Most of us occasionally run out of money before we run out of month. In this precarious situation, just one serious financial setback can have a devastating effect. Setbacks like serious illness, divorce, or job loss can happen to anyone at any time. When these situations cause financial turmoil, you basically have two choices. You can watch things get worse or you can do something about it.
Many times, that “something” is a Chapter 7 bankruptcy. This federal debt relief program keeps moneylenders at bay and gives families a fresh start. Read on to learn more about this life-altering procedure.
Qualifying for a Chapter 7 in Minnesota
The 2005 bankruptcy reform act introduced some new wrinkles in this area. One of them is a pre-filing debt counselling course. This “hurdle” is usually not a big deal, as there are hundreds of online options. Most of them only take about twenty minutes and only cost about twenty dollars. Be sure the Minnesota bankruptcy court has approved the class you select. Moreover, not all these courses produce PDF certificates, and we will need something like that. At Kain & Scott, we can share resources with you to make sure you have completed the pre-filing course with an approved agency.
All bankruptcy debtors must take this pre-filing class. But only Chapter 7 debtors must complete the means test. To clear this hurdle, your income must be below the median for a household your size, or your disposable income, put through a means test constructed by Congress, must be low enough to allow you to file a chapter 7 case. The determination of income is based on median income information for Minnesota.
The Automatic Stay in a MN Chapter 7
As soon as debtors file their voluntary petitions, Section 362 of the Bankruptcy Code takes effect. It usually stays in place until the case is over. The Automatic Stay prohibits all communication between debtors and creditors. Such “communication” includes adverse creditor action like:
- Harassing phone calls,
- Repossession, and
- Wage Garnishment.
If the debtor has previously filed bankruptcy within the last year or two, the Automatic Stay may only have a limited effect.
One of the advantages of Section 362 is that debtors need not prove any fault or negligence on the part of the moneylender. The stay takes effect automatically. That’s an advantage that a civil case does not offer. A state court judge also has the power to halt adverse creditor action, but a Temporary Restraining Order is almost entirely discretionary. A judge can elect to use the power or decide to do nothing.
Exempt Assets in a Minnesota Chapter 7
Perhaps because a Chapter 7 is sometimes called a “liquidation” bankruptcy, may people think they lose most or all of their assets. But the bankruptcy trustee in a case almost never seizes and sells assets to pay creditors. Most assets, like your house, car, personal property, and retirement account, are exempt – protected from the bankruptcy trustee and your creditors.
Most other assets have no value to creditors. Assume the debtor has a small fifth wheel that doubles as a fishing cabin. Used RVs have almost no financial value. And, by the time the trustee (person who oversees the bankruptcy for the judge) makes any necessary repairs to get the trailer ready for sale, there may be no profits at all to distribute. As a result, the trustee may well let the debtor keep the fifth wheel, even though it is not legally an exempt asset.
What Debts Does a Chapter 7 Discharge?
The trustee also conducts a 341 creditors’ meeting about six weeks after the debtor files a petition. This meeting is mislabeled as well. The creditors almost never attend. Instead, it’s only the debtor, the debtor’s attorney, and the trustee. The trustee asks a few basic questions, and that’s about it. The trustee usually requests some documents as well, such as tax returns and paystubs.
Assuming no red flags go up in the 341, the trustee usually gives a no asset report to the bankruptcy court. Based on that report, the bankruptcy judge enters a discharge order. The discharge order removes a debtor’s liability from debts, such as:
- Medical bills,
- Credit cards, and
- Payday loans.
Some other unsecured debts are dischargeable only under certain circumstances. For example, some debtors have past-due income taxes. These unsecured debts are dischargeable if the taxes are at least three years old, the returns have been on file for at least two years, and the debt has not been assessed within the last 240 days.
Bankruptcy eliminates the personal obligation to repay the debt, but does not eliminate the collateral consequences. To return to the tax example, if the IRS filed a lien, bankruptcy only eliminates the debt. It does not dissolve the lien. That must be done separately.
Chapter 7 may be the answer to your seemingly unsurmountable unsecured debt problems. For a free consultation with an experienced bankruptcy attorney in Minneapolis, contact Kain & Scott. Convenient payment plans are available.