing creditors from contacting you, suing you, repossessing or otherwise taking adverse action against you to collect a debt. As a practical matter, however, it may be a week or so before creditors receive notice of your bankruptcy in the mail. If you are contacted by a creditor after having met with us and signed your papers, simply inform the creditor that you have filed bankruptcy, give them your case number and our telephone number, and we will stop the harassment. Once word is out, you should see a dramatic decrease in creditor contact. You should contact this office if you continue to be sued or have lawyers contact you. You can, however, ignore computer generated "dunnings" that may continue to come after bankruptcy. Some creditors may take several months to get you out of their computer system. This should not be of concern to you.

Generally, a restraining order will be in effect in a Chapter 7 for the 90 days in which your case is active. Once you obtain your discharge, the unsecured debt is wiped out and those creditors are permanently enjoined from contacting you for repayment. However, in Chapter 13, secured creditors on houses, cars, furniture, etc. for property that you are keeping can commence contact with you should you default in future payments; fail to pay taxes; or fail to maintain insurance. If you are keeping certain property such as houses and cars, it is important to realize that many creditors will stop sending monthly payment reminders (because they are afraid of violating the bankruptcy court's restraining order). Therefore, you must discipline yourself to make regular and timely monthly payments to these creditors without being prompted to do so. Do whatever works: make a Xerox of a previous monthly statement and send a copy with future payments or put a payment reminder on your refrigerator, or regular prompters on your calendar or computer. Additionally, if you are surrendering property in a bankruptcy case or are behind in payments at the time the bankruptcy is filed, creditors can hire lawyers to file "motions to lift stay" and seek immediate repossession and sale of their property prior to entry of your discharge.

Again, in Chapter 7 as well as in Chapter 13 and Chapter 11 proceedings in which you are reorganizing over a period of years, you must continue to make regular payments to creditors on property you are retaining. Should you fail to do so during the reorganization, creditors can contact you (in a Chapter 13) to inquire as to why you are not making house and car payments or failing to pay insurance; or creditors may, in either Chapter 11 or Chapter 13, hire lawyers to file motions to lift stay to recover their property, or object to confirmation of your plan.