Should I File a Chapter 7 or Chapter 13 Bankruptcy?

Written by Wesley Scott | November 23, 2016 at 3:27 PM

Life should not hurt this much. You have decided that bankruptcy is the medicine your family needs to get your life back and look toward the future not keeping staring at the past. You should be proud of your courage and your need for certainty and security in life. It’s nice to know that when you start fresh you can pay your bills and keep the roof over your head. But still, you struggle with which bankruptcy makes most sense.

A competent Minnesota Bankruptcy Lawyer can help you determine which bankruptcy makes sense for you and your family. However, if you would like a rough break down of the things I think about as I try to figure out if a guest is going to be a chapter 7 or a chapter 13 bankruptcy as a seasoned Minnesota bankruptcy lawyer, well, here it is!

When I sit down with a guest who comes in and wants to File for Chapter 7 Bankruptcy in Minnesota, i tell myself this- I need to make sure this guest understands all of their choices clearly so they can make a good decision. That is what I would want from my lawyer. Many times, clients understand a chapter 7 well enough to know that it is a “fresh start” and that is what the client wants so desperately.

WHAT REALLY DETERMINES WHETHER A CLIENT FILES CHAPTER 7 OR 13?

When we meet with our guests, we sit down and take an inventory of their basic assets and debts. We also discuss their income as well. Once we know this basic information, we have a discussion of the choices available to them- which include chapter 7 and chapter 13 bankruptcy.

1) ABILITY TO PAY:

Congress has divided us into two groups of debtors. The first group of debtors are those with no ability to repay debts at all. Once you pay your reasonable and necessary bills, you have nothing left over to pay creditors. If this is you, you will likely be filing a chapter 7 bankruptcy, the debt will get eliminated and you will get a “fresh start.” Second, regardless of income, if you have the ability to repay your creditors some money, you must do so. These folks would be in a chapter 13 bankruptcy - making payments back to their creditors through a chapter 13 trustee.

Minnesota has two chapter 13 trustees. Greg Burrell is a chapter 13 trustee in Minneapolis. Kyle Carlson is a chapter 13 trustee who serves as trustee in Barnesville, Minnesota and serves out state Minnesota.

Whether you have the ability to repay some of your debt, or not, is simply determined by your budget.

2) NON-EXEMPT ASSETS:

If you file bankruptcy you must disclose all of your assets. If we can protect your assets from creditors and the trustee, we call those assets “exempt.” If we cannot protect your assets, we call them “NON-EXEMPT.”

You may consider Filing for Chapter 13 Bankruptcy if you would lose assets in a chapter 7 bankruptcy. For example, say you own a condo in Florida worth 30k and if you filed a chapter 7 bankruptcy, the condo is “NON-EXEMPT.” If the asset is “non-exempt” it would be the duty of a chapter 7 trustee to sell that asset and use those proceeds to pay down your debt.

But, what if you say, hey, I don’t want to lose my condo in Florida, what can I do? You could file a chapter 13 bankruptcy, not lose the condo, and make payments back to your creditors that would total at least the value of the condo.

Filing a chapter 13 bankruptcy makes some sense if you would prefer not to lose “non-exempt” assets.

3) FUTURE DEBT:

Sometimes, I meet with a guest who is not only concerned about the debts they have now, but they are concerned about debt they may incur in the future. For example, what if you made $13.00 per hour but you had no health insurance and you have brain cancer?

If this were you, you may be concerned about the debt you have now and also concerned about debt you may incur in the future. What good does it do to file a chapter 7 bankruptcy if you are going to incur new debt immediately after filing the bankruptcy? If this were to occur, you would not be able to add the new debt onto your chapter 7 bankruptcy.

However, if you file a chapter 13 bankruptcy, and incur new debt while you are in the chapter 13 bankruptcy, those creditors can sue you while you are in the chapter 13 bankruptcy but they cannot collect from you because your wages are an asset of the chapter 13 bankruptcy estate.

Plus, you can convert to a chapter 7 bankruptcy down the road and add all of the debt you incurred after you filed your chapter 13 bankruptcy and add it onto your chapter 7! This is called insurance right? Typically, your chapter 13 payment would be very modest.

If things go wrong, there is a rip cord you can pull and add any future debt to a converted chapter 7 bankruptcy.

4) MORTGAGE ARREARS AND VEHICLE LOANS:

Chapter 13 bankruptcy is great if you want to keep your home and you are behind the loan payments. Chapter 13 bankruptcy plans can cure your arrears while you make timely payments going forward. We can also cram down vehicle loans if the loan was taken out more than two and half years ago. For example, say a car is worth 5k but the loan balance is still 12k. We can pay 5k for the vehicle and you will get the lien release when the plan is done. We can also cure vehicle loan arrears as well.

CONCLUSION

This is not meant to be an exhaustive list of pro’s and con’s to filing a chapter 7 and chapter 13 bankruptcy. Instead, it is meant to give you some guidance as to whether you should file a chapter 7 or chapter 13 bankruptcy.

I want to make it clear that everyone is different- everyone. In my opinion, chapter 7 looks better on your credit because you are debt free sooner than later. Chapter 13 tends to be a little more difficult on your credit because you don’t get the coveted discharge until the end of a 3-5 year plan.

I know this seems crazy and counter to everything you would have thought before right? You would think that making payments would look better on your credit. Wrong! Turns out having no debt looks the best on your credit score!

And yet, there are many valid reasons to consider a chapter 13 bankruptcy as well. Either way, you will get relief.

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