A common concern for people considering filing for bankruptcy is whether they will be restricted from buying or selling property, or taking out more debt, during their bankruptcy case. Whether these types of transactions are permitted partially depends on whether they file a chapter 13 or chapter 7 bankruptcy case.
In a chapter 13, the debtor is expected to contribute all of their disposable income as monthly payments towards their debt for the duration of their 3 to 5 year repayment plan, after which any remaining debt is discharged.
In a chapter 7, the debtor does not make any payments towards their debts and simply receives a discharge of their debts upon completing all of the formal court requirements, which typically occurs 3 to 4 months after filing their case.
Distinction Between Chapter 7 and Chapter 13 Permittable Transactions
A key distinction between these two types of bankruptcies is that, in a chapter 7, the debtor may potentially have to surrender any property that is nonexempt (not protected under law from creditors) to be liquidated and used to pay creditors, whereas, in a chapter 13, the debtor gets to keep all of their property provided the creditors get paid at least as much as they would have received had the debtor filed a chapter 7 case.
In a chapter 7, all of the property owned by debtor on the date of filing is considered to be property of the “bankruptcy estate,” which is legally in the possession of the trustee. A chapter 7 trustee’s job is to determine what property is legally exempt, and can be kept by the debtor, and what property is nonexempt, and must be taken to pay creditors. In a chapter 13 case, there is essentially no bankruptcy estate, as the debtor retains possession of their property, rather than the trustee.
Buying and Selling Property While in Chapter 13
For this reason, debtors in a chapter 13 are ordinarily allowed to buy and sell property as they desire without need court permission. However, buying or selling expensive property, such as cars or homes, will likely require court permission, as the debtor may receive extra money to be paid to their creditors from selling property (may be considered extra disposable income), or incurring additional expenses from purchasing new property with a loan that needs to be repaid.
Often times, these transactions will require the debtor to modify their plan payments to accommodate these changes in financial circumstances. Notably, the same is true if the debtor happens to acquire property or money (i.e. from an inheritance or winning the lottery), in which case the debtor will likely be required to contribute, at least, some of the proceeds to their creditors in their plan.
Buying and Selling Property While in Chapter 7
The debtor is also generally allowed to buy and sell property in a chapter 7 case. However, a debtor in a chapter 7 should be cautious when selling property until they are certain the property they are selling is actually exempt and protected from creditors. Unless they are sure the property is exempt, the debtor would be wise to wait until, at least, 30 days after the date of their creditors meeting to sell any potentially nonexempt property.
Deadline to Object to Claims of Exempt Property
The deadline for the trustee or creditors to object to the debtor’s claim that the property is exempt is 30 days after the creditor’s meeting, which is usually about 2 months, or so, into the case. After that deadline has passed, the property is officially considered exempt and the debtor may do with it as he or she pleases. As to buying property in a chapter 7, the debtor is free to purchase any property they desire, so long as they make sure they do not purchase the property with nonexempt funds.
What Is Property of the Bankruptcy Estate?
Property of the bankruptcy estate primarily consists primarily of property in the possession of the debtor as of the date of filing and property acquired after that date is typically excluded from the estate. However, an exception to this rule is that if the debtor becomes entitled to any property from inheritance, life insurance payout, or as the result of a divorce, within the 6 month period from the date they filed their bankruptcy case, that after-acquired interest in property becomes property of the bankruptcy estate.
The "Right" to Receive Property After Filing Bankruptcy in MN
It is also notable that certain types of property received after filing for bankruptcy, such as tax refunds and payouts from certain types of claims (i.e. lawsuits and insurance claims) may also considered property of the bankruptcy estate if the “right” to receive those claims existed prior to the date the case is filed. This is because the “right” to receive the property itself is considered property of the bankruptcy estate. This is true in cases in which the debtor knows they have basis for receiving the property at the time their case is filed, such as when they have been injured and may be considering filing a lawsuit or have a large tax withholding and have a tax refund coming to them the next year.
Securing Finance During a Bankruptcy in Minnesota
As to securing financing during a bankruptcy, there is typically no issue with a debtor in either a chapter 7 or a chapter 13 from incurring debt after filing for bankruptcy. While there are basically no restrictions to a debtor’s ability to borrow money in a chapter 7 (so long as not done in a manner that defrauds creditors) there are some limitations on a chapter 13 debtor’s right to do so.
A debtor may generally incur ordinary consumer debt during their chapter 13 case (i.e. credit card debt, modest personal loans and lines of credit) without the need for court permission. However, as mentioned above, larger amounts of financing (i.e. car loans) will likely need to be approved the court and may change the debtor’s plan payments.
These types of debts are generally allowed if they are reasonably necessary for the support of the debtor and do not unfairly deprive creditors of payment. For example, the court would probably allow a debtor, whose car was just totaled, to purchase a reasonably-priced replacement vehicle (not a new Ferrari). It is likely that in that case that the debtor’s plan would have to be modified to account for any increase in expense from monthly payments on the vehicle.
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This is a generalized overview of a debtor’s right to buy and sell property, and their ability to secure financing during their bankruptcy case. It is not designed to be a comprehensive discussion of the topic. To address more specific questions that you have about how a potential bankruptcy will impact your ability to engage in post-filing financial transactions, you should talk to an experienced bankruptcy attorney. See us at LifeBackLaw.com!
