Bankruptcy is a proceeding that allows an individual or a business the ability to resolve some of their debts with their creditors. Bankruptcy may provide an individual with a fresh financial start while still allowing their creditors to be repaid for their debts.
Typically, a creditor cannot collect on a debt once an individual files for bankruptcy. A creditor is required to wait until after the bankruptcy is finalized prior to resuming any collection efforts.
A bankruptcy court issues an automatic stay to keep creditors from attempting to collect on the debts owed. The reasoning behind a stay in a bankruptcy is that debt payment terms are often re-evaluated and reorganized during the process.
Bankruptcy is often considered a last resort for a business or an individual that is struggling to meet their financial obligations. This process often permits a debtor to restructure their existing debt agreements, reduce the amount of debt they already owe, and, in certain circumstances, eliminate a portion of their debt.
There are many considerations for an individual or a business to review prior to filing for bankruptcy. One of the main considerations is that there are some debts that cannot be discharged in a bankruptcy.
What are the Different Types of Bankruptcy?
There are several different types of bankruptcy that may be available to an individual or a business, depending on what they wish to do with their property. If an individual is filing for consumer bankruptcy, the main options are Chapter 7 and Chapter 13.
A Chapter 7 bankruptcy is also called a liquidation bankruptcy. In this type of bankruptcy, the individual will be required to sell, or liquidate, their property in order to satisfy their debts. There is some property that is exempt, which will be discussed below.
A Chapter 13 bankruptcy is also called a reorganization bankruptcy. This type of bankruptcy is often used by individuals with a higher income who want to keep their property. It permits an individual to rearrange their finances so they can afford their monthly payments.
What Debts cannot be Discharged in Bankruptcy?
There are certain debts in a bankruptcy that are considered non-dischargeable. This means the debt is not forgiven during the bankruptcy proceeding. There are 3 main categories of non-dischargeable debts, which include:
- Debts that are not discharged unless the individual can successfully argue that they should be;
- Debts that are not discharged only after a creditor successfully argues that they should not be; and
- Debts that are non-dischargeable.
From these 3 categories, the individual can determine which category their debt falls into. There are certain debts that will not be discharged, called non-dischargeable debts, which include:
- Student loans;
- Federal, state, and local taxes;
- Any money borrowed on a credit card to pay taxes;
- Fines or penalties for breaking the law;
- Child support or alimony;
- Personal injury debts arising out of a drunk driving vehicle accident;
- Debts arising out of tax-advantaged retirement plans and;
- Condo or cooperative housing fee debts.
It is important to note that a creditor may be able to argue their debt is non-dischargeable if they can demonstrate to the court why the individual should still owe the debt. The creditor must request that the bankruptcy court make a determination regarding whether the debt is dischargeable or not.
If the creditor fails to argue the issue of dischargeability, the debt will be discharged. Additionally, if the creditor argues the issue but the court determines the debt is dischargeable, the debt will be discharged.
Types of debts that may fall under this category include:
- Credit card purchases for luxury goods;
- Cash advances; and
- Debts obtained by false pretenses.
What are Bankruptcy Exemptions?
Bankruptcy exemptions allow the individual to keep certain assets or property even after they have filed for bankruptcy. The bankruptcy exemptions are defined by statute. Any property that is exempt cannot be sold or seized to satisfy the debts of the individual.
Any individual who files for bankruptcy may file for the bankruptcy exemptions. Bankruptcy exemptions are available in both Chapter 7 bankruptcies and Chapter 13 bankruptcies.
There are limits in the exemptions to the equity a debtor has in their property and the amount of that equity which is exempt. Equity equals the fair market value minus the unpaid balance of the property. For example, if a house is valued at $100,000 and has a loan of $50,000, it has an equity value of $50,000. If the homestead exemption in the individual’s state is $50,000 or greater, then the individual would be exempt from selling, or liquidating, the equity in the home to pay off the individual’s debt.
There are additional factors that may affect exemption limits. For example, if the individual is married, the limits may double. The exemption amounts may also increase if the individual files with a head of household status or has a certain number of dependents.
The exemptions an individual is permitted to claim vary by state. Additionally, there are federally-created exemptions.
In some states, an individual may choose between the state and federal exemptions. In other states, the individual is required to use the state exemptions. An individual is only permitted to choose exemptions from one statute, the federal or the state.
What are the Bankruptcy Exemptions in North Carolina?
North Carolina is one of the states in which an individual must use the state exemptions and not the federal exemptions. It is important to consult with an attorney to determine the particulars of each exemption and which exemptions an individual may take advantage of.
It is important to note that, in North Carolina, purchases that were made within 90 days of the bankruptcy may not be exempt. Bankruptcy exemptions in North Carolina include:
- Homestead, or equity in the dwelling used as a residence:
- Up to $35,000;
- Up to $60,000 if over the age of 65 and the spouse has passed away, leaving ownership to the survivor;
- A burial plot may be exempted in lieu of the homestead;
- Equity in an automobile:
- Up to $3,500 in one motor vehicle;
- Personal property:
- Up to $5,000 in the following:
- Household goods;
- Crops; and
- Musical instruments;
- Plus an additional $1,000 in these items for each dependent, up to $4,000 more;
- Prescribed health aids;
- Tools of the trade:
- Up to $2,000 in professional books, implements, and tools;
- Up to 60 days wages;
- A portion of unearned, unpaid wages as needed for support;
- Life insurance benefits paid to a spouse or children;
- Employee group life insurance;
- Fraternal benefit society benefits;
- Pensions and retirement:
- Tax exempt retirement accounts including IRAs and 401(k)s;
- State, county, city, and municipal employee pension benefits;
- Legislative, teacher, law enforcement; firefighter; and rescue worker pension benefits;
- Public benefits;
- Alimony and child support:
- Child support; and
- Separate maintenance as needed for support;
- Other :
- Personal injury or wrongful death compensation;
- Qualified college savings accounts up to $25,000;
- Business partnerships in property;
- Wildcard, or an exemption for personal property of the individual’s choice:
- Up to $5,000 in property if a portion of the homestead or burial exemption is not used; and
- Up to $500 of personal property.
Do I Need a Bankruptcy Lawyer?
It is essential to have the assistance of an experienced North Carolina bankruptcy lawyer for any bankruptcy issues you may face in North Carolina. The laws governing bankruptcy are complex and your attorney can help you navigate the bankruptcy system. A lawyer will review your circumstances, advise you what property and debts may be exempt, and represent you during court proceedings.