first in a series on consumer bankruptcy
The idea that you will lose everything if you file for bankruptcy is perhaps the most pervasive of bankruptcy myths, based on conversations I’ve had with clients, neighbors, and friends. Television and movies would have you believe that losing everything is the end of a bankruptcy – to the point that many believe that everything that you own will be taken and sold at a public auction. That outcome however is extremely rare and generally doesn’t happen in a consumer bankruptcy. The purpose of the bankruptcy code is to “provide the honest debtor a fresh start.”
Exemptions may provide a fresh start to the debtor
Exemptions are provided by the federal code, but a US state can choose to opt out of the federal exemptions and replace them with their own. In North Carolina the exemptions are set by NC law, provided you have been a resident of North Carolina for at least 2 years. So how much can you keep? That depends on one thing: equity – how much equity you have in an item. Equity is the amount of value an item has above that of any mortgage, loan, or lien.
You may be able to protect your home and car in bankruptcy
For example if you have a home worth $125,000 and a mortgage of $100,000 you have positive equity of $25,000. Here is where the exemptions come into play. North Carolina allows the debtor to retain up to $35,000 in equity for their primary residence as an individual, or $60,000 as a married couple. Thus the $25,000 home equity would be exempt and the Bankruptcy Trustee cannot have the property sold.* Alternatively if the asset is worth less than the amount owed there is no equity a trustee can pursue and thus the asset is safe in a bankruptcy proceeding.
The same works for one vehicle – the state of North Carolina allows up to $3,500 worth of equity to be exempt from a vehicle. While the number may seem low, most vehicles are typically “underwater,” meaning that due to depreciation they are worth less than the loan balance. Thus, it’s rare that a vehicle would have more than $3500 in equity. Most household goods and many trade supplies can be exempted as well, thus leaving the debtor with most of their personal goods and a solid enough foundation from which to restart their financial life.
Your bankruptcy attorney will go over assets and finances with you to ensure that you qualify for Chapter 7 bankruptcy. If there are signs of problems a debtor may be elect to either wait a period of time or alternatively file a Chapter 13 bankruptcy plan instead.
In a future blog post we’ll go over the differences between Chapter 7 and Chapter 13, but put simply, a Chapter 7 bankruptcy is for people of limited means who cannot hope to pay back all their debts, while a Chapter 13 bankruptcy is often known as a “reorganization” of debts, meaning that the debtor will repay all, or some, debts depending on income, but over a 5 year period.
If you’d like to know more about bankruptcy, contact us.
*Exemptions do not prevent the mortgage/lien holder from initiating foreclosure prior to a bankruptcy filing or after the bankruptcy case is closed. It is therefore imperative that Chapter 7 filers be up to date on mortgage and auto payments if they wish to retain their secured property after the close of the bankruptcy case.
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