subject: Bankruptcy Law Questions And Answers [print this page] Filing for bankruptcy is never an easy decision. Most people who file have already exhausted all their options only to face a process that can be complicated, confusing and intimidating. To cut through the confusion, a good place to start is with answers to some basic bankruptcy questions.
What is bankruptcy supposed to accomplish?
Bankruptcy gives a "fresh start" to the debtor whose debts have become unmanageable, providing relief at two stages in the process. As soon as a bankruptcy petition is filed, an automatic stay goes into effect and all collection efforts must stop. At the end of a successful bankruptcy, the debtor receives a discharge and creditors can no longer collect discharged debts at all.
What filing options are available?
The choice may not be entirely up to the debtor, since rules govern who qualifies for each option, but individuals can file under one of the following chapters:
- Chapter 7, a liquidation plan under which assets can be sold to satisfy debts and many debts are eliminated when a discharge issues.
- Chapter 13, a repayment plan that is approved and supervised by the court, under which a person with regular income pays back some or all debts over a period of up to five years.
- Chapter 12, a plan similar to Chapter 13 but reserved for family farmers and fishermen.
- Chapter 11, a plan reserved mostly for business reorganization in which creditors are paid over time.
For individuals with primarily non-business debt, Chapter 7 is an option if the debtor's income is below the Minnesota median. If it is above the median, the court will apply a formula to determine if that income is sufficient to pay creditors. If there is enough income, the Chapter 7 case is dismissed or, if the debtor elects, converted to Chapter 13.
What debts can be discharged?
Almost all debts that existed when the case was filed and that the debtor listed in the filings can be discharged. Creditors get a chance to object to the potential discharge of a debt, but objections are rare. Some debts, however, survive bankruptcy even without any objection, including:
- Alimony and child support
- Most student loans
- Most taxes
- Fines and court-ordered restitution
- Debts incurred through fraud
In addition, when property serves as collateral for a loan, a creditor can repossess the property if the debtor does not repay the loan.
What property can the debtor keep?
For many individuals, this is the crucial question. The answer, especially in light of major changes to the bankruptcy laws in 2005, is hardly straightforward. As a rule, a debtor in a Chapter 13 plan can often hold on to secured assets so long as the debtor continues to make loan payments. Payments that were in arrears prior to filing become part of the bankruptcy plan. Generally, in Chapter 7 the debtor must bring the loan up to date and continue paying as if bankruptcy never happened, but the collateral may still be at risk depending on the specific situation.
Property may also be protected by certain exemptions that insulate it from creditors. The simplest example occurs in Chapter 7, where assets of the debtor can be sold off to pay debts. If an asset is completely exempt, it cannot be sold. If a certain portion of an asset's value is exempt, that portion is protected. In Minnesota, for instance, the homestead exemption protects up to $300,000 of equity in the debtor's primary residence, subject to certain time limits and residency requirements. If there is a mortgage on the property and the property is sold, the debtor gets to keep up to $300,000 of whatever remains after paying off the mortgage.
Is a debtor required to have a lawyer?
There is no requirement that the debtor involve an attorney in a bankruptcy case, but representing yourself in notoriously difficult. The rules require very careful attention and filing bankruptcy necessitates careful consideration of which chapter to use, what exemptions are best and what issues may arise as the case goes forward.
Before the 2005 revision of the bankruptcy laws, debtors had more rights and greater flexibility. Outcomes were more certain and a lawyer who was not a specialist could provide effective representation in a straightforward case. Now, creditors' powers have increased and the bankruptcy landscape is littered with traps for both the unwary debtor and the unwary lawyer. Retaining seasoned counsel with expertise in bankruptcy practice and a commitment to the client's needs has never more critical to a debtor looking for a fresh start.
The information you obtain from this article is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.
