Is Chapter 7 Bankruptcy a Magical Solution for Debt Problems?

Chapter 7 is not a magical solution for debt problems. Congress has set up this system, because they recognize that in an economy that depends on consumer credit, you must have some kind of safety valve when things go bad. Because we do not want to put people in a situation where they take out debt under a set of circumstances – if things are going well, and they are making enough money to address their monthly expenses and they go out and they buy something on credit and it is fine because they can manage the monthly payments. But, if they lose that job or have their hours cut then all of a sudden they are put in a situation where they can no longer make payments and keep up with bills.

You might have some money in savings, or you might decide to liquidate a small retirement account that you have. You might have friends or family that can help you out for a while. But, if you are unable to address that underlying issue, and are unable to get a new job or get those hours back, get your income re-established, then the underlying problem is still there. If you do not have that safety valve in place, then the interest is just going to keep piling up and it is going to dominate the person’s life financially, to the point where they are not going to be able to meet monthly living expenses. They will not be able to support themselves or their family, and it can have a very negative effect on society.

Congress has said in those situations we want to have a safety valve. We are willing to setup a system where we will discharge your debt or most of your debt. Student loans are not dischargeable though. We do not want to take away assets so that you are going to be a destitute on the streets, but at the same time, they have to balance that against the right of the creditors. There is a line drawn in terms of how many assets you can keep.

That is reflected through the exemptions and the amounts. It is basically Congress balancing out these goals of what we want to give to people. But we do want creditors to have faith that people are going to be able to pay out their debts. Congress did not want to setup a system where everybody just runs into bankruptcy and discharges all of their debt. There is balancing there, that if you have assets over a certain amount, then those could be liquidated, and the proceeds turned over to creditors. That is the carrot and the stick that Congress uses to maintain that balance. But, there is no magic wand. It is pursuant to a court order, and there can be consequences if you act fraudulently.

One of the goals that Congress has is treating your creditors fairly. One of the rules in furtherance of that goal is what we call preferential transfers. There is a lookback period from the date you file bankruptcy, and if you have paid any of your creditors a certain amount of money within the three months prior to filing, the court can go after that creditor and say we want the amount that was received over $600. The creditor has to pay that money back. The court takes it, and they distribute it evenly amongst all of the other creditors. There is another preferential transfer rule that applies to “insiders.” Insiders are basically creditors who are friends, family members, and business partners.

If you have paid any insider creditors any money within a twelve month period then the trustee has the right to go after that person and require that the insider pay the money back. Then the trustee distributes it amongst all of the creditors. It is not all rainbows and sunshine. There are things set into the code to balance out the creditors’ rights as well, and this is why it really makes sense to sit down with an attorney who is going to ask you these questions, get the information, analyze the issues in your case, and help you address them.

For more information on Chapter 7 Bankruptcy in Minnesota, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling today.