A reaffirmation is an official way to “reobligate” yourself on the loan. This involves the lender sending us a reaffirmation contract to be signed by you.
The Bankruptcy Process in Minnesota
There are a lot of myths surrounding bankruptcy. Many people think that you will automatically lose your car or your house if you file. That’s not true. The bankruptcy laws – called the bankruptcy code – is federal law passed by Congress. The right to file bankruptcy is also stated in the Constitution. The different types of bankruptcy are divided into chapters. There are a number of different chapters: chapter 9 – municipalities; chapter 11 – business reorganization; chapter 12 – family farmers and fisherman; chapter 7 – liquidation; and chapter 13 – individual reorganization. Chapter 7 is the classic bankruptcy that people think of when they think of bankruptcy. Congress named chapter 7 after the sabbatical year in the Old Testament. In the Bible, after every seventh year, members of the community would have their debts released, but not the debts of foreigners. Every seventh sabbatical year, or forty-ninth year, the release of all debts was mandated.
Chapter 7 and chapter 13 are the most common types of bankruptcy for individuals and small businesses. In a chapter 7 you disclose all of your assets, but what most people do not realize is that most, if not all of your assets are protected. In fact, for 98% of our clients, we are able to protect all of their assets in a chapter 7. The protections are called “exemptions.” The exemptions are categorical. Each category has value limits. The bankruptcy code provides for a set of exemptions – the federal exemptions. However, Congress also gave the states the power to “opt out” of the federal exemptions if the state so chose. Each state also has a group of exemptions it allows its residents to use in bankruptcy. Some states have opted out of the federal exemptions, meaning a resident that files for bankruptcy protection in that state can only use the state’s exemption laws and not the federal exemption laws. Other states have not opted out and the residents of those states can choose between the federal exemptions and state exemptions. For example, Minnesota allows either federal or MN state exemptions, but Iowa allows only Iowa exemptions. The federal exemptions and MN exemptions differ greatly. To determine which best protects your assets will require a consultation with a bankruptcy attorney.
The exemptions specify what types of assets can be protected and the maximum value of those assets. The exemptions allow one to protect equity in their home, equity in their vehicle, household goods, clothing, jewelry, tools of trade, life insurance policies, tax-qualified retirement accounts, personal injury claims, and so on. We prefer to use the federal exemptions to protect our clients’ assets. This is because the federal exemptions give the debtor a wildcard exemption. The amount one is entitled to for wildcard exemption value is calculated by adding $1,150 to the unused portion of their homestead exemption (up to a maximum of $10,825) for a maximum allowed amount of $11,975. If a married couple files for chapter 7 protection, each spouse gets up to $12,725 of wildcard protection. The wildcard exemption can be applied to any assets that are not otherwise categorically protected: such as bank account balances, cash on hand, stocks, recreational vehicles, etc. Wildcard exemption can also be useful to protect assets that have exceeded the allotted categorical value. For example, if you own a vehicle valued at $10,000 and owe a $4,000 loan against it, you have $6,000 worth of equity in that vehicle. Under the federal exemptions, you are entitled to $3,675 of vehicle protection. In our example, you could use $2,325 of your wildcard exemption in addition to your vehicle exemption to protect your vehicle. Chapter 7 is called liquidation because if the debtor has any assets beyond what they can exempt, they become property of the bankruptcy estate and are liquidated by the trustee. The proceeds of the sale are then distributed according to the hierarchy of debt detailed by the bankruptcy code. If you have assets that may not be protected, or what we call “non-exempt”, you have a few options. First, depending on the type and amount of the asset, you may be able to spend it down prior to filing your case. For example, a client expecting a particularly large tax refund that we have determined will be non-exempt may want to wait until the refund is received and spend it on a much needed car repair or catch up their property taxes prior to filing their case. This is accepted by the court. However, there are limits. In our example, the debtor could not simply receive the tax refund and transfer it into someone else’s bank account or use it to purchase luxury items without those actions causing substantial problems in their bankruptcy case. Second, If you have non-exempt assets in your bankruptcy case, you can buy them back from the bankruptcy estate. In fact, this is the option that the trustee would prefer. For example, if you had a $500 motorcycle that was non-exempt, the trustee would first ask if you wished to pay $500 to the bankruptcy estate to keep it. If you were unwilling or unable, the trustee would request (or get a court order if you refused) that you turnover the motorcycle, so that it could be auctioned: this would be the third option. Finally, if the non-exempt asset is low enough in value, the trustee may abandon the asset – meaning that the trustee would allow you to keep it and not attempt to get value for it.
Also of critical importance in determining whether bankruptcy is in your best interest, is whether you qualify for Chapter 7 protection. There are two hurdles to cross to qualify for Chapter 7 and they are both based on income. The first is the means test. The means test is a very mechanical calculation of the past six months of gross income from all sources for your household. From this six month period, the test projects your annual gross income and weighs it against the median income for a household of your size. The median income data is updated every six-months and varies by state. If the annual gross income for your household is below the median income, you pass the means test. If it is greater than the median income, then you must complete the second half of the means test. The second half of the means test is designed to allow you to deduct monthly expenses from your income to determine the amount of your disposable income each month. The means test allows you to input some of your actual expenses such as mortgage payment, taxes, health insurance, but many of the expenses are standard numbers from the IRS’s standard data for living expenses. Expenses such as food, clothing, and transportation costs are standard numbers based on your geographic location. If by the end of the second half of the means test, it is determined that you have no disposable income or that your disposable income is insufficient to pay the lesser of 25% of your nonpriority unsecured claims or $6,575 (whichever is greater) or $10,950 when multiplied by 60, then you pass the means test.
If you pass the means test, you must still also pass the second hurdle, which is referred to as the real time budget. The real time budget looks forward at take-home income and monthly expenses. Essentially, what the court is looking for, is whether at the end of the month after paying your bills and living expenses you have a sufficient amount remaining to afford to pay some amount to your creditors. If you do, the trustee may object to you filing for Chapter 7 protection and make a motion to dismiss your case or convert it to a Chapter 13.
A Chapter 13 is a repayment plan over a period of three to five years. Unlike a plan through a Debt Consolidation company, this does not necessarily mean that you have to pay back 100% of the debt. Instead, we will help you propose a payment plan to the court based upon your income and expenses. These payment plans last either 3 or 5 years, depending on your situation. Under the plan, the court consolidates all of your unsecured debt, and you agree to pay one payment each month to the trustee. The trustee then distributes your payment among your creditors. At the end of the plan, whatever is left due and owing on your unsecured debt is discharged. In a Chapter 13, you can also bring your back mortgage payments current, make payments on student loans, cars, and tax debt. In Chapter 13, there is also a mechanism to “cramdown” (i.e., separate the secured non-dischargable debt from the unsecured dischargable debt) on assets that are worth less than the debt owed against them, subject to some limitations. Like a Chapter 7, a Chapter 13 petition also triggers the automatic stay. Call us for a free consultation to determine what chapter of bankruptcy, or another solution, best meets your needs.
Chapter 13 is essentially a payment plan that you organize through the court system. Think of it as a consolidation loan with teeth.
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.