Most of us never receive any formal instruction in finance, and so it’s no surprise that so many adults at some point find themselves in financial straits. If you’re lucky, you learn your lesson early on and you’re able to repair any damage you’ve caused in short order. Maybe you overextend with a low-limit credit card, but over the course of several months you pay it off and you solemnly resolve to be more careful with credit in the future.
On the other hand, you could be going along fine, paying off student loans, whittling down your mortgage, and even setting some money aside in savings and a 401K, when all of a sudden you suffer an unexpected injury, illness, layoff, divorce, or another scenario that launches you into a financial crisis. Not everyone ends up facing overwhelming financial burden because of poor decisions – some people are just unlucky or unprepared.
Although the thought of filing for Chapter 7 or another form of bankruptcy is a frightening proposition, it really is a pretty simple and easy process. Bankruptcy could be your best option to get out from under overwhelming financial burden. Or perhaps there are other options you hadn’t considered. Your best bet is to speak with a qualified advisor from an experienced local law firm in Saint Cloud, Minnesota.
A professional attorney that specializes in bankruptcy can guide you through every option and help you determine whether it’s in your best interest to file for bankruptcy, or if another option is better suited to your situation. In the meantime, here are a few things you’ll have to consider when deciding if bankruptcy is right for you.
What is Chapter 7?
There are two main forms of bankruptcy filing: Chapter 7 and Chapter 13. The most common by far is Chapter 7, which is sometimes referred to as “straight bankruptcy” because of the relative simplicity of the process. In Chapter 7, there is no payment plan, and it only takes about 3 months from filing to the end, when the bankruptcy court issues you a “discharge”, which is the forgiveness of your debts that are covered in bankruptcy.
In Minnesota, we have laws that are very generous to ensure that people can keep the assets they own to guarantee a “fresh start”. That means that most people will be able to keep everything and eliminate all of their debts. Because bankruptcy is a balancing act, sometimes people have significant assets and not all of them can be protected. In that case, your bankruptcy professional will review with you what assets are not protected and how the bankruptcy trustee will work with you to either surrender the unprotected assets or negotiate a settlement where you can “buy back” the non-exempt property that you wish to keep.
How Do I Know Its Time To Talk to a Bankruptcy Attorney?
What is Chapter 13?
Chapter 13 bankruptcy is where you use your future income to pay back some or all of your current debts. Chapter 13 is sometimes called a “wage earner” plan or a “reorganization bankruptcy”. When you file for Chapter 13 in Waite Park, MN, or anywhere in Minnesota, for that matter, you and your attorney propose a plan to contribute a certain payment for a period of time between 36 and 60 months.
There are a number of reasons why you might choose Chapter 13 over Chapter 7. They include:
- You simply want to pay back your debts but everyone wants all of their money right now, but you cannot please everyone. Chapter 13 forces the creditors to wait to allow you to make one payment and the creditors get an orderly and predictable payment so long as you can afford to do so. In other words, you can pay them back on your schedule, in an amount that you can afford, rather than the amount and timeframe they want.
- You are behind on a secured payment, such as a mortgage or car loan. You are at risk for either repossession or foreclosure. Chapter 13 can prevent the banks from taking your home or car. You can use the Chapter 13 plan to get caught up on the back payments while you continue to make your regular scheduled payments to the bank. By the time your plan is completed, you will have caught up on your loan payments.
- You want to save an asset that you would otherwise have to surrender if you filed Chapter 7. Let’s say your dad left you a classic car that he had as a teenager. It is a family heirloom and it is your duty to protect it. Or let’s say your parents put a cabin in the your name, along with your other siblings. That asset may prevent you from filing a Chapter 7 because you would risk having to sell the cabin in order cover your interest in the cabin. A Chapter 13 will allow you to keep the car or cabin so long as you pay enough to cover the value of the asset. Your bankruptcy professional will help figure out how much your payment would need to be to successfully keep your special, but valuable assets and still get relief from your creditors.
- You have filed a Chapter 7 within the last 8 years. You would not be eligible for a Chapter 7 discharge until after the 8 years has passed. However, you could file a Chapter 7 after only 4 years.
- You have issues from a divorce where you are obligated to pay a property settlement to your former spouse or have agreed to “hold harmless” your former spouse for a debt that you both owed jointly. Filing Chapter 7 in that situation could result in your ex-spouse taking you back to family court to enforce that provision in your divorce decree. A chapter 13 will allow you to discharge you property settlement with your ex-wife. Keep in mind that debts relating to child support and spousal maintenance are never discharged in bankruptcy. You need to speak with a very experienced attorney about divorce decree related debts because there are other issues that may be raised when divorce related debts are at issue in bankruptcy.
- You just make too much money to qualify for Chapter 7. Chapter 7 is means tested. That means the court looks at the amount of money that you have earned over the past 6 months and also looks at the size of your household. The more people in the house, the more money you can earn and still qualify for Chapter 7. Your attorney will help you figure out if you qualify for Chapter 7 based on income. You you do not qualify, Chapter 13 will be your best bet for getting debt relief.
What Are the Benefits of Filing Bankruptcy?
Once the court accepts the bankruptcy filing, creditors can no longer contact you for payment, garnishment will stop, harassing phone calls will stop, foreclosure will be postponed or stopped, depending on the bankruptcy you choose, and after the bankruptcy is complete, remaining debt will be discharged.
As mentioned above, bankruptcy will allow you to eliminate your debts, keep most if not all of your assets, and give you a fresh start. You can also begin to rebuild your credit. You cannot rebuild your credit until your debt problem has been resolved. Bankruptcy is usually the fastest way to solve your debt problem. Most people are able to rebuild their credit rather quickly after bankruptcy. Banks will be willing to lend money for the purchase of a car the day after your discharge, albeit at a higher interest rate. Income and employment are, of course, a factor.
Banks will send you solicitations for car loans and credit card offers after you file bankruptcy. We caution you to be careful about the offers. Check the fine print and beware of high interest rates, annual fees and other hidden costs. We recommend that our clients get a pre-paid credit card from their bank and keep using it and re-filling it every month.
What are the Lasting Effects?
There’s no denying that successfully filing for bankruptcy will affect your credit, but perhaps not in the ways you anticipate. Yes, a Chapter 7 filing will stay on your credit report for ten years. A Chapter 13 will likely remain for seven years (although it could be up to ten).
What does this mean? It could affect your eligibility for leases or loans, impacting your ability to purchase big ticket items like a home or automobile. It could stop you from qualifying for other credit offers like credit cards. Underwriting guidelines will govern when a bank will be able to approve you for a mortgage loan.
However, you may find that just the opposite is true. For many people, a successful bankruptcy filing is something of a clean slate. You get to wipe away the majority of your debt and begin rebuilding your credit from scratch, instead of struggling to dig your way out of a deficit.
In some ways, a successful bankruptcy can help you to regain control of your life. It’s not easy admitting that you’ve lost all control of your finances, and you certainly don’t want to give up a family home in the process.
When you no longer have a mountain of debt weighing you down and creditors breathing down your neck, though, you can begin to see a hopeful future ahead and start planning again, even if you do have to be a lot more careful with your finances moving forward.
It is important that you actively rebuild your credit, rather than just waiting for time to pass. It is sometimes said that no credit is worse than bad credit.
Filing for bankruptcy may not turn out to be your best option, as an experienced bankruptcy attorney can tell you. There are other options to explore in many cases, depending on your particular situation.
You may be able to negotiate reductions in bills and set up viable payment plans with creditors, for example. After all, their goal is to recoup any portion of what you owe, and they may be willing to bend a lot in order to make that happen.
If you’re being harassed by creditors, you may be able to file a claim against them under the Fair Debt Collection Practices Act (FDCPA) and reduce the amount you owe in part or in full. In short, you might not need to file for bankruptcy at all. The first step to finding out is to contact a qualified legal firm to discuss whether or not bankruptcy is right for you.