In A Nutshell
(1) “I Will Lose Everything If I File A Chapter 7 Bankruptcy” – WRONG
(2) “Bankruptcy Will Permanently Ruin My Credit” – WRONG
(3) “Everyone Will Know That I Have Filed Bankruptcy” – WRONG
(4) “It Is Too Late To File Bankruptcy” – WRONG
In More Detail
(1) “I Will Lose Everything If I File A Chapter 7 Bankruptcy”
WRONG. Many believe that if they file a Chapter 7 they will lose everything they own. I believe some of this misconception comes from Chapter 7 often being called a “liquidation” form of bankruptcy. This is wrong. In fact in most Chapter 7s the individual keeps all of their property. You can provide me with a list of your assets and their values in the online intake form.
Exemptions. The Bankruptcy Code has established “exemptions” that allow you to keep your assets despite filing a Chapter 7. Basically, the law says that you are allowed to own up to a certain amount of “stuff” and not be forced to lose it to pay creditors. The law is concerned with the equity (value of the asset minus the debt owed on the asset) you have in this stuff. The value of each asset you can exempt depends on the type of asset and your entire situation. Your assets are broken down into categories such as your residence, primary vehicle, household goods, and many more. Each category is given a certain amount of exemption value. Some assets do not fall into any of the preset categories and must be exempted by the “wildcard” exemption. At the bottom of this post is a list (current as of 7/2019) of the exemptions allowed under the laws of North Carolina.
Value Of Assets. Again, in your bankruptcy petition you must list all of your assets and their values. Determining the value of everything you own can seem like a daunting task. For certain items (i.e. your real estate), the tax value is a good starting point. From their you can research what other homes in your neighborhood have recently sold for or consult with local real estate agents to see if the tax value is high or low. In certain circumstances it may be wise to have your property appraised by a certified appraiser. It is fairly easy to lookup the value of your car, motorcycle, motor home, or boat online. I use the NADA website to determine these values. When it comes to household goods, I typically have the individual provide me with a value equal to what they think the item would sell for at a yard sale or if listed on a website like eBay or Craigslist.
Unexempt Assets. It is very important to ensure that every asset you own is listed in your bankruptcy and that each is exempted by the proper exemption. If your assets are not properly listed in your Chapter 7’s exemption schedule or if the value of your assets falls above what the law allows, then you could lose the asset to the Trustee who will take the asset, sell it, and pay off a portion of your debt. In certain situations, you can settle with the Trustee by paying him an agreed upon amount of money to keep him from taking the unexempt asset.
This graph shows some of the COMMON EXEMPTIONS individuals use when filing a Chapter 7 Bankruptcy as well as common methods used for determining the value of the asset. This graph does not contain all of the possible exemptions created by the law and does not purport to advise that this is the best way to value your particular asset. Every bankruptcy is different and legal counsel should be sought in every case.
|Amount Of Exemption
|How To Value
|Tax Value Similar Property In Area Appraisal
| $5,000 + $1,000 per dependent up to
|Yard Sale / Auction Value
|Tools Of Trade
(Used for your work)
|Yard Sale / Auction Value Research Online Appraisal
(i.e. 401(k), IRA)
|100% in most cases
|Balance of the account
| 100% if beneficiary is dependent or spouse
Exempt under wildcard if beneficiary is anyone else
|$5,000 (depending on homestead exemption)
|Used to exempt any property not falling into another category
(2) “Bankruptcy Will Permanently Ruin My Credit”
WRONG. Bankruptcy will not permanently ruin your credit. It will negatively affect your credit in the short run but will create a clean slate allowing you to rebuild your credit. It will remain on your credit for a certain period of time before falling off.
Immediate Impact To Your Credit. Your bankruptcy filing will almost immediately show up on your credit report. This will negatively affect your credit score. The amount your credit score will be lowered will depend on what your credit score is before the bankruptcy is filed. Most individuals who file a bankruptcy already have fairly low credit scores due to delinquent payments, judgments, or repossessions. These individuals’ credit scores will drop less than one who files a bankruptcy without any negative reportings on their credit report.
7 To 10 Years After The Bankruptcy Is Filed. The bankruptcy filing will then remain on your credit report for a certain period of time. This amount of time depends on the type of bankruptcy you have filed. For a Chapter 7, it will remain on your credit for 10 years from the date it is filed. For a Chapter 13, it will remain on your credit for 7 years from the date it is filed. I describe bankruptcy as a “red flag” on your credit. If you attempt to get financing, the financing company will run your credit and see the red flag of bankruptcy. The company will likely either extend you financing at a higher interest rate or deny you any financing altogether.
The Process Of Rebuilding Your Credit. I find that most individuals who file bankruptcy are able to get financing in some form very soon after their bankruptcy ends. If you can manage, then having a credit card with a low limit, using it to buy groceries, and paying it off every month is a good way to begin the process of rebuilding your credit following a bankruptcy. While finance companies will not be fond of you having filed bankruptcy, they will be satisfied that your debt-to-income ratio is very low. Keep in mind that following a bankruptcy, most (if not all) of your debt is wiped off of your credit report giving you a “fresh start” on your credit. All of the previous negative reportings that were on your credit report will be gone. While the red flag of bankruptcy remains for some time, you will be able to increase your credit score. After the 7-10 year period, bankruptcy will fall off of your credit report and you will be able to build your credit even faster.
(3) “Everyone Will Know That I Have Filed Bankruptcy”
WRONG. It is not true that your bankruptcy filing will be advertised for everyone to see. Typically, you will get to decide who sees your bankruptcy filing (i.e. your creditors). Others will have to actively search to find out if you have filed. In certain situations your employer will know about your bankruptcy.
Those Listed In Your Bankruptcy. Notice of your bankruptcy will be sent to those listed in your bankruptcy petition. Your bankruptcy will include a list of all of your creditors, their addresses, and the balances you owe them. Most of the time these creditors are large banks (i.e. Chase, Wells Fargo). You may also owe debts to family members, friends, or coworkers. All of your creditors will be sent notice that you have filed bankruptcy. In addition, your bankruptcy petition has to include individuals that have co-signed debts with you. They will also receive notice of your bankruptcy filing. These individuals are typically family members.
Search To Find. When you file a bankruptcy, your name and case number will be available to those who search the federal database for bankruptcy filings. This is not a database that individuals typically have access to because there is a cost to having access. As mentioned before, your bankruptcy filing will show up on your credit report which will be seen by anyone running your credit for financing purposes. I have had clients that have searched their names on Google following the filing of a bankruptcy and the bankruptcy court calendar has appeared on the search page showing the individuals name and case number. This is not something that can be censored. But, in order for someone to find out that you have filed a bankruptcy they will have to actively search for it.
Employer. Sometimes your employer will find out about your bankruptcy…but certainly not in every case. In a Chapter 7 bankruptcy, your employer will not have to be notified of your bankruptcy. Your employer and income will have to be disclosed in your bankruptcy, but nothing will be sent to your employer notifying them of your case. In Chapter 13, your employer will know about your bankruptcy in most cases. Through a Chapter 13 bankruptcy (as described in another post) you make a monthly payment for 3 to 5 years. The Chapter 13 Trustee typically likes to have your payment paid via your wages being garnished. So, your employer would be notified of the bankruptcy and directed to garnish a certain amount of money from each paycheck to send to the Trustee.
(4) “It Is Too Late To File Bankruptcy”
WRONG. It is rare that it ever becomes too late to file a bankruptcy, although filing sooner rather than later can certainly have its benefits. Bankruptcy can assist in saving your house from being foreclosed, your car from being repossessed, and your property from being taken by other creditors.
Foreclosure. One of the most common reasons for filing a Chapter 13 bankruptcy is to save a residence from being foreclosed upon. If you are behind on your mortgage payments, then filing a Chapter 13 will allow you to catch up these missed payments through an easier to manage payment plan stopping the foreclosure action. In order to save your house, your Chapter 13 must be filed within 10 days after the foreclosure sale. This 10 day period is called the upset period. Filing the case during the upset period will stop the sale from becoming finalized. Keep in mind that you will pay through your Chapter 13 payment the entire amount you are behind on your mortgage. The longer you wait, the more behind you become resulting in a higher monthly bankruptcy payment.
Repossession. Another common reason to file a bankruptcy is to stop one’s vehicle from being repossessed. A creditor with a lien against your vehicle can repossess the vehicle upon you missing one monthly payment. The creditor can come to your house, work, or anywhere else and take the vehicle from you. Individuals have told me that they have gone into a grocery store and come out to find their vehicle towed away by the creditor. Bankruptcy can stop your car from being repossessed. If your car has been repossessed, then filing a Chapter 13 prior to the car being sold at auction (typically 10 days from the repossession) will allow you to get your car back. Sometimes the creditor will require a court order to return the vehicle. Most of the time if you can provide proof of insurance on the vehicle, then it can be worked out for you to retrieve your vehicle from the location to which it was towed. Through your Chapter 13 bankruptcy payment you will pay for your vehicle. By the end of the bankruptcy the loan will be satisfied and you will receive the vehicle’s title.
Collection Efforts From Other Creditors. Bankruptcies are often filed to stop all collection efforts from creditors. These collection efforts include phone calls, demand letters, lawsuits, enforcement of judgments, and more. All collection efforts must stop upon the filing of a bankruptcy.