North Carolina Bankruptcy Exemptions and Law
COVID-19 Update: Due to COVID-19, clerk's offices are open, but public access is restricted. Courts encourage debtors without an attorney to interface with clerks via email or telephone. These same restrictions apply to the courthouses themselves. Visitors must comply with limitations like symptom screens, facemask requirements, and occupancy limits. Nevertheless, some live hearings and meetings are available.
Like most other jurisdictions, North Carolina bankruptcy courts have temporarily waived the debtor's wet-ink signature requirements for the petition, Social Security Number declaration, attorneys' fees declaration, and any other documents which normally require a physical debtor's signature. These restrictions are subject to change with little or no notice. Visit the court's website here to obtain the latest information.
The Benefits of Bankruptcy
Fear can sometimes prevent us from making a good decision. Bankruptcy phobia is a good example. Board games like Monopoly give many people a fear of filing bankruptcy. Bankrupt Monopoly players must leave the game, and they have no hope of returning. Furthermore, bankrupt players instantly lose all their property.
A real-world bankruptcy is light years different. The Supreme Court has repeatedly held that bankruptcy does not end the game. Instead, “the principal purpose of the Bankruptcy Code is to grant a 'fresh start' to the 'honest but unfortunate debtor.'" Moreover, as outlined below, the law exempts (protects) most of your property.
You have these rights under the law. But you still have to assert them throughout any legal proceeding. A bankruptcy attorney can enforce your freedoms in court. Diligence is key in these areas.
The federal Bankruptcy Code controls most procedural matters in this area. Property exemptions, which are discussed below, are often governed by state law. North Carolina is a state which has its own laws about property protections in bankruptcy.
Recently, the Supreme Court and the Consumer Financial Protection Bureau have given debt collectors more power than ever before. As a result, bankruptcy's automatic stay might be the only way to stop adverse actions like:
- Wage garnishment
- Bank account levy
- Creditor lawsuits
- Lien placement
Generally, creditors can only bypass Section 362 of the Bankruptcy Code if the debtor threatens the collateral (for example, "I'm going to drive my car off a cliff"). Getting around the stay is so difficult, and the penalties for violating it are so harsh, that most creditors don't even try. An attorney can ensure creditors follow the law.
Technically, the automatic stay prohibits moneylenders from communicating with debtors. Therefore, many banks stop sending statements, out of an abundance of caution. Other banks suspend ACH and other bank account debit payment arrangements. If the underlying obligation is a secured debt or a contract, like a cell phone agreement, that you want to maintain, you must continue to make payments.
The automatic stay offers immediate relief to distressed debtors. Bankruptcy's debt discharge offers long-term relief to these same debtors. Generally, unsecured debts are dischargeable in bankruptcy. Examples include:
- Payday loans
- Medical bills
- Credit cards
A few unsecured obligations, such as child support and criminal fines are not dischargeable. Some other unsecured debts, like student loans and back taxes, are only dischargeable in certain situations. Furthermore, if there is compelling evidence of fraud, the debt is not dischargeable.
A bankruptcy attorney can generally address nondischargeable debts in separate proceedings.
“Discharge" means the judge eliminates the legal obligation to repay a debt. The judge does not have the power to address collateral consequences. As an example:
Assume State U is withholding Alex's transcript because he owes unpaid tuition. School tuition is a dischargeable unsecured debt. However, even after the discharge order comes down, State U may keep withholding Alex's transcript.
You (or your lawyer) must address this matter separately.
Kinds of Consumer Bankruptcy
The two kinds of consumer bankruptcy begin and end the same way, with the automatic stay and debt discharge. The middles are very different.
Bankruptcy does not end the collateral consequences of debt. It also does not dissolve security agreements. If you want to keep your house, car, and other secured assets, you must keep making payments. Chapter 13 does not give you a free car or house. But it does make these assets easier to afford.
First, there's the protected repayment period. The automatic stay lasts up to five years in a Chapter 13. Debtors use this time to ease past-due mortgage payments and other delinquent secured debts. Each month, you make an income-based debt consolidation payment. The trustee apportions this money among your creditors, which primarily go to your secured debts, like your car loan.
As long as the plan meets minimum legal requirements, creditors must accept it, regardless of the amount of delinquency. As mentioned, it's almost impossible to bypass the automatic stay.
Additionally, a bankruptcy lawyer can unlock some advanced options in a Chapter 13. A cram-down is a good example:
Assume David still owes $5,0000 on a motor vehicle which is only worth $2,500. If he pays the bank the car's current fair market value by the end of the bankruptcy, the bank might have to forgive the rest of the loan.
Chapter 7 bankruptcies are a bit more straightforward. These actions are designed for individuals and families struggling with large amounts of credit card and other unsecured debt. These struggles are quite common, mostly because the average credit card interest rate is around 20 percent, and medical bills can be astronomical.
About six weeks after debtors file their petitions and schedules, the trustee reviews the paperwork for red flags of fraud, such as income/lifestyle discrepancies. If Eddie drives a new luxury SUV and claims he only makes $1,000 a month, something is rotten in the state of Denmark.
If everything goes well at the meeting, and it usually does, the judge typically signs the discharge order without requiring a hearing. And that, as they say, is that.
The Tarheel State imposes general and specific qualifications on bankruptcy debtors. Everyone must complete an approved debt counseling class before they file. Furthermore, everyone must complete an approved budgeting class before the judge signs the discharge order.
Chapter-Specific Formal Qualifications
The means test applies in Chapter 7 bankruptcies. Your family's annual income must be below average for that household size. In North Carolina, as of November 1, 2020, that amount is $88,942. This figure is not set in stone for everyone. For example, it's more expensive to live in Raleigh/Durham, Winston-Salem/Greensboro, and Charlotte than in some other areas of the state. So, if you live in these areas, the income cutoff might be higher.
Chapter 13 debtors must be below the debt ceiling. As of January 1, 2021, these ceilings are $1.4 million in secured debt and $400,000 in unsecured debt. These totals include past-due and current obligations.
Chapter-Specific Informal Qualifications
Do not let the “informal" label fool you. These qualifications are real. They are simply unwritten. Failure to meet them could result in an involuntary dismissal.
A Chapter 7 debtor must convince the trustee that they are in serious financial trouble and extreme measures, like immediate debt discharge, are justified. So, if you file Chapter 7, you normally must be at least marginally in the red every month.
Chapter 13 bankruptcy debtors must clear a different income-based hurdle. As mentioned, these debtors must make a monthly debt consolidation payment. So, they must have a rather large amount of disposable income.
These unwritten rules vary in different jurisdictions. An experienced North Carolina bankruptcy attorney is aware of them and can help ensure that you qualify.
Formal property exemptions (protections) are in Article 16 of the North Carolina code. Some highlights include:
- Homestead exemption: Most homeowners may protect up to $35,000 of home equity. The exemption increases to $60,000 in some cases. If you have less home equity, neither the trustee nor a creditor can touch your home. Mortgage loans are amortized (interest first). So, unless you have lived in the house for more than ten years, you probably have very little equity.
- Motor vehicle exemption: State law protects up to $3,500 in vehicle equity. Once again, owners have almost no equity in new cars. Used cars typically have little financial value, especially if they need work or have been in an accident.
- Current wages: Earned, unpaid wages dating back two months are exempt in a North Carolina bankruptcy. A similar federal exemption sometimes applies as well.
- Personal property: Generally, the law protects about $7,000 of household goods, such as electronics, jewelry, and furniture. These items have even less market value than cars. A $1,500 laptop might fetch $150 in a garage sale.
- Retirement accounts: Teacher retirement and other public pension plans are 100 percent exempt. So are 401(k)s, IRAs, and other such retirement accounts. Life insurance payments, if the debtor's spouse or child is a beneficiary, are 100 percent exempt as well. On a related note, college savings accounts are also exempt, if they contain less than $25,000.
- Public benefits: Social Security, unemployment compensation, and other public benefits are 100 percent exempt. Private benefits, like workers' compensation benefits and personal injury awards, are usually exempt as well.
- Wildcard: If you have nonexempt assets, like cash in a savings account, you may use North Carolina's wildcard exemption and keep them. This exemption provides up to $500 of protection ($5,000 if you apply part of the homestead exemption).
Debtors in North Carolina must use these state exemptions. The exemptions listed in federal law are unavailable in the Tarheel State.
Additionally, there are some informal exemptions in North Carolina. The best interest of creditors rule is a good example:
Assume Sammy has a nonexempt RV. It's worth about $1,000, and it needs about $500 in minor repairs. The trustee estimates sales costs, mostly cleanup and storage, at $500. Under these facts, although the RV is nonexempt, the trustee cannot legally liquidate it. A seizure and sale would produce little or no money. So, such action is not in the best interests of the creditors.
How do I start bankruptcy in North Carolina?
North Carolinians are very self-reliant. So, there is a strong DIY (Do-It-Yourself) impulse in the state. Especially since the forms are available here, many debtors assume a DIY bankruptcy is a good idea.
That's true in a few cases. However, remember that bankruptcy is about as complex as a divorce or personal injury lawsuit. You generally need a lawyer in these proceedings, and it's often the same in a bankruptcy. As discussed above, an attorney knows all the written and unwritten rules. It can be difficult to protect all your rights under bankruptcy law when your creditors' lawyers are fighting for their clients.
Where do I file bankruptcy in North Carolina?
Pro se debtors without lawyers must conduct most business at a designated location. If you live between Interstate 77 and the Tennessee border, you are probably in the Western District. If you live in a north-south corridor that runs from the Winston-Salem, Greensboro, and Durham area to the South Carolina border, you are probably in the Middle District. If you live anywhere else in the state, you are probably in the Eastern District.
Bankruptcy lawyers usually have no such geographic constraints. They may use the ECF (Electronic Case Filing) system to pay fees, file documents, and more.
How much does bankruptcy cost in North Carolina?
Depending on the type of bankruptcy and some other factors, consumer bankruptcy filing fees are usually about $350. Installment agreements and fee waivers are sometimes available. Professional fees vary as well. Sliding scales, as well as pre-and post-filing installment plans, are almost always available.
What happens when you declare bankruptcy in NC?
When you declare bankruptcy in North Carolina, the automatic stay stops foreclosure, wage garnishment, and other adverse creditor actions. The state's property exemptions protect your house, car, and other key assets. While you're under the bankruptcy court's protection, you can repay debts on your own terms. In other words, when you declare bankruptcy, you get a fresh start.
How much debt do you have to have to declare bankruptcy?
Typically, if you are more than one month behind on a house note, car note, or other secured debt payment, you should probably consider bankruptcy. Additionally, if you spend more than about 10 percent of your income on credit cards, medical bills, and other unsecured debts, you should probably consider bankruptcy.
How much money can you have in the bank when filing bankruptcy?
The amount varies. North Carolina law protects most of your current wages. You can use the state's wildcard exemption to protect even more money in the bank. Furthermore, a lawyer can use some rules such as the mootness doctrine to keep creditors out of your bank account. On a related note, the automatic stay instantly stops wage garnishment and lifts bank account levies.
Rely on an Experienced Lawyer
If you want to keep your assets, get relief from creditors, and get a fresh start, call a North Carolina bankruptcy lawyer today.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.