When people think about bankruptcy, they usually think about a Chapter 7 Bankruptcy.  In Chapter 7 the debtor asks the bankruptcy court to discharge most of the debts owed.  In exchange , the bankruptcy trustee can “liquidate” or seize and sell any property that is not exempt (ie, protected).  The proceeds are used to pay back unsecured creditors.

There are several requirements to be eligible to file a Chapter 7 including the ability to pass the income-based means test.   Additionally, to file a Chapter 7 petition a debtor will be required to provide evidence of the debtor’s finances including, but not limited to, copies of recent tax returns; a list of all creditors and the amount and nature of their claims; the source, amount, and frequency of the debtor’s income; and a list of all of the debtor’s property.

Chapter 7 allows the Debtor a quick and clean fresh start. If the debtor does not have any nonexempt assets and is only trying to discharge debt, it can provide  great relief to those who qualify.

CHAPTER 13

A debtor that has nonexempt assets can be better off filing a Chapter 13 petition to protect those assets. In Chapter 13 bankruptcy, the debtor agrees to a repayment plan with the bankruptcy court in order to pay back all or a portion of the debts over time. The amount that will have to be repaid depends on the amount of debtor’s income, the amount and types of debt owed, and how much property the debtor owns.

Typically, no property is taken from the debtor in Chapter 13 bankruptcy because the repayment plan is funded by the debtor’s income rather than a liquidation of assets.  Most assets are protected in a Chapter 13 bankruptcy. In certain situations a Chapter 13 bankruptcy can even help save assets that the debtor put up as collateral for a loan- such as a house or car- that are are in danger of being subject to repossession or foreclosure.

Chapter 7 bankruptcy can also be called “liquidation” bankruptcy because the bankruptcy trustee may take and sell (“liquidate”) some of your property to pay back some of your debt.  However, you may keep property that is protected (or “exempt”) under state law.  For many debtors, all of their property is exempt and none of their property is liquidated.

The second type of bankruptcy is “reorganization” bankruptcy.  There are several different reorganization chapters, but Chapter 13 is the most common for consumers. In Chapter 13, no property is sold to repay debt.  Instead, the debtor agrees to make monthly payments over three to five years to repay all or some of the debt. While some debts must be paid in full, other debts may be partially repaid or not at all.

First of all, there are all sorts of liens. Simply put, a lien is the right to take and hold or sell the property of a debtor as security or payment for a debt or duty. The property we’re talking about is real estate. There are two types of liens- consensual and nonconsensual. A consensual lien is one that you agree to, like a mortgage. A nonconsensual lien is one that you do not agree to, such as a judgment.

A judgment is the end result of a lawsuit. A judgment obtained against you attaches as a lien to real estate that you own in the county in which the judgment was obtained. So, if you own a parcel of real estate in Buncombe County, are sued in Buncombe County, and lose the lawsuit the parcel will be subject to a lien in favor of the party that sued you (the “Judgment Creditor”). The only exception is if you own the real estate with your spouse as “tenants by the entireties” and your spouse was not a party to the lawsuit. In that case, the judgment does not attach as a lien to your real estate. However, it will attach as a lien to any other real estate that you own, even if you own it jointly with another person who is not your spouse.

The judgment lien will have to be paid if you sell or transfer the property. It will also usually have to be paid if you refinance your existing mortgage. The lien will survive your death and have to be paid by your heirs if they intend to retain the property. Additionally, a Judgment Creditor can execute on its judgment and force the sale of your real estate to satisfy the debt you owe to it.

A bankruptcy can change this. The formula is a bit complex, but it essentially boils down to this: if you can claim your real estate as exempt in your bankruptcy case, then you can “avoid” (i.e., strip off) a judgment lien. For example, an individual in North Carolina can exempt up to $35,000 worth of equity in a residence. So, if Jane Doe owns a home worth $100,000, has a mortgage lien of $90,000 and a judgment lien of $20,000, then she can avoid the judgment lien. This is because, without the judgment lien she would have $10,000 in equity in her home (i.e., $100,000 value minus $90,000 mortgage). She can protect up to $35,000. So, she could claim her home as exempt. This means that she will be able to avoid/ strip off the judgment lien.

Lien avoidance in bankruptcy is a complicated and fascinating subject. Please feel free to contact Kight Law if you have been sued and are concerned about a judgment lien on your property.

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The answer is no. Debt discharged in bankruptcy is not forgiven or written off. It is discharged. A bankruptcy discharge is not a taxable event. The debt that was once owed but that is now extinguished will not come back to haunt you in the form of a tax liability.

If you or your accountant have questions about this issue I encourage you to review IRS Form 982, “Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)”. This is the form that you will use in filing your tax returns to show that your discharged debt is not taxable income. You can find the form here:

http://www.irs.gov/pub/irs-pdf/f982.pdf

So, if you’ve received your bankruptcy discharge but received a Form 1099 take a deep breath and download Form 982. You won’t owe additional taxes because of your bankruptcy case.

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• the right to a “fresh start” from a financial perspective.
• the right to terminate creditor harassment and certain debt related law suits
• the right to discharge certain debts and lower your monthly payments on others
• the right to relinquish certain contractual obligations
• the right to retain certain property
• the right to relinquish encumbered properties and their associated liens
• the right to protect your co-signers from liability in your bankruptcy

Claiming your rights under the Bankruptcy Code can provide real and immediate benefit.  If you have more bills than you can pay, if your home-equity has become a liability, if you are facing foreclosure and creditor harassment, contact Kight Law.  We can help you understand how bankruptcy works.  If you are considering bankruptcy, please be sure to read these sections in our website:

• About Bankruptcy
• Bankruptcy Basics Video Part I
• Bankruptcy Basics Video Part II
• Bankruptcy Basics Video Part III
• Things Your Creditors Don’t Want You to Know
• Frequently Asked Questions