What Do You Lose When You File Bankruptcy?
Filing bankruptcy could give you a financial fresh start if you can’t repay your debts. However, it’s not a magic bullet, and some consequences remain. The type of bankruptcy you file, along with your asset and debt makeup, will determine what you are entitled to keep and what you could potentially lose.
The U.S. Bankruptcy Code lays out many different types of bankruptcy proceedings. Some can lead to the complete discharge of most debts. In others, the filer drafts a plan to repay creditors or reorganize their finances, and their remaining debts might get discharged if they adhere to the plan.
While bankruptcy can discharge most unsecured debts, some obligations can’t be wiped clean. These include:
- Child support
- Student loans are only dischargeable in very limited circumstances
- Liens on property
- Tax debt is only dischargeable in limited circumstances.
In most cases, an automatic stay takes effect once someone files bankruptcy for the first time. Creditors must stop collection activities.
Chapter 7 Bankruptcy
Chapter 7, or “liquidation bankruptcy,” is one of the most common bankruptcy types for individual debtors. You must pass a “means test” to qualify if the debts are primarily consumer in nature.
The proceedings generally follow these steps:
- Take credit counseling – You must take credit counseling within six months before you file.
- Filing with the court – Your lawyer submits the petition and documents outlining your income, assets, expenses, and debts. Once you file, the automatic stay takes effect, and a trustee is appointed.
- Creditors’ meeting – At the “341 meeting,” the trustee will ask you about your financial situation under oath. Creditors can appear to ask questions themselves. If the debtor doesn’t appear, the court can dismiss the bankruptcy.
- Liquidation – The trustee sells non-exempt property to satisfy unsecured debt (debt for which you haven’t put up collateral.)
- Complete coursework – You must take an approved financial management class before receiving a discharge.
- Court issues its decision – If the court grants you a discharge, the stay ends.
According to the Administrative Office of the U.S. Courts, roughly 99 percent of Chapter 7 cases that aren’t dismissed or converted result in a debt discharge. The order often comes 65 to 90 days after the creditors’ meeting.
What do you lose when you file Chapter 7 bankruptcy? That depends on if the asset is exempt or non-exempt. If the asset is non-exempt the trustee may choose to sell the asset or abandon it back to the debtor. If the trustee abandons the asset and you wish to keep assets like your home and car, you will need to keep up to date on your payments to the secured creditor. However, if you fall behind, the lender could take back any property you put up as collateral.
Chapter 11 Bankruptcy
With Chapter 11 bankruptcy, there is no liquidation. Instead, the debtor presents a plan to reorganize their assets and finances, and creditors vote to approve or reject it.
Struggling businesses frequently take this route because it lets them continue to operate, even though the legal fees are higher and the proceedings take longer than Chapter 7. Some individuals also choose to file Chapter 11.
Chapter 13 Bankruptcy
Chapter 13 is sometimes called the “wage earner’s bankruptcy.” It might be an option for filers who don’t pass the Chapter 7 means test, or are delinquent on secured debt, wish to protect co-signers, and keep property that is non-exempt and would be liquidated under Chapter 7.
The proceedings generally work like this:
- Create a repayment plan – This plan will outline how you’ll repay creditors over the next three to five years.
- Prepare and file – After you take the required credit counseling, your lawyer will file the bankruptcy petition and your proposed plan.
- Attend the creditors’ meeting – The court will start the automatic stay and schedule a 341 meeting for your case. You’ll submit more supporting documents, like pay stubs, bank statements, and tax returns.
- Start paying into the plan – Your Chapter 13 plan isn’t final until the court confirms it. However, payments will still begin the first day of the next month after the case is filed. A court-appointed trustee will collect the money and forward it to creditors.
If you complete your Chapter 13 plan, stay current on alimony and child support, and pass financial management coursework, the court will issue a discharge order for the remainder of any qualifying debts.
What Do You Lose If You Declare Bankruptcy?
Do you lose everything when you file Chapter 7 bankruptcy? Not necessarily. Some of the things you might lose after a bankruptcy proceeding include:
- Non-exempt property – If you file Chapter 7, your trustee can sell non-exempt property.
- Credit score and access – Bankruptcies appear on credit reports as “derogatory marks.” This means your credit score will decrease, and it might be harder to access favorable loans or credit lines until the mark falls off the report. Chapter 13 bankruptcies stay on reports for up to seven years, while Chapter 7 bankruptcies stay for up to 10.
- Privacy – As court documents, most information in bankruptcy filings will become part of the public record. However, interested parties must know the specific court that oversaw the proceedings, and they might have to pay a processing fee.
What Assets Do I Keep After Declaring Chapter 7 Bankruptcy?
While federal law governs bankruptcy procedure, the North Carolina General Statute has its own exemption rules that determine the assets you can keep. Some NC bankruptcy exemptions that you can keep after filing include:
- $35,000 of home equity ($60,000 in some cases)
- $3,500 of equity in one car
- Unpaid, earned wages for 60 days of work
- $5,000 for miscellaneous personal property, plus $1,000 per dependent (up to four dependents)
- $2,000 for tools of the trade.
- Medical equipment as prescribed by a doctor
- All public benefits, including Social Security and unemployment insurance
- Workers’ comp and disability benefits
- Personal injury settlements or awards
- Retirement accounts, including 401(k)s, IRAs, and public pensions
- Life insurance policies
- 529 college savings plans, up to $25,000
- Child support, alimony, or separate maintenance
North Carolina also has a “wildcard” rule. If you have $5,000 of property left you want to protect, you can use the wildcard allowance to protect property. This only applies if the debtor does not have a homestead or chooses to limit his or her homestead to $30,000. If the full homestead exempt of $35,000 is claimed, no wildcard will be available. In chapter 11 and 13, there is no liquidation of assets by a trustee. If you resided in a state other than North Carolina two years prior to filing then the exemption laws applicable in your case may differ from that which is set forth above.
Contact a North Carolina Bankruptcy Lawyer Now
Over the past two decades, Sasser Law Firm has handled more than 10,000 bankruptcy cases for individuals and businesses in the Research Triangle. Each of our lawyers is a board-certified specialist who understands the various chapters. They aim to work directly with you to pursue the best financial future possible, even in the face of foreclosures, repossessions, and other emergencies.
Honesty has always been our policy, and we dislike fine print as much as you do. You won’t pay anything unless you file, and there’s no obligation to file after a consultation with us. To speak with one of our team members, contact us today.
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For more than 20 years, the Sasser Law Firm has been helping individuals and business owners sort through financial hardships to see the light at the end of the tunnel. Our North Carolina bankruptcy attorneys are all board-certified specialists, which means we have passed a complex exam, undergone a thorough peer review, and continue to earn legal education credits in this ever-evolving area of law.