Chapter 13 bankruptcy is based on the principle of debt reorganization, rather than asset liquidation—you take all of your debts, put them into a pile, and then make repayments into that pile over a three to five year period. (If you need more information about the basic difference between Chapter 7 and Chapter 13, look here.) The central concept of a Chapter 13 is that your repayments aren’t based on what your creditor’s say that you owe, rather, the payments are based on your disposable income. The chief benefit of this approach is that a Chapter 13 debtor has the opportunity to account for important daily expenses (i.e. gas, food, rent, clothing, cell phone bills, utilities, etc.), before making payments to their creditors.
This basic conceptualization of a Chapter 13 plan payment, however, does not adequately capture the practical impact of different varieties of debt. When it comes to secured debt and unsecured “priority” debt, understanding the components of a Chapter 13 repayment plan can be difficult.
A Threshold Question: Are You Above or Below Median?
The first question that we ask in a Chapter 13 context has to do with your “commitment period” under 11 USC §1325(b)(4). In other words, do you qualify for a three year bankruptcy, or are you required to stay in your Chapter 13 bankruptcy for five years? Learn more about means testing and median income threshold in our previous post, here. If your household income is below-median, you qualify for three-year Chapter 13; if your income is above-median, then you are required to stay in your Chapter 13 for five years.
As importantly, this determination bears heavily on the calculation of your disposable income for the purposes of your Chapter 13 plan. If you are above-median, then your disposable income is determined on the basis of the subsequent means test calculation (see more here). If you are below the median for your household size, then your disposable income is calculated in a less formulaic manner, based on the self-reporting that you do on Schedules I and J. Always keep in mind that all of your disposable income must be included in your plan in order for the court to confirm it. Consequently, determining your disposable income can be an important exercise in anticipating your potential payment in a Chapter 13 bankruptcy.
What about my House and Car Payments?
A common misconception is that Chapter 13 bankruptcy can eliminate (or drastically reduce) car or house payments to make them more manageable. For most debtors, this is untrue, although there are some uncommon scenarios where you can have your car payment reduced (ask your attorney about cram downs) or a second mortgage payment extinguished (ask your attorney about lien stripping).
The general rule is that you should expect to make payments for those houses or cars (or other secured debt) which you plan to keep through the bankruptcy. If you want to keep your house, you better be prepared to make the regular mortgage payment. Same goes for the car, unless you are eligible for a cram down—even in the “cram down” context, you will still have to make payments on the secured debt.
Of course, arrearages come into play here as well. If you are behind on your house or car payment, you can plan on paying back that arrearage over the life of your bankruptcy. Remember that Chapter 13 rearranges secured debt, but rarely does it discharge it altogether. If you want to keep your stuff, and it is pledged as collateral, you are probably going to be paying that debt back in full.
What is Priority Debt?
The most common examples of priority unsecured debt are monies owed to the government (i.e. taxes) and payments/arrearages owed as part of a domestic support obligation. Domestic support obligations commonly include child support and/or alimony payments. There are certainly other kinds of priority debt, a list of which you can find here. If you owe arrearages on unsecured priority debt, you should expect to pay those arrearages back over the life of the bankruptcy.
Tell Me How Much.
Unfortunately, it is rarely so easy. Even in the event that you file a Chapter 13 bankruptcy, the trustee can, and often does, modify the proposed repayment amount. While every Chapter 13 plan is different, you can expect to pay the following in your Chapter 13 plan:
- Trustee’s Fees;
- Attorney’s Fees;
- Regular Payments on Secured Debt (for property you intend on keeping);
- Regular Payments on Priority Debt (typically for an ongoing domestic support obligation);
- Repayment of Arrearages on Secured Debt;
- Repayment of Arrearages on Priority Unsecured Debt;
- Payment of any and all disposable income left over.
If it isn’t clear from the above, crafting a plan in a Chapter 13 bankruptcy can be a complex and client-specific exercise. Our office offers a free bankruptcy consultation for clients who are interested in learning more about Chapter 13 plans or any other aspect of bankruptcy. Please give our office a call today to arrange yours (336-996-4166).
In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act, known more familiarly for its unwieldy acronym/nickname, BAPCPA (pronounced “bap-see-pa”). One of the critical, and most criticized, inventions of BAPCPA was the creation of the “means test.” The key principle behind the means test was the idea that individuals with high levels of income should not be allowed to file bankruptcy. In theory, the means test component would eliminate some abusive and unnecessary bankruptcy filings—in practice, the means test served to complicate bankruptcy filings.
Suffice it to say that the means test is one of the more complex aspects of modern bankruptcy practice. A full explanation of the means test is beyond the scope of one blog post—please consider this post a primer on the means test. If you are uncertain about means testing or whether you would be able to pass a means test, the best thing to do would be to contact our office and talk to our bankruptcy attorney. We offer a free bankruptcy consultation, part and parcel of which is consideration of your ability to pass the means test.
The Threshold Question (the CMI Test)
The threshold question for means testing purposes is whether your household current monthly income is less than the median income for a household of your size in North Carolina. This is commonly called a CMI determination. This determination has a couple of nuances: first, figuring out your household size in North Carolina can be tricky. For those households with complex living situations, it can be difficult to determine household size without the advice of an attorney.
Current monthly income is a product of the bankruptcy code, and one which is not necessarily an accurate indicator of your “current” income. Current monthly income considers your gross income over the last six months. For calculation of current monthly income, you do not consider the month in which you are filing, but the six months preceding the month of filing. If your income has fluctuated over that six-month period, the means test requires that you average your gross income over that six-month period and then annualize it for the comparison to NC’s median income for your household size. Median income numbers fluctuate, but you can find the most current numbers here.
Well that Was Easy
Not so fast. It is very common for debtors to fail to consider all sources of income in calculating their current monthly income. It is important to include all sources of income over the last six months, excluding those funds received from the Social Security Administration. Some commonly excluded income sources that should be included are pension/retirement income, support from family members, income of children contributing to the household, child support, 401(k) and retirement withdrawals, self-employment income, dividends or investment income, and rental income. It all has to be included before making your threshold determination for means testing.
My Income is Too High—What about my Expenses? (the DMI test)
If you do not pass the threshold CMI test, you do not necessarily fail the means test. There is a secondary test that allows you to make certain deductions from your CMI to reach a determination as to your disposable income. This is commonly called a DMI (Disposable Monthly Income) test. For a DMI determination, you must reduce your CMI by certain actual and imputed expenses. The actual expenses include income taxes paid, monthly payments for mortgages/rent, monthly payments on vehicles, monthly payments on other secured debt, average monthly charitable contributions, and payments on prepetition priority claims (ex. child support and/or alimony). Imputed/standardized expenses are determined by IRS standards and include deductions for food, clothing, utilities, transportation, healthcare, childcare, and insurance. After taking deductions, if your DMI, multiplied by sixty, is less than $7,475.00, then you have passed the means test.
If your DMI times sixty is more than $12,475.00, than you have not passed the means test and there is a presumption of abuse in the event that you file bankruptcy. If your DMI times sixty is between $7,475 and $12,475, then a third means test section asks whether your DMI times sixty equals more than 25% of your unsecured debts. If it is less than 25%, than you will pass the means test.
If you followed most of the above, you should have a good sense of how the means test works. We strongly discourage, however, completion of means test without the aid of an attorney. Be careful of online means test calculators as well. Every potential bankruptcy filing has intricacies that make means testing variable. Importantly, just because you pass the means test and qualify for a bankruptcy, doesn’t mean that bankruptcy is the best option for you. As mentioned above, our firm offers a free consultation for clients interested in learning more about bankruptcy. Give us a call today to set up yours (336-996-4166).
In North Carolina, there are many statutory and common law protections in place that help a debtor keep their wages and property, even in the face of claims by credit card companies or other creditors. North Carolina has stringent restrictions on wage garnishment, about which you can learn here. Even outside of the wage garnishment context, North Carolina exemptions can help you keep real and personal property from the reach of your creditors.
What is an Exemption?
The legal term “exemption,” in the creditor-debtor setting, is a fancy term for “protection.” North Carolina General Statute § 1C-1601 protects property from the claims of creditors up to a certain value. The rationale for this protection is that all North Carolina citizens are entitled to certain real and personal property as a matter of right. Importantly, exemptions do not necessarily protect the value of that property, but rather, the amount of equity you have in the property. This can be very important when you have a valuable asset which has a lien or security interest on it—you still can protect that property as exempt as long as the equity you own falls within the statutory guidelines.
If you have not already gathered, determining whether your property is exempt can be a difficult and complicated exercise. There are many variables that can affect exemptions, including instances where property is co-owned, where property is owned with a spouse, where property has been recently acquired, where property is not a residence, and various other examples. Here is a grossly oversimplified, and non-exhaustive, list of those exemptions which are commonly used in North Carolina:
Real Property can be exempted up to $35,000 in equity. There are various caveats to this exemption, which is commonly called the “homestead” exemption. Importantly, you must be residing in the real property to use the homestead exemption. If you are (1) sixty-five or older, (2) hold the property as a joint tenant or tenant by the entirety, and (3) the surviving spouse has passed, then this exemption is increased to $60,000 in equity. Property owned as tenants by the entirety is exempt without any equity limit with respect to the debts of one spouse (ex. your spouse has a judgment against her for a credit card debt but you are not listed on the judgment and the property is owned by the entirety). In the event that the debt is joint, you are permitted to each use your $35,000 exemption, which means that you can protect up to $70,000 in equity in your primary residence.
In North Carolina, you can claim an exemption up to $3,500 in equity in a single vehicle. Please keep in mind that this exemption may not apply if you have purchased the vehicle within 90 days of claiming the exemption.
Household goods can be exempted up to $5,000 per debtor. You are permitted an additional $1,000 per dependent of the debtor (for up to $4,000 extra) as well. Household exemption typically includes clothing, furnishings, appliances, books, and other household items that are used as part of everyday residential existence.
In North Carolina, most retirement savings accounts are 100% exempt. All tax exempt retirement accounts are fully exempt, including 401(k), 403(b), and simple IRAs are exempt under NC statute. State and federal employee retirement contribution plans typically receive full protection as well. This is why we typically discourage our debtors from withdrawing or taking loans against 401(k) accounts, absent extenuating circumstances.
Wildcard Exemption and Other Exemptions
There are other relevant exemptions too numerous to name here, including property such as the following: tools of the trade, life insurance, personal injury compensation, prescribed health aids, public benefits, and alimony/child support payments. There exists what is called a “wildcard” exemption under the North Carolina statutory scheme, as well, which allows you to claim up to $5,000 in any property, provided that you have used less than $30,000 of your homestead exemption. This can be a helpful tool for allowing flexibility in developing your exemptions.
When Do I Need Exemptions / Why Should I Worry about This?
If you are a North Carolina resident, it is important to know how you are exposing your assets when you contract for a debt. Specifically, though, these exemptions are most important in the event that you have been served with a lawsuit or a Notice of Right to Claim Exemptions. Exemptions are also important in the Chapter 7 bankruptcy context, because they dictate which assets are available to the bankruptcy trustee for sale to your creditors. In the event that you have been served with a Notice of Right to Claim Exemptions, you typically have 20 days to respond before waiving your right to claim exemptions. It is essential that you talk to an attorney about the potential ramifications of a Motion to Claim Exemptions. Give Coltrane Grubbs & Orenstein a call to set up a consultation today (336-996-4166)!
Unlike many other states, North Carolina law typically prevents credit card companies and private creditors from collecting debts from NC citizens by wage garnishment. While there are certainly exceptions, as discussed below, wage garnishment is not a widely available collections option for creditors in NC.
Wage Garnishment? What is that?
Wage garnishment is the legal terminology used for a court or governmental order to collect funds directly from your employer. It is sometimes also known as a “wage attachment.” A wage garnishment requires your employer to withhold a portion of your paycheck for payment to a creditor.
NC Wage Garnishment is Limited
North Carolina General Statute § 1-362, along with interpretations of that law, heavily limit the ability for non-governmental creditors to withhold wages through wage garnishment. NC courts are unable to issue orders for wage garnishment in favor of your judgment creditors (i.e. entities who have prevailed in a lawsuit against you). Even in instances where NC law does not prohibit garnishment, federal wage garnishment restrictions can limit the extent to which your wages are garnished.
Some Creditors Can Garnish Wages
While most private, non-governmental creditors are not allowed to garnish wages, there are some instances where garnishment is permitted:
- – if you have unpaid income taxes or owe other money to the state/federal government
- – if you have a student loan in default
- – if you have child-support payments pursuant to a court order, or
- – if you are behind on your child support and owe arrears.
North Carolina is one of only four states that have similar limitations on wage garnishments for private creditors. Consequently, it is possible for some out-of-state creditors to obtain a judgment and wage garnishment order against you in their state. In such cases, NC courts tend to honor the judgments of other states, and NC protections against wage garnishment may not apply.
This is Good News – Don’t Rest on your Laurels
As you can tell, there are plenty of situations where garnishment is available to creditors. More, importantly, there are other remedies that are readily available to your creditors to collect the debt that you owe. A judgment against you can allow a creditor to attach to a bank account, require sale of personal property, or attach a judgment lien to your real estate. More so, a judgment remains intact for 10 years after entry, and can be renewed thereafter. Judgments, like the underlying debt, can effect your credit.
While wage garnishment is unavailable in many cases, ignoring a burdensome debt is not an effective strategy for long-term financial health. Coltrane Grubbs & Orenstein, PLLC, offers a free bankruptcy consultation for clients interested in learning more about debt management and the option of bankruptcy.
If you are worried about wage garnishment from a credit card company, a consultation with our attorneys will be useful to you in learning the landscape of debt collection in our state. The best time to consider debt collection defense strategies is early in the collection process. Our bankruptcy consultation is free. Call (336) 996-4166 to set up an appointment today.
In considering the benefits and drawbacks of filing for bankruptcy, the decision as to which type of bankruptcy to file is extremely important. Below is a basic primer on the two main forms of consumer bankruptcy:
Bankruptcy under Chapter 7 is what attorneys and others frequently call “liquidation” bankruptcy. The primary benefit of a Chapter 7 is to discharge debts that are unsecured (with exceptions, that typically includes credit card debt, medical bills, and personal loans). When you file, a bankruptcy trustee will sell your non-exempt assets and pay the proceeds to your creditors. Whatever debt that is not repaid from those proceeds is discharged (wiped out) though the bankruptcy.
Most assets, however, are going to be exempt—exemptions are North Carolina statutory protections that prevent your creditors from taking your assets to pay debt. In fact, many debtors do not have to turn over their house or car in a Chapter 7 bankruptcy.
The main function of a Chapter 13 bankruptcy is to reorganize your debt to make it manageable. After you file, you will make payments against your debt over a 3-5 year period. At the conclusion of that period, unsecured debt that you still owe is discharged through the bankruptcy.
Importantly, your payments in a Chapter 13 bankruptcy are not based on the amount of unsecured debt that you owe—these payments are based on your disposable income (after taking out payments for mortgages/cars and living expenses). Although this form of bankruptcy can have a longer term, it can be a more favorable approach for debtors with high household income or non-exempt assets.
Coltrane Grubbs & Orenstein offers a free consultation for clients who are interested in learning more about bankruptcy. The consultation is an opportunity for our clients to educate themselves on their financial options, even if bankruptcy is not their preferred route. We hope that you will schedule an appointment with us soon to talk about your financial situation and whether bankruptcy is the right option for you.
Coltrane Grubbs & Orenstein is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.