Individual people can file either a Chapter 7 or Chapter 13 bankruptcy in order to get relief from their personal debt. Chapter 7 bankruptcies are typically the more attractive option to potential bankruptcy filers for a couple of reasons. First, people in a Chapter 7 bankruptcy are not required to make any payments towards their debt like they do in a Chapter 13. Second, a Chapter 7 typically lasts only a few months, unlike a Chapter 13, which lasts 3 to 5 years.
Who Can File for Chapter 7 Bankruptcy in Minnesota?
While anyone is permitted to file for Chapter 13 bankruptcy, only people who meet certain income requirements are eligible to file for a Chapter 7 bankruptcy. A person whose income is less than the median income for the State, based on household size, is allowed to file a Chapter 7 bankruptcy.
Technically, people who earn a little bit over the State median income can also file a Chapter 7 bankruptcy, but they must be able to prove that they have insufficient disposable income (the amount they have left after subtracting normal monthly expenses) to be able to afford payments in a Chapter 13 bankruptcy.
If you are considering filing for a Chapter 7 bankruptcy, and your income is a little over the median income, you should definitely consult with an experienced bankruptcy attorney to see if a Chapter 7 is feasible, as the calculation of disposable income can be a bit complicated.
What Is the Median Household Income in Minnesota?
The median household income in the State of Minnesota is frequently adjusted, but currently, in 2021, the median income for a household of one person is $62,574. For a household of two, it is $82,483. For a household of three, it is $101,669, and for a household of 4, it is $120,110. For households with more than 4 people, an additional $9,000 is added for each additional person.
Household income includes the income of the person filing for bankruptcy (the “debtor”), the debtor’s spouse (if residing with the debtor), and any contributions made by any other person towards the debtor’s monthly household expenses. Typically, household size is considered all of the people who reside in the home. It includes couples, married or not, the debtor’s dependents (even if custody is shared and they don’t live there all the time), and any other roommates, or family members, who actually live in, and occupy the home.
Why Chapter 13 Might Be Better for You Thank Chapter 7 in MN
Even if someone qualifies for filing a Chapter 7 bankruptcy based on their income, it may be better for them to file a Chapter 13 bankruptcy in some circumstances. A Chapter 7 bankruptcy is technically called a “liquidation” because, to the extent that the debtor has any non-exempt property (property not specifically protected under the law), the trustee can take that property and sell it for cash (if not already in cash form) in order to apply the proceeds towards the debt.
Non-Exempt Property in Chapter 7 Bankruptcy
Most Chapter 7 filers do not have any nonexempt property that the trustee can take and the law is pretty generous about allowing debtors to keep their basic property (i.e. their house, a modest vehicle, and household goods). However, in some cases debtors with excessive or expensive property may be at risk for having their property taken by the trustee and liquidated into cash to be given to their creditors.
Knowing what property is specifically nonexempt can be a bit complicated and an experienced bankruptcy attorney should be consulted before filing a chapter 7 bankruptcy so as to be sure what, if any property, is subject to being taken by the trustee.
Why Would I Want to File Chapter 13 and Pay Payments?
Another reason one may want to consider filing a Chapter 13 bankruptcy instead of a Chapter 7 is the fact that certain debts can only be properly addressed and/or discharged in a Chapter 13. For example, Chapter 7 bankruptcies cannot protect debtors from foreclosures on homes or repossessions of vehicles when the debtor is behind on payments. In those cases, a Chapter 13 plan is needed to keep those types of property, as a Chapter 13 Plan allows the debtor to get caught up and current on payments in the plan.
Priority Debts in Chapter 13
A Chapter 13 plan also frequently enables debtors to pay down certain “priority” debts (i.e. tax debt and domestic support obligations) during the life of the plan. Furthermore, certain debts, such as those resulting from deliberate injury to property, bank fraud, government fines and penalties (except for criminal punishment), and outstanding divorce property settlements, are dischargeable in a Chapter 13, but not in a Chapter 7.
There are numerous other reasons why one would wisely consider filing for a Chapter 13, despite being eligible for a Chapter 7, such as to avoid the potential consequences of certain financial actions taken prior to filing for bankruptcy (i.e. fraudulent or preferential transfers of property from the debtor to others before filing). However, these issues are complex and better explained in other blogs.
CALL NOW FOR A FREE STRATEGY SESSION FROM A MN BANKRUPTCY LAWYER AT LIFEBACK LAW FIRM
One should always consult with an experienced bankruptcy attorney to make sure they understand all the potential benefits and drawback to filing a Chapter 7, and whether Chapter 13 would be a better option, before filing for bankruptcy. See us at LifeBackLaw.com.
