When should you consider filing personal bankruptcy? 

Families facing serious financial challenges are strongly encouraged to seek some objective direction before bankruptcy, the last resort, is necessary. As discussed in the previous column, the best place to start is to contact a non-profit agency to help you work through your financial circumstances before your more serious options are forced upon youOne such non-profit is Financial Pathways of the Piedmont, a highly regarded United Way-supported organization. You may receive a confidential courtesy initial session via telephone or a virtual session.  Contact them at 336.896.1191 or at info@financialpathways.org. 

If you have made every reasonable effort to work out your financial obligations on your own and you cannot, you may need to consider filing a petition in bankruptcy to get the protection of the federal bankruptcy court.  If you do file bankruptcy, it generally is noted on your credit record for several years.  But it may be the best choice of some less than ideal choices for your family.  

A chapter 7 bankruptcy refers to the chapter in the federal bankruptcy laws.  Its purpose is to give debtors a “fresh start.”  It helps parties to wipe out or extinguish a significant portion of their general (unsecured) debt, such as credit card balances. 

Who qualifies to file?   

  • If you have filed bankruptcy before, you may not be able to file again at the time you want, depending on the amount of time since you last filed.   
  •  Your income must be below a certain level to assure, essentially, that you do not have sufficient income to pay your debts in full.  
  • You must have completed approved credit counseling (to be sure you have no other choice but to file bankruptcy) within 180 days before you file. 
  •  If you want to keep your home with a mortgage on it, you should be sure you are fully current on your mortgage payments so you can continue to make timely mortgage payments.  If you are in default on your mortgage when you file, the mortgage lien holder may ask the court for the ability to proceed against you to foreclose on your property.   
  • Federal bankruptcy law allows you to receive certain state law exemptions of property.  NC law provides certain exemptions (equity/value you get to keep) so you can receive  a fresh start with the proverbial shirt on your back: some equity in a vehicle and your home, protection of your IRA/retirement plan, some household goods, and others. (Search North Carolina General Statutes IC-1601 and following for the full listing of state exemptions.) 

You start a bankruptcy by filing a petition in bankruptcy. You provide: 

  •  A list of all creditors and the amount and nature of their claims. 
  • The source and frequency of your income. 
  • A list of all your property; and 
  • A detailed list of your monthly living expenses, i.e. food, clothing, shelter, utilities, taxes, transportation, medicine, and others. 

When a chapter 7 petition is filed, a trustee is appointed by the court to sort out the assets, debts, liens, status of various claims and exemptions, and other details.  The primary role of the chapter 7 trustee in a so-called asset case is to liquidate the debtor’s nonexempt assets in a manner that maximizes the return to the debtor’s unsecured creditors.  The trustee may also avoid certain preferred payments (aka preference claims) made to general (unsecured—no lien) creditors within 90 days before the petition is filed, and to set aside some transactions. 

 Citizens should talk to a lawyer who files bankruptcy petitions regularly for clients to consider their options.  Generally, lawyers will meet with you for a courtesy initial consultation to discuss your options, including costs and lawyer fees, and whether you should, and can, file bankruptcy. 

Next Column: What is a Chapter 13 (Wage Earner) bankruptcy plan, and when is it an option? 

Remember: An informed choice is a smart choice. 

Mike Wells is a partner with Wells Law, PLLC in Winston-Salem.  His email address is mike@wellslaw.us and his telephone number is 336.283.8700.