Filing bankruptcy can provide a “fresh start” to individuals, married couples, or companies struggling with insurmountable debt or harassing creditors. The Bankruptcy Code provides different relief depending on the debtor’s situation, but most cases are filed under Chapter 7, Chapter 11, or Chapter 13.
Chapter 7 bankruptcy is a “liquidation” where a trustee sells the debtor’s non-exempt property and distributes the proceeds to creditors. A list of the most common exemptions can be found in N.C.G.S. § 1C-1601 and includes $35,000 of equity in your residence, $3,500 of equity in your vehicle, the full value of certain retirement accounts, and recent wages. Chapter 7 bankruptcy is available to business entities and individuals no matter how much debt they owe. However, if an individual’s income is well above the state median, he or she may not be eligible for a chapter 7. Absent complications, an individual who files a chapter 7 bankruptcy may receive a discharge of his or her debts within four to six months.
In a Chapter 13 bankruptcy, sometimes called the “wage earner’s plan”, individuals with a regular income propose a plan to pay their creditors a portion of their income each month. The plans last from three to five years, depending on the individual’s circumstances. Chapter 13 is particularly helpful to homeowners who are behind on their mortgage and wish to keep their residence because they are allowed to catch up or “cure” the arrears over the course of the plan. Chapter 13 is only available to individuals, not business entities, whose non-contingent, liquidated, unsecured debt is less than $383,175 and whose secured debt is less than $1,149,525. After making all payments according to their plan, individuals receive a discharge of their remaining debt.
Chapter 11 bankruptcy is usually known as a “reorganization” because the debtor wants to keep its assets or continue its business operations but needs to restructure the interest rate, term, or other aspects of its debts. Any individual or business entity with any amount of income or debt may file a chapter 11 bankruptcy. This type of bankruptcy is typically more costly and time-consuming because the debtor’s assets, debts, income, and expenses are usually more complex and because the court’s reporting requirements are more burdensome. In a chapter 11 bankruptcy, the debtor proposes a plan to repay creditors in full or in part. Each creditor may vote for or against the plan. If enough creditors reject the plan, the debtor must either propose a more generous plan or ask the court for a ruling that the plan is fair and equitable, known as a “cramdown”. There is usually no trustee in a chapter 11 bankruptcy, so the debtor assumes all of the responsibilities of a trustee, including making payments to creditors after the plan is confirmed.