Are My Tools Protected in A Bankruptcy?

Due to the recession our economy has faced, many small business owners find themselves sitting in our office discussing the possibility of filing for bankruptcy.  Legitimately, one of their main questions is how to protect their assets. One of the major assets of most small business owners is their “tools”. Tools can range from hand tools of a construction worker to the painting supplies of a painter. So, can they take your tools?

Construction Worker Carrying Lumber With Tools

The answer is not simple; this is where an attorney can be helpful.  If you are a sole proprietor then the tools are seen as your personal property and protected as any other property you have.  By default, an business is a sole proprietorship if it is owned by one person and has not been incorporated in one way or another. An example of a sole proprietor is Joe Blow’s Lawn Care; one person owns the company, owns the tools, works for himself, and files a self employment tax (Schedule C) on his taxes.  The lawn mower, rakes, blower, hedgers, etc. all belong to Joe.  If he decided to no longer run the company next week, the only difference would be that the tools would move from his truck to the garage.  If Joe were to be sued, he would need to protect those tools as he would any other asset he has from seizure.

Now, if Joe had gone to the Secretary of State and registered his company, it’s a bit of a different story.  If that were the case, Joe Blow’s Lawn Care, LLC owns the tools.  They would be included in the balance sheet (what tells other people what your company is worth) as a business asset.  The lawn mower, rakes, blower, hedgers, etc all belong to Joe Blow’s Lawn Care, LLC. If he decided to no longer run the company next week, the company still holds the assets until it is closed down with the Secretary of State (then in most cases ownership reverts back to the owner of the company).  If Joe was to be sued and he was protecting his property, until he closed the company down, those tools belong to the company in which he owns, not him personally.

The bottom line is, you can protect your tools using the “tools of the trade” exemption in North Carolina. An experienced attorney would need to look at your unique situation to determine if using that exemption is proper or not. If you own a business, whether it is large or small, we strongly suggest that you discuss all of your assets and liabilities with your attorney.  Businesses can be a tricky subject, whether owned directly by you or an entity you own, and protecting your assets are important to your success in a bankruptcy.

Can the Homeowners’ Association (HOA) Foreclose If I Don’t Pay My Dues?

Many people have been led to believe that a homeowners’ association cannot foreclose on their home.  That is not true!  Homeowners’ associations foreclose on property everyday across America and very likely everyday in North Carolina.

Happy Family Standing Together

If your neighborhood has a homeowners’ association, you received and signed documents acknowledging the association’s rights when you purchased your lot or home.  As a matter of fact, participation in the homeowners’ association was not an option for you, it was a requirement if you wanted to purchase your lot or home!   Many people do not read the documents and realize the requirements and powers of the homeowners’ association when they purchase their property, since it was just one of the many documents signed the day of closing.

Your neighborhood will have bylaws and covenants that are specific to your homeowners’ association, but it is under North Carolina General Statutes Chapter 47F that all homeowners’ associations obtain their power.    Under Chapter 47F-3-116 Lien for assessments, the homeowners’ association can place a lien on your home or lot if you do not pay your assessment.  If the amount owed is “…unpaid for a period of 30 days or longer…” the homeowners’ association may file a lien on your property with the Clerk of Superior Court.  The statute provides the timelines, procedures and notice requirements for filing the lien.  If the homeowners association files a lien on our property and the assessment remains unpaid for 90 days or more, the homeowners’ association may foreclose on the property just like your mortgage companies.

Unfortunately, many homeowners ignore the letters they receive from their homeowners’ association.  Most often the letters are ignored because the homeowner does not realize the power provided to the homeowners’ association.  In other cases, the amount owed to the homeowners’ association seems immaterial compared with the monthly mortgage payment(s), so the homeowner does not expect the association to proceed with foreclosure.  Regardless, the homeowners’ association has the right to, and often will, foreclose for what might seem like small dollar amounts.  There have been many cases when the attorney’s fee associated with the foreclosure is more than the homeowners’ assessment amount.  The key is to never ignore the letters from the homeowners’ association; otherwise, you may discover you no longer own your home or lot.  Filing Chapter 13 bankruptcy can stop foreclosure proceedings, so you may want to see if this is an option if you find the homeowners’ association foreclosing on your property.

Can a Second Mortgage Company Foreclose on My Home?

Have you ever had those times when you were running short of cash?  There was that unexpected car repair or the kids’ summer camp deposit you didn’t have in the budget.  You knew something had to give that month but you weren’t sure what!  When you considered the options of what you could do without or simply not pay – food, gas, car payment, mortgage – you decided you would not pay your second mortgage.  You have missed a couple of payments on the second mortgage in the past and they have never said anything, so you should be fine.  What can they do anyway?

Foreclosure Sign in Front of House

You might be surprised to hear that your second mortgage, Home Equity Line of Credit (HELOC) or third mortgage, if you have one, can foreclose on your property.  Unfortunately, many people have been led to believe that is not possible or that it is not legal.  Do not be fooled.  No different than your first mortgage, your second/third mortgage or HELOC has a lien on your home.  When you obtained the second/third mortgage loan or HELOC you singed a deed of trust.  That deed of trust provides them a lien on your home and gives them the option of foreclosing on your home if you fall behind on the payments.

In most cases, the second/third mortgage company or HELOC will allow you to get further behind on your mortgage payments before starting the foreclosure process.  They will also work with you for a longer period of time before foreclosing, since they know they will be required to pay the balance of the first mortgage loan before they receive any money from the foreclosure.  Sometimes the delay in the foreclosure process by the second/third mortgage company or HELOC can lull you into a false sense of security.  Unfortunately, when they start the foreclosure process you may be so far behind on the mortgage payments with them that you have no way of catching up.  At that point, you may want to consider filing a Chapter 13 bankruptcy to save your home.

What is A Collection Agency?

When the original creditor goes unpaid for a significant amount of time, the debt goes into what is called “collections.”  Many of us have heard of these agencies but are somewhat confused as to what exactly constitutes a collection agency.  A collection agency is an outside organization helping original creditors to collect on unpaid debts. Both the original creditor and the collection agency only have one thing in mind and that is to get the money that’s owed from the Debtor.  An original creditor such as a hospital, understand that the longer the bill goes unpaid, the less likely it is that they will actually recover the debt.  This is why it is important to original creditors to send the debt into collections as soon as a significant amount of time has gone by.  This is truly the primary purpose of a collection agency which is to contact the Debtor with letters, phones calls, and other forms of communication in hopes of acquiring the debt.  Representatives of these agencies should immediately state their name and what creditor they are calling on behalf of.  If they do not, you have the right to ask where they are calling from and what debt they are trying to collect on.

Creditor & Collection Agency Phone Calls

There are at least three different types of collection agencies, all of those with the same goal, which is to recover the amount of money owed by the Debtor.  First party collection agencies are often representatives from the original creditor, therefore it is not considered an outside agency.  These first party agencies will try to collect on the debt for several months in hopes of maintaining a more constructive customer relationship, since they are working for the original creditor.  As previously mentioned, once a significant amount of time has gone by, the original creditor or first party agencies will eventually pass the debt along to a collection agency.

Third party agencies are those that are not representatives or associated with the original contract.  This is often where the term collection agency comes from, as these are representatives trying to collect on the debt for the original creditor.  The original creditor may assign specific accounts of various Debtors to the agencies.  It will most likely only cost the original creditor communication fees for the agencies to contact the Debtors, unless the debt is successfully recovered.  If the debt is recovered and the Debtor agrees to pay the balance, then it depends on the contract between the creditor and the collection agency.  The agreement between the two determines what percentage each will obtain.

The last type of collection agency can be referred to as a “Debt Buyer.”  These Debt Buyers basically purchase debts from original creditors for pennies on the dollar.  Their goal is to collect the full balance from the Debtor, which may include interest.  These debt buyers come in the form of regular companies or may be reorganized as law firms. They can try to collect the debt by reaching out to other collection agencies if necessary.  This is because the debt buyer has actually purchased the charged off or delinquent debt from the original creditor.   Unlike first party agencies, the debt buyers are not as concerned about the relationship they maintain with the Debtor. Therefore, they tend to be the ones who call at all ours of the day and night, use harassing techniques and are beyond rude on the phone.

Collection agencies are required to abide by the Fair Debt Collections Act, so be sure if you feel you are being harassed or abused by creditors in an unfair manner, you educate yourself on what you need to do or contact a bankruptcy lawyer to learn more about your rights. If you file a bankruptcy the the bankruptcy filing enacts the automatic stay which prevents form creditors and collection agencies form still trying to contact you.

What is the Difference Between Gross Income and Net Income?

There is a saying that always helps me remember the difference between gross and net income: it’s gross to see how much you would be bringing home before taxes.  Gross income is what you make before taxes and what you claim as income on your tax returns.  Net income is what you actual bring home after taxes and other deductions.  If you are a business owner or self employed, your gross income would consist of the entire profit received, and the net income would be what is left over after business expenses.

Uncle Sam Wants You | Gross Income v. Net Income

What does this have to do with bankruptcy?  In order to qualify for a Chapter 7 bankruptcy each case is subjected to the Means Test.  The Means Test first considers your gross income versus how many people are living in your household.  When you consult with a bankruptcy attorney, one of the initial questions should be: “on average, how much do you gross per month?”  Knowing this information, your attorney can have a general idea of whether or not you’ll easily pass the Means Test or not.  If your gross income automatically fails the Means Test or rather is in violation of the Means Test, there is a possibility that by factoring in certain deductions and expenses you may be able to still qualify for a Chapter 7 bankruptcy.  For instance, your gross income for an individual is $4,000 a month, which would rise above the current Means Test.  However, each month you pay taxes, a house and car payment, health insurance, term life, and you support your elderly mother or pay child support or alimony.  Once these deductions are considered, your income is reconfigured and more than likely you may now pass the Means Test.

When you file for bankruptcy, your average gross income over the last 6 months is a major factor.  You must be aware of bonuses, family support, 401(K) or retirement withdrawals, student loans, unemployment, or sale of assets because these are all counted towards your gross income.

In a Chapter 13 bankruptcy, your gross versus net income factors into whether or not you can afford your plan payments or if your disposable monthly income is too high, what percentage should be paid back to unsecured creditors.

What is the Motor Vehicle Exemption in Bankruptcy?

Protecting your vehicle is one of the most important things that can be done within a bankruptcy. We understand your car is, in many ways, your livelihood. It helps you get to and from work, take your children to daycare and other events, get groceries as well as many of the other necessities of life.

Doing Research on a White Computer

When you file a bankruptcy and we protect your personal property, we are able to do so based on exemptions.   Exemptions vary from state to state and in some cases, you may use Federal exemptions.  In North Carolina you are given an exemption of $3,500 per person for motor vehicles.  We can only use the exemption if the person’s name is on the title to the vehicle. For example, if a married couple has two vehicles but both vehicles are in the husband’s name then we can only use the husband’s one motor vehicle exemption on one of the vehicles. Even though the wife also has a $3,500 motor vehicle exemption we cannot use it on either of the vehicles since her name is not on the titles. If the vehicles were both jointly owned then we could use one motor vehicle exemption on one vehicle and one on the other.

The “motor vehicle” exemption is used to protect any equity in the car.  Equity is the difference between the amount that you owe on the vehicle and the value of the vehicle.  For example, you own a car that is worth $5,000 and you only owe $3,000; you will then have $2,000 of equity to protect.

If for some reason we cannot protect all of the equity with just your motor vehicle exemption, we can also combine that exemption with your miscellaneous “wild card” exemption.  This is called exemption stacking. If you have $8,000 of equity in a vehicle we could use your $3,500 motor vehicle exemption and the “stack” your “wild card” exemption on top of it to protect up to $8,500 in equity.

We try to use the lowest reasonable value that we can fairly use, but still in some cases, no matter what, we cannot protect all of the equity in a vehicle.  At that point, whatever amount is unprotected; the bankruptcy Trustee will have the right to ask you to compensate them for it.  We never like for this to happen, but just like life, it happens.  So it is very important to make sure you have an accurate value for the amount owed on the vehicle and the value of the car to determine the equity that needs to be protected for your vehicle.  We understand the importance of having your vehicle so we will do everything we can to protect it! It’s very important you discuss your situation with an experienced bankruptcy lawyer so they can explain your different options.