Wondering if I can explain to you what a Chapter 7 and Chapter 13 Bankruptcy is so that you can understand it in English? Of course, I can! After all, I am the managing partner at Kain & Scott, Eagan, Minnesota’s oldest bankruptcy law firm - since 1972. Let's start by taking a closer look at the basics of how a Chapter 7 and Chapter 13 bankruptcy actually work.
What is a chapter 7 bankruptcy?
A Chapter 7 Bankruptcy is a liquidation bankruptcy. The focus in a chapter 7 bankruptcy is on your assets, not on your income and expenses. Once a chapter 7 bankruptcy case is filed with the bankruptcy court, a chapter 7 bankruptcy trustee is assigned to the case. The trustee’s job, in part, is to determine if there are assets that belong the chapter 7 bankruptcy estate.
What happens to my assets?
In the vast majority of chapter 7 bankruptcy cases, our guests lose no assets. Most homes, cars, clothing, furnishings, pensions, and other misc assets are what we call “exempt” from creditors. This means the assets cannot be taken from you to pay your debt. People understandably get worried about this and don’t want to lose their home or the vehicle they need to use to travel to and from work.
Even for those clients who do have a non-exempt assets, the amount of non exempt assets we run into are often very modest. Chapter 7 trustees don’t want the actual asset, they want money. The chapter 7 trustees are charged with “liquidating” non-exempt assets which means reducing the assets to money which can be used to pay down your debts.
When there are no assets to liquidate, the trustee files a no asset report with the bankruptcy court letting the court know that there are no non-exempt assets to disburse.
What happens to my general unsecured debt?
When the chapter 7 bankruptcy is over, and you receive your “bankruptcy discharge,” your liability on credit card debt, medical bills, unsecured loans, repossession deficiencies etc all get wiped out, tax free, forever.
The meaning of this is significant. You can never be sued on any debt you incurred prior to the time you filed for bankruptcy protection. Not only is your liability gone for the debt, but the debt that is forgiven as part of a Title 11 bankruptcy, which both chapter 7 and chapter 13 bankruptcy is, is not taxable to you. This does not mean that the creditor will not send you a 1099 for debt forgiven. They might. But, there is a form that you should file with the IRS, form 982, which shows the IRS you filed a bankruptcy and the debt forgiven is not taxable to you.
If you need a form 982, go to our website at www.kainscott.com and you will find one.
What debts don’t go away in a chapter 7 bankruptcy?
There are debts that do not go away in chapter 7 bankruptcy. Child support, alimony, taxes, and student loans cannot be discharged. There are some exceptions to taxes and student loans in limited situations. This is not an exhaustive list by any means. Some debts incurred by fraud may be dischargeable unless a creditor objects.
What is a chapter 13 bankruptcy?
The best way to think about a Chapter 13 Bankruptcy is to think about it as a government sponsored debt consolidation plan because that is what it is. Your debts get consolidated and you make a payments into a chapter 13 trustee for a minimum of 36 months or a maximum of 60 months.
The idea is you make payments, based on what you can afford to pay during the plan. When the plan is done, whoever doesn’t get paid off, gets wiped out forever, tax free! Can I ask you a question? I know that I supposed to write and you read but can I ask you a point blank question?
Who, on earth, would do traditional debt consolidation after what I just wrote? If we called a chapter 13 bankruptcy a “government sponsored debt consolidation plan,” everyone would do it! Right?
Who determines the payment I make to the chapter 13 trustee?
A budget is created by you and your lawyer and a proposed plan is set up with a payment derived from you and your lawyer. The budget includes your net monthly income offset by your reasonable and necessary monthly expenses. Your family eats first and your creditors eat second!
Groovy uh? We think so.
Can I pay my mortgage arrears or vehicle arrears on the plan?
It is not uncommon to have people call us and say something like this- “I lost my job 7 months ago, I fell behind on my mortgage, but now I am working and I don’t want to lose my house.” We can file a chapter 13 bankruptcy for you, but whatever mortgage arrears you have on the plan (to be paid over the life of the plan) and you would start normal payments again on the mortgage beginning the month after we file you.
We can also do this with vehicle arrears as well. You get to keep your vehicle and your home assuming we stay current on the chapter 13 and post petition home/auto payments. Slick right? We think so!
Curing mortgage and vehicle arrears on a chapter 13 plan is a wonderful way to solve a problem and yet keep your home/vehicle.
Do I have to pay my creditors in full on a chapter 13 plan?
No, in the vast majority of chapter 13 bankruptcy cases, paying the debt in full is not required. In most cases, the amount you pay back is strictly based on your ability to pay. So, for example, if you have 50k in credit card debt but you only pay back 10k in debt, the balance of the 40k in debt gets wiped out tax free. POW!
CONCLUSION
When the time is right, or when you are ready, reach out to Minnesota’s 24/7 Bankruptcy Help Line at www.kainscott.com. All the Minnesota bankruptcy information you will ever need to know is contained at www.kainscott.com.
