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Atlas Law Firm Jan. 12, 2023

Is Chapter 13 Preferred Over a Chapter 7 Bankruptcy in Minnesota?

In general, a Chapter 7 is preferred over a Chapter 13. That is simply because it is so much quicker. The Chapter 7 takes about three months, and then you are done and move on. A big part of moving forward is the ability to start rebuilding your credit. There is a lot of misinformation out there about how bankruptcy affects your credit. Some people say it is a huge black eye. It is on your credit report for ten years. The implication being you are just going to be blacklisted from any credit cards or car loans for the next ten years. If that was the case, our economy would screech to a halt. Our economy is completely built on consumer credit. You cannot cut out a significant part of the population from obtaining credit in order to purchase things.

What happens is the date your Chapter 7 is filed, the Chapter 7 bankruptcy is listed in the account history for each of your accounts. We call them trade lines. For each credit card or loan you have, there is a line of payment history. That history is where the credit reporting bureaus pull the data to generate your credit score. If you have a good debt to income ratio, and you make all your payments on time, your credit score is going to be high. If you have some late payments on your account, your credit score is going to be a little bit lower. If you found yourself in a hardship and you have not been able to make payments for the last six to nine months then your credit score will be lower.

On the date we file your case, on each of these account histories; it is going to say Chapter 7 bankruptcy has been filed. In that first month, the Chapter 7 bankruptcy is going to affect your credit score, because that is the area that the score is generated from. The higher your credit score on the date we file your case, the more it will to drop. The lower your credit score on the date we file your case, the less it will drop. If you have a 780 credit score on the date we file your case, it might drop down to 690, but if you have a 510 credit score on the date we file your case, you might only go down to 500. But, you are not going to go down to 0 or 250 or whatever the bottom line might be.

What a lot of people do not realize is that because of the way the automatic stay works; there is also a benefit to how Chapter 7 affects your credit. After that first month, the bankruptcy is going to move from the account history section down to the public records section. For ten years that is where it will sit. But the credit reporting bureaus do not pull information from the public records in order to generate your credit score. The automatic stay has prevented any of your creditors from negatively reporting on your credit in the future, the late payments, and the debt to income ratio being skewed, all of that stops. All of the negative information affecting your credit score stops.

The idea is to move forward, and any debts that you keep through the bankruptcy, like a mortgage, a car loan, student loans, or if you go out and get acquire new debt, every time you make a payment on time your credit score will go up. It is usually within a year that most of our clients have rebuilt their credit to better than what it was. Bankruptcy can actually work in your favor quite a bit, even though it sits on your credit report for ten years. I have a lot of people asking me what if I go and try to get a new job and they pull my credit? They are going to see the bankruptcy on the credit report. But they would pull your credit report either way (even if you don’t file for bankruptcy). If you have not resolved the debt situation and they pull your credit and they see $50,000 of unpaid debt on your credit report that probably reflects worse on you than having a bankruptcy in your past.

A lot of companies are waking up to the fact that after the Great Recession where filings went so high, they are recognizing that bankruptcy is not for people who are irresponsible or reckless. Bankruptcy is a safety net to help people in times of need, and just because you have used the bankruptcy laws to get back on your feet that does not mean that you are not a responsible person. Your character is in good standing, you just made some poor choices. There are a lot less companies that look into your credit scores or use that as a determining factor for employment. Certainly the bankruptcy code is written so your present employer cannot fire you for exercising your bankruptcy rights.

You cannot be terminated for filing for bankruptcy. Chapter 7 is the way you can start rebuilding your credit soon after your case is filed, just after three months. That is one of the main benefits, because you are able to get back on your feet so quickly. All else being equal, with a Chapter 13, you are going to be making at a minimum, three years of payments into your payment plan, and those payments that are ultimately going to your creditors, those will not reflect on your credit report, because that is the way the automatic stay works.

During the Chapter 13 payment plan, the creditors are not reporting payments on your credit anymore; even though they are receiving payments through the Chapter 13 plan. You are in this credit limbo. It does not mean that you cannot get credit, but it means you do not really have a lot of traction for rebuilding your credit while your Chapter 13 is in place. It is going to take you a minimum of three years before you get the discharge, to really start moving forward with your life and to start rebuilding your credit. Sometimes, if you do not qualify for 7, Chapter 13 is the best deal you are going to be offered and it is still a great deal. For other reasons, the Chapter 13 does make sense because you have a house that is about to go in to foreclosure and your main goal is to save that house. It probably makes more sense in that particular circumstance. In general, the Chapter 7 is the preferred option, because it is so much quicker and you can just move forward with your life.

For more information on Bankruptcy Preferences in Minnesota, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling today.


What Do I Bring to The Meeting of Creditors?  -

There are 2 things you must do after your case is filed: (1) attend the meeting of creditors (aka the 341 hearing); and (2) complete a debtor’s education course via phone within 75 days from the date your case was filed. The 341 hearing is sometimes referred to as the meeting of creditors because your creditors can attend the meeting and ask you questions about the information contained in your petition.

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