Since the early 1800s, the Supreme Court has consistently held that bankruptcy is designed to give honest but unfortunate debtors a fresh start. Many notable individuals and businesses, from Henry Ford in the early 1900s to General Motors in the early 2000s, have used bankruptcy to get this fresh start. You can do the same thing.
From start to finish, the Chapter 7 bankruptcy process usually takes a little less than a year. A lot of things happen in these nine or ten months. This post highlights some of the key points.
Do I Qualify for Chapter 7 Bankruptcy in Minnesota?
Statistically, most people file bankruptcy due to medical bills, unemployment, divorce, or some other adverse outside circumstances. For the most part, these things are beyond the debtor’s control. However, a persistent myth remains that overspending causes most bankruptcies. Poor financial planning is sometimes a contributing factor in Minneapolis, but it’s hardly ever the primary factor.
Nevertheless, the big moneylenders convinced lawmakers to enact the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005. Among other things, BAPCPA introduced a qualification for Chapter 7. All these debtors must have an income below the median for that geographic area, according to the government’s means test. In Minnesota, that figure is $107,902 for a family of four as of May 1, 2018.
The moneylenders secretly hoped that the means test would either force more people into Chapter 13 or take away the bankruptcy option altogether. But that does not seem to be the case. Chapter 7 filing rates dropped initially, but they have crept back up again.
Determining Exempt Assets in Minnesota
This next part of the Chapter 7 bankruptcy process is often the most time-consuming. The debtor initially declares exempt assets in Schedule C of his bankruptcy schedules. In Minnesota, debtors can choose between federal or state exemptions. In many ways, they are much the same. Both state and federal exemptions cover:
- House,
- Motor vehicle,
- Retirement account,
- Most personal property, and
- Some insurance payouts.
There are some differences as well. For example, the federal home equity exemption is $47,350 for joint debtors; the Minnesota exemption is $390,000. As another example, the federal exemptions include a wildcard exemption that protects cash and other nonexempt property; there is no such exemption under Minnesota law.
The trustee (person who oversees the bankruptcy – think of a case manager) does not automatically seize nonexempt assets. This is where the time-consuming part kicks in. Assume Debra Debtor has a boat she likes to use on the weekends. The boat is not exempt and is worth about $3,000.
Before the trustee seizes the boat, sells it, and distributes the profits among Debra’s creditors, the trustee must do the math. The boat probably needs work to make it saleable. The trustee must also store the boat, market it, and bear all the risk of sale. Most Minnesota trustees would conclude that the asset is not worth seizing under these circumstances.
An attorney plays an important role here. At Kain & Scott, we speak up for our clients and make sure that the trustee has all the facts before making a decision.
The Automatic Stay in a Minnesota Bankruptcy
Whereas the exemption process is sometimes rather subjective, Section 362 of the Bankruptcy Code is almost always black and white. This provision clearly prohibits any communication between debtor and creditor while the case is pending. This prohibition includes adverse activities like:
- Harassing phone calls,
- Repossession,
- Wage garnishment,
- Foreclosure, and
- Lawsuits.
For the most part, no creditors are immune from the automatic stay. It applies to public and private moneylenders. It also applies whether or not the underlying debt is dischargeable. A creditor can get special permission from the judge to ignore the stay. But, such permission is almost impossible to obtain. The stay also has limited applicability if the court deems the debtor to be a serial filer. But, that does not happen very often either.
Debt Discharge: The Final Step of the Chapter 7 Bankruptcy Process
Most unsecured debts are dischargeable in a Chapter 7. An obligation is unsecured if the debtor did not sign a security agreement but only made a verbal or written promise to pay. This list includes:
- Medical bills,
- Credit card debt,
- Most personal loans, and
- Payday loans.
An additional word about payday loans. Americans spend about $9 billion a year on payday loan fees. Although the lender wants you to believe otherwise, these loans are unsecured. If you have payday loans and you are about to file bankruptcy, we normally recommend that you close your current checking account. We’ll go over the details during your bankruptcy consultation.
Bankruptcy eliminates the personal liability for the debt, but it does not eliminate the debt itself. There is a difference. For example, assume Debra Debtor had high medical bills from a prior surgery which her insurance company refused to cover. The hospital sued Debra for the money and refused to provide additional services until the bill was paid.
Section 362 stops the lawsuit and the discharge portion of the Chapter 7 bankruptcy process removes Debra’s obligation to repay the debt. But the hospital can still blacklist Debra.
An attorney helps here as well. Many times, creditors in these situations are willing to negotiate. In this case, the hospital knows that it is legally entitled to nothing. Even arithmetically-challenged people know that something is better than nothing. So, Debra’s debt suddenly becomes negotiable.
Chapter 7 may be the answer to your unsecured debt problems. For a free consultation with an experienced bankruptcy attorney in Minneapolis, contact Kain & Scott. We’ve helped Minnesotans get rid of debt problems for over forty years.
