Filing a Bankruptcy case imposes the “Automatic Stay” in Bankruptcy, 11 U.S.C. 362. Once the case is filed and the creditor notified, the Automatic Stay immediately stops creditors from continuing collection action such as foreclosure, repossession, or garnishment.

Bankruptcy Chapter 7 is called Liquidation, and is the only Chapter of Bankruptcy which does not involve some type of repayment plan.

To file Bankruptcy Chapter 7, first a Petition must be prepared. The Petition requires that all property, debts, budget, and financial affairs be shown. The Financial Affairs section includes revealing all of the Petitioner’s income for the past several years, payments to creditors, sales and transfers of property, and other information. The Petition must be true and complete, and must be signed under penalty of perjury. The Petition also requires production of the last four years income tax returns.

Once the petition is filed, the case number is established, and a Trustee is appointed to administer or handle the case. The Trustee’s job is to make sure the case is appropriate, to make sure that the Petitioner is entitled to the Discharge relief, and to see if there is any money or property that can be gained from the Petitioner’s case for the benefit of creditors.

Each individual is allowed to exempt or protect a certain amount of property from the reach of creditors. Only if the Petitioner’s property exceeds these limits will any property be taken by the Trustee.

The amount of debt against the property is deducted from the property value so each person is permitted to protect their “equity” in the property. In the majority of cases filed under Bankruptcy Chapter 7, the Petitioner does not lose any property to the Court or for the benefit of creditors.

Under Bankruptcy Chapter 7, the Petitioner is allowed to continue paying for property which is “secured” such as a home or vehicle. To keep a home or vehicle, the Petitioner is required to enter into a Reaffirmation Agreement, which states that even though the Petitioner filed Bankruptcy, the Petitioner wishes to reaffirm or reinstate the debt. If the debt is reaffirmed, the Petitioner keeps the home and vehicle, and the debt passes through the Bankruptcy as if the Petitioner never filed Bankruptcy.

If a Petitioner is burdened with a home loan or car loan which the Petitioner wishes to surrender, the home or vehicle can be surrendered to the creditor, and any debt associated with the home or vehicle will be discharged.

Normally once a person retains a lawyer to file Bankruptcy, the fees must be paid. As soon as the retainer fee of $100.00 is paid, the file is set up, and begin referring creditor calls to your attorney. The case cannot be filed until the full fee is paid, and paying the fees can take months. During the period before the case is filed, refer creditors to my office, and continue paying the debts secured by property to be retained. Discontinue paying unsecured debts which will be discharged such as credit cards, medical bills, and unsecured loans.

The package we provide includes Bankruptcy Information sheets which each client must complete. The Bankruptcy Information Sheets require listing all property, debts, financial affairs, and other information required to prepare the Bankruptcy Petition. Tax returns, bills, paycheck stubs, checking account information must be provided.

Once the fee is paid, preparing the Bankruptcy petition involves one or more meetings with my office, to review all information required.
Once the Petition is properly prepared, the petition is signed under penalty of perjury, and filed with the Court.

After the Petition is filed, the Court appoints the Trustee, and schedules a meeting where attendance is required. All creditors are invited and have the right to attend the meeting, but few creditors actually attend. The Trustee presides, and can ask any question concerning the Petition and case. Each person will be prepared for the meeting by discussing matters the Trustee will likely ask at the meeting.

After the meeting, the Chapter 7 case remains open for 60 days before the Discharge is granted. During this period, any information requested by the Trustee must be provided, debts must be reaffirmed, and property to be surrendered must be surrendered. After 60 days from the meeting, if no objections are filed by either the Trustee or a creditor, the Petitioner receives a Discharge Order, releasing the dischargeable debts forever.  

Bankruptcy Chapter 7 will discharge credit cards, medical bills, and unsecured loans. The Chapter 7 will not discharge certain debts, including recent taxes or employer withholding taxes, student loans, child support, educational or student loans.

Any individual has the right to file Bankruptcy and as long as the rules and procedures are followed, the case will receive a Discharge. Problems arise when there has been misconduct or fraud with regard to a particular debt or upon the Court. A creditor can object to the Dischargeability of their particular debt if the Petitioner has committed some type of fraud or misconduct with regard to obtaining the debt. The Trustee can object to the overall Discharge if the Petitioner has committed fraud, did not list all property or debts as required by law, or lies to the Court. Generally, the Discharge is granted unless some type of misconduct is involved in the case.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which took effect in October, 2005, requires that each Chapter 7 case include a “Means Test” to determine if a Bankruptcy Chapter 7 case is appropriate, or if the Petitioner should be required to file a Chapter 13 or repayment plan. The Means Test requires a calculation of the Petitioner’s income based upon the gross amount of income for the six months before the case is filed, beginning with the month preceding the file date. All household income must be included, including a nonfiling spouse or roommate; however, social security income does not count as income under the Means Test. If the Petitioner’s household income exceeds the median income in North Carolina for a household of that size, further steps must be calculated under a complicated formula.

If the Means Test result shows the Petitioner can repay creditors over a period of time, the person may be required to file a Bankruptcy Chapter 13 case and make payments over a period of time.

The Means Test is complex and individual. In practice, most individuals who are in debt and cannot pay their debts on time have been eligible to file Chapter 7 Bankruptcy.

Bankruptcy Chapter 7 requires a Pre-Bankruptcy Credit Counseling certificate to be eligible to file a case. Chapter 7 also requires a Financial Management certificate after filing the case, in order to receive the Discharge. The Bankruptcy Administrator must approve any agency offering either the Pre-Bankruptcy Credit Counseling or the Financial Management Counseling.

Bankruptcy Chapter 13 is called a Reorganization for an Individual with regular income. The case involves formulating a plan requiring payments to the Chapter 13 Trustee, normally over a period of three to five years.

Bankruptcy Chapter 13 is necessary when if a person is about to lose property through foreclosure or repossession. Filing a Chapter 13 case imposes what is called the “Automatic Stay” in Bankruptcy. The Automatic Stay stops foreclosure, repossession and garnishments, and allows a person to reorganize their debts under a repayment plan.

To file Chapter 13, first a Petition must be prepared. The Petition requires all property, debts, budget, and financial affairs be shown. The Financial Affairs section includes revealing all of the Petitioner’s income for the past several years, payments to creditors, sales and transfers of property, and other information. The Petition also requires production of the last four years’ income tax returns. The Petition also requires information concerning any child support obligation information. The Petition must be true and complete, and must be signed under penalty of perjury.

The Bankruptcy Chapter 13 Petition also includes what is called a ”Disposable Income Test” which is designed to evaluate the income to determine what amount should be paid to unsecured creditors. The Disposable Income Test requires a calculation of income based upon the gross amount of income for the six months’ before the case is filed, beginning with the month preceding the file date. All household income must be included, including a nonfiling spouse or roommate, and child support; however, social security income does not count as income under the Disposable Income Test. If the Petitioner’s household income exceeds the median income in North Carolina for a household of that size, further steps must be calculated under a complicated formula. The purpose of the Disposable Income Test is to determine what percentage a case should pay to the unsecured creditors. Some cases are allowed to repay as low as 1% to the unsecured creditors.

In some cases, the Petition must be filed very quickly because the home is about to be foreclosed upon, or a vehicle is about to be repossessed. The Bankruptcy Code allows a petition to be filed very quickly in emergency circumstances, but the complete petition must then be prepared and filed within fifteen days. The emergency procedure is used only in extreme cases where immediate protection is necessary.

The Chapter 13 case also requires payment of some amount to the Chapter 13 Trustee, called the Plan payment. The Plan normally includes the regular mortgage payment, if any, and all past due mortgage payments, vehicle and secured debt payments, past due taxes, past due child support, and a percentage of unsecured debts. Normally, the plan will include future residential mortgage payments, if any. The plan will also include some attorney’s fees and the Trustee’s commission.In each case there is a “minimum” plan payment calculation to retain the property and pay the minimum toward all other obligations. The law also requires in each case that the Petitioner pay the unsecured debts according to the “best effort” over a period of years, that is, the best effort the Petitioner’s budget will allow. This is based upon current income and expenses.

For secured debts, if the Petitioner has been paying toward the property for a certain period of time, the secured debt may be “modified.” If the debt can be modified, the plan must pay only the value of the property to retain the property. Each case must be analyzed to obtain the best plan result under law.

All recent past due taxes must be paid through the Chapter 13 Plan. The taxes are paid over a period of the plan, three to five years, so repaying taxes over a plan period can be the best manner available to repay tax debts. Some older taxes may have lost their priority status. Each tax year must be analyzed to determine if the
tax is a priority tax or not.

Plan payments must commence within thirty days of the Petition file date. Future mortgage payments must be paid going forward from the file date normally to the mortgage company, and these payments must be accepted.

Approximately one month after the case is filed, the Petitioner must attend a meeting, where the Trustee reviews the plan for compliance with law.
Once the plan is approved by the Trustee, the Trustee recommends “confirmation” of the plan to the Judge. Creditors have 28 days to object to confirmation of the Plan. If no objections are filed, the Plan is confirmed.

Upon completion of the Chapter 13 Plan payments, the Petitioner receives a Chapter 13 Discharge, which releases the Petitioner forever from dischargeable debts.

Filing Bankruptcy will be shown on the credit report for between seven to ten years. Bankruptcy of course is a negative credit mark, but most of the clients I meet with either have negative marks on the credit report already, or will have in the near future. Most other negative reports on the credit report, such as repossessions, payments 30-60-or 90 days late, also stay on the credit report for seven years. Once the Discharge is ordered, balances are removed from the credit report and are shown as zero balances, discharged in Bankruptcy.

Therefore, the debt to income ratio greatly improves. From there each person rebuild their credit with timely payments toward reaffirmed debts, home and vehicle, and by establishing new credit. As new positive marks are listed on the credit report, and as the Bankruptcy case becomes older, each person will be able to reestablish good credit. There are many books and publications addressing reestablishing good credit after Bankruptcy.

Bankruptcy can help almost any person who cannot pay their debts as they become due. Bankruptcy is complex and each case is individual. Each person must take many factors into account in deciding whether filing Bankruptcy will provide the relief needed. I , as a Bankruptcy Lawyer offer a free consultation with you, one on one, to discuss Bankruptcy in general and as Bankruptcy law applies to you. If you cannot pay your debts as they become due, call for a free consultation.