Financial distress can come from many situations.
Whether it is trouble stemming from job loss, divorce, medical emergency, or something else, personal bankruptcy provides a legal and acceptable method to get out of debt and get a fresh start.
Folks often want to learn more about their options through bankruptcy. They have typically heard about Chapter 7 and Chapter 13, but are not sure about the difference between the two. Through a detailed, personalized consultation, we will examine your finances and determine your best option.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy helps people with a steady income get back on their feet by reorganizing debt into more manageable payments.
Not only can you back back creditors over the course of three to five years, but you might also be able to pay less than what you owe–at least for some debts, such as credit card balances.
How Is Chapter 13 Different from Chapter 7 Bankruptcy?
One of the biggest differences is that in a Chapter 7 Bankruptcy, you don’t pay back your creditors and the bankruptcy trustee–the person who oversees your case–will sell any property that you’re not allowed to exempt or protect under Minnesota law.
By contrast, in a Chapter 13 case, you’ll make monthly payments over the course of a three-to-five-year plan and the trustee won’t sell your nonexempt property (you’ll pay your creditors the value, instead).
You can expect to pay back the following in your monthly plan payments:
- House and car payments, including any past due amounts
- Priority debts, such as overdue tax bills and domestic support obligations (spousal and child support)
- The value of any nonexempt property
Additionally, any discretionary funds left after meeting these payment requirements will get paid into the plan. Once you’ve satisfied your payment obligations and completed your plan, the remaining balance on any dischargeable debt will get wiped out.
Debt Discharged Only In a Chapter 13 Bankruptcy
- Debt for willful and malicious injury to property
- Certain debt arising from a divorce or separation order or settlement
- Debt incurred to pay nondischargeable taxes
- Post-petition homeowners’ dues
- Fines, penalties, and forfeitures payable to a government unit
- Debt previously included in an unsuccessful bankruptcy case
Who Typically Files for Chapter 13 Bankruptcy?
If after deducting allowable expenses, your income exceeds the median income in Minnesota for a family of your size and you need bankruptcy relief, you’ll have to file for a Chapter 13 case because you won’t be able to pass the Chapter 7 “means test.”
Failing the means test is a common reason that people turn to Chapter 13 bankruptcy for financial help.
Specifically, it solves problems that a Chapter 7 bankruptcy won’t help. For instance, it will likely be the better choice for you if:
- You need time to catch up on an overdue house or vehicle payment to keep your house or car
- You want to keep an asset that you’d lose in a Chapter 7 bankruptcy (nonexempt property)
- You need time to pay off non-dischargeable debt that won’t go away in bankruptcy
- You want to lower your student loan payments while paying off other debt
This is a brief list of a few main advantages. We will be able to review your case and determine whether Chapter 13 would be a good fit for you.
Am I Eligible for Chapter 13 Bankruptcy?
It depends. The requirements are a bit different than the Chapter 7 requirements, but here are the basics:
- You must have enough monthly income for a repayment plan
- You can’t file on behalf of a business (other than a sole practitioner)
- Your debt cannot exceed certain debt limits
Additionally the length of your plan will depend on your income. If it exceeds the median income of your Minnesota, your plan will last five years. If not, you’ll pay into a three-year plan.
How Does the Chapter 13 Process Work?
We will propose a plan to pay back a certain amount to your creditors during the course of your three-to-five-year plan. You’ll start paying your monthly-proposed plan payment to the trustee shortly after you file. Your creditors and the trustee will have an opportunity to object to the plan if you don’t believe you’re following bankruptcy rules or procedures.
If no one objects, or if you successfully address all objections, your matter will go to a hearing before the assigned judge who will likely approve your plan.
If the court doesn’t confirm your plan, you’ll probably get additional time to correct any issues. However, the court is mandated to make sure that you submit a verifiable plan promptly.
So if you don’t fix your plan within the time given, the court will dismiss your case.
Once confirmed, you’ll continue making your payments to the trustee each month, and the trustee will disperse the funds to your creditors.
What Will Happen If I Can’t Continue With My Plan?
Three-to-five years is a long time, and during that period, it’s common for financial situations to change.
For instance, you might get laid off, or an employer might reduce your work hours. If you aren’t able to make your monthly payment, we will figure out your next steps.
If possible, we will ask the court to modify your plan and decrease your payment to an amount that is more affordable. If you don’t have enough income to satisfy a modified plan, then you’ll need to make another decision.
Here are a few possibilities:
- Convert and transfer to a Chapter 7 case
- Ask the court for a hardship discharge
- Do nothing and allow the court to dismiss your case
It’s important to recognize that you might lose property if you convert your matter to a Chapter 7 case.
The court will likely use the exemption you claimed in your original paperwork, meaning you won’t be allowed to change your exemptions to avoid giving up property, so it’s important that it’s as accurate as possible when you prepare your initial paperwork.
Chapter 13 Bankruptcy might be the right choice for you to get a fresh start.
Moshier Law Office, PLLC
St. Paul, Minnesota