My Minneapolis Bankruptcy Attorneys and I analyze whether a potential client should file a bankruptcy case based on several factors. The fundamental issue is whether the person considering filing a bankruptcy case will receive a bankruptcy discharge. The bankruptcy discharge is the legally binding order of the bankruptcy court that eliminates an individual’s personal liability on debt that existed at the time the bankruptcy case was filed. Almost everyone who comes to see me about a potential bankruptcy case will receive a discharge if they choose to go forward - but not everyone.
The client who has filed a prior bankruptcy case may, in some cases not be eligible for a discharge. The Bankruptcy Code sets out the rules governing when a bankruptcy debtor is eligible for a discharge after a prior case was filed. Most consumers are going to file either a Chapter 7 liquidation bankruptcy or a Chapter 13 payment plan bankruptcy. The Bankruptcy Code tells us that a debtor can receive a chapter 7 discharge only if a prior chapter 7 case that was discharged was filed more than eight years prior to this most recent filing. A debtor can receive a chapter 7 discharge only if a prior chapter 13 case that was discharged was filed more than six years prior to this most recent filing. For a chapter 13 discharge, a debtor can only receive a discharge if it has been more than four years since that debtor filed a chapter 7 case for which the debtor received a discharge or that it has been at least two years since the debtor has filed a previous chapter 13 case in which the debtor received a discharge.
If a client is not going to qualify for a discharge because of a recent filing, chapter 7 simply won’t work. If an individual files a chapter 7 case and they are not eligible for a discharge, the United States Trustee’s Office will bring an action shortly after the bankruptcy case is filed to deny a discharge and dismiss the case - and if the fact is that the debtor won’t qualify for a discharge, the United States Trustee’s position will prevail.
There are cases, though, where a person needs their Minneapolis Bankruptcy Lawyer to file a bankruptcy case for them even though they won’t qualify for a discharge. Examples include a person who is currently going through a wage garnishment or a person whose home is in foreclosure. In these circumstances Chapter 13 MN Bankruptcy Lawyers are still an option even though there will be no discharge. Even though the Chapter 13 won’t end in a discharge, the person in financial difficulty will receive the benefit of the automatic stay - all collection will stop when the chapter 13 case is filed. Foreclosure sales will be cancelled, and the debtor, in the chapter 13 case, can catch up on the mortgage arrears through Chapter 13 Plan Payments. So while a discharge may not take place, a Chapter 13 Bankruptcy can be an advantage for some debtors nevertheless.
Most clients who have previously filed a Bankruptcy case are going to “fit” in the time periods that have been set out in the Bankruptcy Code. So then the question of whether a debtor will receive a bankruptcy discharge becomes one of whether the debt in question can be discharged, and/or whether the debtor has behaved in such a way that the debtor’s general discharge could be denied or revoked.
Debts for business-related taxes, court fines, child support, alimony and student loans, to name a few, cannot be discharged in a bankruptcy case. So a debtor whose only debts are of a type that can’t be discharged are well-advised to explore alternatives to bankruptcy, since there won’t be a discharge entered against these types of debts. And debtors who have engaged in quasi-criminal financial-related activity - such as destroying assets that serve as collateral for loans, or destroying business records critical to the record-keeping of a business. Intentional acts designed to mislead creditors or destroy evidence will create discharge problems as a whole for debtors. Again, individuals who engage in this behavior are well-advised to not file a bankruptcy case, since a discharge is doubtful.
Another reason why a potential bankruptcy debtor may decide the time to file is not right is that in order to file a case in a state, the debtor must have lived in the state for the last six months, or the greater portion of the last six months, or have their principal asset in the state in which he or she files, or have his or her business located in the state in which he or she files.So recent arrivers to a state may have to wait to file a bankruptcy case until they have lived in the state for at least 91 days.
Clients who have only non-dischargeable debts or clients whose behaviors expose them to a denial of their general discharge, or have just recently arrived in state are few and far between. So assuming that a client is not in the small minority of people who should at a minimum wait to file, then the question of whether to file a bankruptcy case becomes a bit more subjective and a bit less objective. For the vast majority of potential clients, the decision whether to file a bankruptcy case or not rests with them.
There are some obvious signs that a person with debt problems needs to seriously consider filing a bankruptcy case. If a civil judgment either is about to be entered, or already has been entered in a case the judgment creditor will have the ability to use creditor’s remedies to get the judgment paid by the judgment debtor, either voluntarily, or involuntarily. People facing the entry of a civil judgment for money owed a creditor are looking at the possibility of having wages garnished and/or bank accounts levied after the judgment is entered. Almost every judgment debtor cannot afford to lose 25% of his or her pay check or have his or her bank balance taken by a judgment creditor. People facing the entry of a civil judgment should seriously consider filing a bankruptcy case, since the filing of the case creates a court order, called the automatic stay, that prohibits creditors from garnishing wages or levying on the bank accounts of a bankruptcy debtor.
In the same way, a person who has defaulted on a home mortgage or on a car loan should consider filing a bankruptcy. When a case is filed, and the automatic stay is entered, at a minimum foreclosure proceedings or repossession actions are postponed. If an individual with mortgage defaults or car loan defaults file a chapter 7 case, that person will receive the benefit of a “time out” that will give them the chance to work out a way to catch up on past-due payments while the bankruptcy case is pending (usually three to four months). For individuals with relatively small defaults a chapter 7 can be a very useful tool. For people with more significant defaults on their home loan or car loan payments - those people for whom catching up on past-due payments will require more than just three or four months, filing a chapter 13 bankruptcy is the best way to go. In a chapter 13 case, the bankruptcy debtor proposes a repayment of mortgage defaults, if such defaults exist and the debtor wants to remain living in his or her home.
Chapter 13 also offers a debtor a way to restructure their car loan to make their car loan payments more affordable. Another feature of a chapter 13 case is that in many cases, people with high-interest car loans can “re-set” the interest rate (we usually set the interest rate at 5.25% for our car loans) on the loan, which in many cases results in significant savings for the debtor - making the car loan that was proving very difficult to pay much more affordable.
These cases - in which debtors are looking at an imminent wage garnishment, foreclosure or repossession are fairly clear-cut. For almost everyone in this situation, filing a bankruptcy case will give them security that their paycheck, home and/or car will be protected.
But not every client, and not every person who should seriously consider filing a bankruptcy case are facing garnishment, foreclosure or repossession. Many clients have not had formal legal action taken against them yet. But they are receiving collection phone calls and letters. They are being harassed by creditors for payment, and if the default is for more than a couple of months, the collection efforts are getting more and more aggressive. Debt collection is, for many collectors, a psychological exercise. The collector is attempting to make the person who owes an account as uncomfortable as possible. And the collectors who are good at their jobs succeed. When I speak with people who are the targets of active collection, and let them know that as soon as a bankruptcy case is filed all collection activities are going to stop by court order, many of those people know instantly that a bankruptcy will help them resolve their debt issues and relieve the extreme stress they feel.
Not everyone who files a bankruptcy case is being hounded by collectors, though. Many of the people who come to see me about filing a bankruptcy are still current on their obligations. The reason for their visit, though, is that the client believes that their budget is not sustainable if the payments they are required to make are going to continue as is without being abated. For these potential clients, making their budget work is getting more and more problematic. So one of the things that I try to review with potential clients is approximately how much of their monthly expenses is going to servicing debt - what are the interest charges each month that the client is paying. And how much of that interest is for unsecured debt, such as credit cards or open lines of credit. If the interest being charged (and paid) by clients is pushing them into a deficit budget number, then these clients need to know about what a bankruptcy would do for them.
Still others are not looking at some structural budget problem. Rather, through some combination of circumstances, they are instead looking at the reality of an unexpected, unaffordable expense that they did not anticipate being responsible for. It happens when an individual is involved in a property damage or personal injury accident and learn, to their dismay, that the insurance coverage that they believed they had, in fact would not cover the accident. It happens when people, or their dependents are taken sick, or are injured and there isn’t enough medical insurance to cover all of the costs of the sickness or the injury. And it happens frequently when couples that have been living together, pooling their resources to pay their debts see their relationship end for whatever reason. In all these cases, something sudden happens that disrupts budgets in a profound way. In these circumstances, too, a bankruptcy case can offer people security that their paycheck, home and vehicle are going to be protected.
So as you can see, there are a number of different circumstances in which the decision whether to file a bankruptcy case will be “front and center.” The bottom line is that the individual’s perception of the problem - and how threatening the problem is to that person - will govern whether or not a bankruptcy case is filed.
Next week I’ll discuss timing and venue issues in making a decision as to whether to file a bankruptcy case. In the meantime feel free to reach out to Minneapolis Bankruptcy Lawyer from Kain & Scott at:
Kain & Scott, P.A.