WHAT IS BANKRUPTCY?
Filing bankruptcy means filing a petition in the United States Bankruptcy Court asking to discharge, or legally eliminate, certain debts. Once a person files a bankruptcy petition, a bankruptcy case is opened in the bankruptcy court, which remains open during the administration of the bankruptcy case. During this bankruptcy case administration, you are protected from your creditors. At the end of the bankruptcy case, if everything goes as planned (which it does in over 99% of our clients’ bankruptcy cases), the bankruptcy court orders that the person’s debts are discharged, which means that they are legally eliminated.
WHAT PROTECTION DOES BANKRUPTCY GIVE ME?
The filing of a bankruptcy petition operates as an “automatic stay” which prevents creditors from taking virtually any action to try to collect on a debt. The law that creates the “automatic stay” is a very powerful law, and is what gives our clients immediate relief from their creditors. In plain English terms, filing bankruptcy puts an immediate stop to:
- Wage garnishments (except child support)
- Bank levies
- Debt collection lawsuits
- Collections calls and harassment
- Vehicle repossession attempts
- Impending foreclosure sales
- Tax levies
During the bankruptcy case, this automatic stay continues to protect the bankruptcy filer from most collection actions. If a creditor wishes to try to collect on a debt during the bankruptcy, the creditor must file a motion in the bankruptcy court, serve notice on the bankruptcy filer, and have a hearing.
At the end of a successful bankruptcy case, the court enters an order discharging the debtor’s debts. Most unsecured debts such as medical bills, credit cards, unsecured lines of credit, and certain tax and other debts are discharged, which means that it is now illegal for anyone to try to collect on the discharged debt.
WHAT TYPES OF BANKRUPTCY CAN I FILE?
The most common type of bankruptcy in Minnesota is Chapter 7, which is debt liquidation and is what most people have in mind when they hear “bankruptcy.” A Chapter 7 bankruptcy usually only takes three to four months from start to finish, and results in most unsecured debts being discharged at the end. In the majority of Chapter 7 bankruptcy cases, the person who filed bankruptcy does not lose or have to give property or money to the bankruptcy court or Trustee. A Chapter 7 bankruptcy has many advantages, including the fact that consumer debts are discharged or eliminated and the process takes only a few months. A Chapter 7 bankruptcy is usually the quickest and least complicated way to get a fresh start financially.
The next most common type of bankruptcy in Minnesota is Chapter 13, which is a debt restructuring. A Chapter 13 bankruptcy takes from three to five years to complete. During this three to five years, the bankruptcy filer’s attorney proposes a plan to the bankruptcy court, the Trustee, and the creditors, called the “Chapter 13 plan,” which governs the bankruptcy. The Chapter 13 plan requires the bankruptcy filer to pay monthly payments to an attorney called the Trustee, who uses that money to pay the person’s creditors. One of the most important aspects of Chapter 13 bankruptcy is that a person does NOT necessarily pay all, or even most of their debts – the payments are based on what the person can afford to pay, NOT how much unsecured debt the person has. Chapter 13 has some advantages over Chapter 7, such as being able to catch up past-due mortgage payments and car payments over several years’ time. Chapter 13 also enables people to pay certain tax debts over a long time, up to 5 years, while keeping tax authorities from taking collection action on pre-petition tax debts. At the end of the repayment period, any remaining debt included in the Chapter 13 bankruptcy is discharged.
Other types of bankruptcies include Chapter 11 (which is a more complex debt restructuring often used for large businesses) and Chapter 12 (which is reserved solely for farming and fishing families and businesses). Prescott Pearson & Tande, PA, solely focuses on Chapter 7 and Chapter 13, the bankruptcies that serve the vast majority of people who contact us for debt relief advice and representation.
What about “Chapter 20” bankruptcy that you may have heard about? This term is used to describe back-to-back Chapter 7 and Chapter 13 in order to deal with consumer debt as well as a mortgage in a past-due status. This debt relief solution may apply in very specific circumstances such as a change in a filer’s financial picture. In most cases, a carefully executed Chapter 7 or Chapter 13 filing will provide efficient answers for individuals with unmanageable debt.
WHY FILE FOR BANKRUPTCY?
Financial decisions we make can feel right at the time made, but as our circumstances change they can lead to disaster. Bankruptcy is a way to push the reset button and start over again.
When your family suffers a financial loss (be it through illness, loss of income, death of a family member, or divorce) and payment of your debt overwhelms all other aspects of your life and totally consumes your budget, bankruptcy is an option to consider.
When you have had an interruption in your income that has caused you to get behind on your mortgage and your car payment and you want to keep those assets and pay those creditors, bankruptcy can help you do that.
When one creditor’s actions have caused you to fall behind on all of your other debt and there is no way to get current, bankruptcy can provide you with relief.
WHEN DO I FILE FOR BANKRUPTCY?
When you file for bankruptcy will depend on the facts of your case. Just know that whenever you file bankruptcy, you will receive powerful protection from your creditors. Some of our clients file bankruptcy before they have fallen behind on their debts because they know that their financial situation is not repairable. Some of our clients file after waiting to see if their circumstances change or their finances improve. Some of our clients file after their wages are garnished or bank accounts are levied. No matter when you file, we can stop the bills, stop the collections calls, and stop garnishments and levies.
Sometimes, it is in our client’s best interest to wait to file until some future event happens such as tax refunds are paid to our client, or until a bill is received. In other cases, it is in our client’s best interest to file as soon as possible. When you consult with us, we will review the specific facts of your situation to help determine the right time for you to file.
WHAT DO I FILE, CHAPTER 7 OR CHAPTER 13?
Chapter 7 discharges most of your unsecured debts such as credit cards, medical bills, deficiency balances from repossessions, and unsecured loans. Chapter 13 is a restructuring that can be used to pay off certain debts before other debts, or pay a portion of your debts over a three-to-five-year time period. What type of bankruptcy to file is a complicated question, and will likely be informed by your assets, debts, and budget. There may be pros and cons to either type of bankruptcy in your situation. After reviewing your specific financial situation, we will advise you of the pros and cons of each type of bankruptcy and can help you determine the best option for you.
WHAT AM I LEFT WITH AFTER FILING FOR BANKRUPTCY?
The goal in a successful bankruptcy case is the elimination of debt, and we accomplish this in well over 99% of all bankruptcy cases we file. Some debts do survive bankruptcy, such as recent tax debts, and other rare types of debt. Some debts you can choose to keep paying on after bankruptcy, such as home and vehicle loans.
As far as assets are concerned, in about 95% of Chapter 7 bankruptcy cases none of your assets are taken from you by the bankruptcy trustee because most assets are exempt and protected in the process. In Chapter 13 bankruptcy cases, you do not lose assets, but instead pay in a portion of your income during the Chapter 13 plan.
After meeting with you and reviewing your assets and debts, we will be able to advise you on the effect a bankruptcy would have on your assets and debts.
CAN I KEEP MY HOUSE AND MY CAR?
Yes! Your homestead and your car are protected in bankruptcy through exemption laws. If you have a loan on your homestead or your car, you will need to continue making payments to the lender and keep the property insured.