The challenging economy has forced many families to consider filing bankruptcy as a way to put their financial woes behind them. Although it is not a remedy anyone should consider except as a last resort, bankruptcy does provide an opportunity to start over financially.
Bankruptcy is intended to give debtor families a "fresh start," in the words of Congress. One cannot have a fresh start if the process strips families of the proverbial shirt off their backs. Debtor families, therefore, are given exemptions, allowing family members to keep some assets. The amount of the exemptions is based on state law. The exemptions the law provides are to secure for these families minimal assets so they can be successful in rebuilding their financial and personal lives.
The Bankruptcy Reform Act, passed in 2005, provides standards to require families to get credit counseling before they can file bankruptcy. The belief is that counseling could stave off the necessity of bankruptcy.
Experience shows that families that get confidential credit counseling early can avoid bankruptcy.
A well-regarded counseling group in our community is Consumer Credit Counseling Service of Forsyth County, a United Way agency (896-1191, or toll-free in North Carolina at 888-474-8015, or www.cccsforsyth.org). Its counselors can often work with creditors, even if a debtor is in foreclosure, to chart a pathway out of financial troubles.
If a family does file bankruptcy, it has to receive additional counseling, before it completes the process, to help to equip it to handle its finances differently when it comes out of bankruptcy.
The two forms of bankruptcies most families choose are a Chapter 7, "straight" bankruptcy, and a Chapter 13 bankruptcy, commonly called a "Wage Earners Plan." The numbers represent the chapter numbers in the bankruptcy laws.
In a "straight" bankruptcy, the debtor family is not able to repay its debts, and most of the family's debts, specifically general, unsecured debts, such as credit-card debts, are canceled or discharged. Many debts, such as mortgages, secured loans on vehicles, taxes, alimony, child support, and others, are not discharged, however.
As noted, the debtor family may exempt, or keep, certain items or property. The assets that are exempt from creditors include a certain dollar amount of the value of one's home, motor vehicle, clothing, household furnishings, tools of one's trade, most retirement accounts and others.
Once the process is completed, the unsecured general creditor claims are discharged, which means the debtor family does not owe these debts any more.
A Chapter 13 "Wage Earners Plan" allows a debtor family to pay part of its income over a three- to five-year period to its creditors. The plan, which requires court approval, provides for repayment of some or all of the debtor family's debts, depending on the amount of family income and the amount of assets the family owns.
The "Wage Earner Plan" is the primary form of bankruptcy chosen by debtors who are behind in mortgage payments because of the protection it offers.
Although the court in a Chapter 7 bankruptcy can stop a foreclosure proceeding, ultimately creditors can, with court permission, proceed with the foreclosure. In a Chapter 13 proceeding, however, the court can under most circumstances require the creditor to allow the debtor family to catch up its house payments while keeping up with its regular payments, too.
The North Carolina Bar Association publishes a free pamphlet on bankruptcy. It can be downloaded at www.ncbar.org, or call 1-800-662-7407. The pamphlets also are generally available without charge at public libraries.
Remember: An informed choice is a smart choice.
■ Mike Wells is the senior partner at Wells Jenkins Lucas & Jenkins, PLLC.
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