I am an Asheville, NC bankruptcy lawyer. I also represent individuals in the following NC counties: Henderson, Madison, Polk, Transylvania, McDowell, and all counties west of Asheville, NC. I represent individual debtors in bankruptcy actions. I do not represent creditors and I do not represent debtor businesses. Debtors filing for bankruptcy protection have the two options below. But your first decision is to decide is whether bankruptcy is your best option. And if you decide bankruptcy is in your best interests, then you will need to decide which type of bankruptcy will work best with your facts. And please remember: your particular set of facts is the most important consideration in reviewing the information below. There is not one "right" answer which fits all cases.
What Happens When You File Bankruptcy?
Alternatives to Bankruptcy
Chapter 7 allows you to discharge almost all unsecured debts (Ex: credit cards, personal loans, medical bills, etc--bills without collateral) and secured debts where you no longer want the collateral. You are allowed to continue to pay "secured debts" (Ex: car loans, house mortgage, furniture, etc.--bills where the creditor will repossess the collateral if not paid) so long as you are current on the loan at the time you file for bankruptcy. In fact, most Chapter 7 debtors keep almost all of their unsecured personal property. Chapter 7 allows you to keep $18,500 in value in a home equity, $3500 in value in a vehicle, $3500 in value in household furnishings and $5000 in any type of personal property. If you are married you may double these amounts. Some debts are not dischargeable , including child support, alimony, criminal restitution, student loans, tax debts, debts incurred by fraud, embezzlement, larceny, credit purchases or cash advances of $1,150 or more made within 60 days of filing.
Chapter 7 Eligibility Means Test You will not be able to use Chapter 7 if you have already received a bankruptcy discharge in the last eight years or if, based on your income, expenses, and debt burden, you could feasibly complete a Chapter 13 repayment plan. To determine whether you are eligible to file under Chapter 7 the bankruptcy court requires you complete a means test. There are two parts to this test but you must only pass one. The first part is whether your yearly gross income is below the "median" for North Carolina which is: $36,813 (1 person), $51,415 (2 people), $65,143 (3 people) and $69,098 (4 people) as determined by your average household income for the past six calendar months. If so, you are eligible for Chapter 7 relief. If your income is greater than the "median" the 2nd part of the "means test" is used to deduct expenses from your income to determine how much you can pay your unsecured creditors over the next five years. Chapter 7 also requires you complete credit counseling with an agency approved by the United States Trustee.
Chapter 13, the "wage earner" plan, allows you to create and pay a monthly payment plan for all debts you are currently behind on--especially car and house loans. It enables individuals with regular income to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over 3 to 5 years. You will also have to pay back a portion of all your "unsecured" debts over a 3 to 5 year period. Importantly, Chapter 13 allows you to keep your personal property if you finish the plan. Some debts--such as a home mortgage--must be paid in full in addition to the bankruptcy plan. Other secured debts--such as car loans--may be reduced slightly by being paid "in the plan." Debts you are behind on become "unsecured" in a Chapter 13 unless you have more than $18,500 in equity value in a home.
The Bankruptcy Court notes that Chapter 13 may have a great advantage over Chapter 7 if you need to save your home from foreclosure. A Chapter 13 filling will stop a foreclosure proceedings and allow you to cure delinquent mortgage payments during the bankruptcy (3 to 5 years). But in this situation you must still timely make all mortgage payments that come due during the Chapter 13 plan. Also Chapter 13 may allow you to lower certain debts, like a car loan, by putting them "in the plan" but it currently does not allow you to lower your most important debt: your home mortgage. Chapter 13 will also protect third parties who "co-signed" your loan. But the best thing about Chapter 13--assuming you can afford the plan on top of your original mortgage, is "the plan" acts like a consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under Chapter 13 protection. This is a very helpful feature.
However, unless you are facing foreclosure on a house with substantial equity, our office believes it is better to file a Chapter 7 case rather than a Chapter 13 case. You should only consider a Chapter 13 case if your equity in your home is greater than $18,500 ($37,000 if married) and you are temporarily unable to make payments and you need temporary emergency help to to buy time to begin making payments again (note: if you will not be able to make your regular monthly payments on your house the very next month, Chapter 13 will not help you). But there are situations where a Chapter 13 plan, if you can afford the payment, might be preferable. For example, you have very valuable personal property you cannot protect with your exemptions (above); or you have a codebtor--your parents/sibilings who co-signed your loan--who will have to pay the debt if you do not do so. In these situations a Chapter 13 is in your interests.
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When Chapter 13 might be better
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