How Does Bankruptcy Affect Foreign Debt?

Posted by Erick Bohm on October 5, 2017 at 4:10 PM
Erick Bohm

bankruptcy and foreign debt.jpgHere in Minnesota, it’s not unheard of to have clients who are either from Canada or frequently move back and forth. Sometimes clients will come to us with questions regarding their foreign debt. When I say foreign debt, I’m referring to debts which were incurred outside of the United States. So, what happens when someone incurs a debt outside of the United States and then moves here? Well, unlike debts which are recognized across state borders, international debts are generally not collectible.

Enforceability of Foreign Debt

The biggest problem creditors run into with collecting on debts which originated outside of the United States is enforceability. In order for a creditor to collect on a debt, the debt must be validated in the state in which the debtor lives. So, if you live in Minnesota and a creditor is trying to collect on a debt against you, the creditor must validate the debt in Minnesota. This is why if a creditor validates the debt in a state in which you no longer live, they must re-validate the debt in your new state. For instance, if you have a judgment entered against you in Nebraska for a debt you owe, but then move to Minnesota, the creditor will need to re-validate the debt in Minnesota in order to enforce the judgment. Here in the United States, a debt in one state can be recognized as a debt in another state, if the creditor validates the debt with the court in the state the debtor lives. However, this does not hold true for foreign debts.

If you incur a debt outside of the United States, and then subsequently move to the United States, the foreign creditor likely cannot collect against you here in the States. It is highly unlikely a court here in the United States will recognize your foreign debt as being valid. Accordingly, the creditor’s only option to collect against you will be in the country of origin. So, if you incur a debt in Canada, moved to the United States, and failed to make payments on the debt, the Canadian creditor will likely only have recourse against you in Canada.

Although you’re likely protected from foreign debt collection here in the United States, the creditors can still collect against you in the country of origin, subject to the respective collection laws of that country. With that said, if you intend on returning to the country in which the debt was incurred, you may be subject to collection in the future. However, are likely protected from that debt while you’re in the United States.

Conflict with Foreign Legal Systems

Another major issue with filing bankruptcy on foreign debts is the conflict rooted in the differing legal systems. Here in the United States, bankruptcy laws promote equal treatment amongst debtors and creditors. Bankruptcy laws allow individual debtors to retain legal interest in property up-to a certain dollar amount. Although bankruptcy laws differ from state-to-state, creditors are entitled to receive a portion of non-exempt property through the bankruptcy estate, when it exists. Because foreign bankruptcy laws may permit creditors to retain more, or less, of the bankruptcy estate, there could be potential issues with liquidating assets through a Chapter 7 bankruptcy in a case where a foreign creditor attempts to validate debt you owe.

Consumer Bankruptcy Protection

When it comes to consumer bankruptcy here in the United States, you have two options: Chapter 7 and Chapter 13. Both options provide you legal protection from your creditors. As soon as your case is filed your creditors cannot collect from you. However, Chapter 7 and Chapter 13 provide financial relief in two different ways.

Chapter 7 Bankruptcy

Also known as “liquidation bankruptcy”, Chapter 7 provides financial relief by eliminating liability for most debts. The process is fairly short – four to six months. There are only a few meetings that you have to attend and there is minimal work on your end. We will do most of the work for you and will discuss your case with you in detail prior to filing your petition with the court.

There are certain requirements that must be met in order to qualify for a Chapter 7, but our experienced MN Bankruptcy Attorneys can help you determine whether or not you qualify. Although referred to as the liquidation bankruptcy, most of our clients do not lose assets when filing a Chapter 7. There are many laws in place which are designed to protect you. And, if your situation presents the need for additional steps to protect your assets, we have you covered. We can protect most, if not all, of your assets by filing a Chapter 13 in the event you have assets that are not protected in a Chapter 7.

Chapter 13 Bankruptcy

Best described as a government sponsored debt consolidation plan, Chapter 13 allows debtors to file bankruptcy and receive protection from their creditors. Through a Chapter 13, debtors pay off a portion of their debts through monthly payments over a three to five-year plan.

Chapter 13 is beneficial for a number of reasons. Most notably, you receive protection from your creditors while being able to protect all of your assets. Chapter 13 relief allows for repayment of mortgage arrears and taxes. Additionally, Chapter 13 provides you protection from other unsecured creditors.

Your Chapter 13 payment is based on what you can afford to pay. We develop a structured repayment plan based on your discretionary income. The idea is to have you pay off your debts to the extent you can afford to pay them off; nothing more, nothing less.

At the end of the Chapter 13 payment period, debts that are left unsatisfied are discharged, tax free. So, if you have credit card debt in the amount of $60,000, but your Chapter 13 payment is only $300 for five years, there will be about $42,000 of credit card debt that gets discharged, tax free. Once the debt is discharged, your creditors cannot collect.

Closing Thoughts

If you have foreign-based debt and have questions about how bankruptcy may or may not help, please contact one of our experienced bankruptcy attorneys for advice. We can explain to you the benefits of filing bankruptcy and what life looks like after filing.

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Topics: Bankruptcy, Chapter 13, Chapter 7

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