Choosing the Bankruptcy for You

Bankruptcy is not a process to be entered into lightly, but when you have debts and obligations that you absolutely cannot meet, it is a lifesaver. As freeing as bankruptcy can be, however, bankruptcy laws in this country can seem quite complex to the uninitiated.

Yet once you have a full understanding of the bankruptcy process and how best to approach it, you can end up coming out the other side of your bankruptcy far better off than you were before. Of course, without a full understanding of bankruptcy, it is easy to make mistakes that can have a devastating impact on your financial status for years, even decades, to come.

The first and most important thing for you to understand before filing bankruptcy is the difference between Chapter 7 and Chapter 13 bankruptcy. In fact, you may not even qualify for one type of bankruptcy depending on your income and other financial factors; these are things you need to discover prior to starting the bankruptcy process, as it can take quite some time, and if you are denied, that is time – and money – you’ve lost.

Generally speaking, Chapter 7 bankruptcy is for debtors who want to be rid of unsecured debt. Filing for Chapter 7 bankruptcy will take you approximately six months. The bankruptcy filing fee in Minnesota is $335. Yes, it costs money even to file for bankruptcy. Keep in mind that if you’ve received a bankruptcy discharge in the last six to eight years, you will not be able to file for Chapter 7. Additionally, if your income and debt burden meets certain requirements, you will also be denied a Chapter 7 bankruptcy.

Your bankruptcy court will want to know a few things about your financial situation. Specifically, they will want to know about the property you own, what property you are claiming as exempt from the bankruptcy process, what your current income is versus your monthly living expenses, and what debts you owe.

To prevent you from ridding yourself of property only to reacquire it after bankruptcy has been declared, the court will also want you to detail what property you owned and what money you spent in the past two years, as well as any property you sold or gave away during the same time period. A trustee will then be appointed to review your papers and other documents, as well as sell your nonexempt property to your creditors.

The process for and reasoning behind filing for Chapter 13 bankruptcy is different in several ways from Chapter 7 bankruptcy. Chapter 13 is referred to as a “reorganization bankruptcy,” meaning that it is for debtors who have regular income and who can pay back a portion of their debts through a structured repayment plan. Chapter 13 is often the only alternative for someone whose income is too high to qualify for Chapter 7. The benefits of Chapter 13 allow the you to repay missed mortgage payments or even remove unsecured junior liens from your house, make it preferable in some cases.

Chapter 13 bankruptcy allows you to keep all of your property, whether it is exempt or nonexempt, but it forces you to pay back a portion of your debts through a repayment plan. Thus, if you have property you want to keep, Chapter 13 may be for you.

The Lasting Impact of Bankruptcy

Before applying for bankruptcy, you should understand that until you begin to rebuild your credit (typically 1 – 3 years) you will only qualify for personal loans or credit cards with high interest rates. This is actually a great opportunity to begin building your credit rating back up, so long as you can make your payments quickly.

Additionally, for a year after your bankruptcy, you may have difficulty opening a standard bank account, though you may keep the ones you already had when your bankruptcy was filed. Even after your bankruptcy has been discharged (i.e., completed), it will be on the public record section of your credit report for ten years. Bankruptcy has consequences – but sometimes, the inability to repay your debts has even greater consequences. As ever, you must weigh the costs and benefits of this decision, but if bankruptcy is right for you, don’t hesitate to contact us to schedule your free consultation.