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Bankruptcy in Minnesota

Monitored by the Bankruptcy Code under federal law, bankruptcies also fall within the ambit of respective state laws.  Individuals residing or having a domicile or business in the US (whether US citizens or not) usually file for bankruptcy on account of preventing garnishments, facing foreclosure or being overwhelmed by debts such as credit cards etc. under Chapter 7 or Chapter 13.  Both provide the option of allowing the individual to make a fresh start through a discharge.  Owners of small and mid-size businesses file for Chapter 11 reorganization.

Signs that one needs to file for bankruptcy are:

  • Inability to pay bills as they become due
  • Using loans to make monthly payments on credit cards
  • Considering a consolidation loan, a second mortgage or a home equity loan
  • Being pursued incessantly by creditors/collection agencies
  • Falling behind on mortgage payments

Chapter 7 (Straight Bankruptcy)

An individual with few or no assets to pay creditors avails of Chapter 7.  Some salient features are:

  • The individual’s income and the outcome of a means test qualify the person to file for bankruptcy under this chapter.
  • The bankruptcy trustee appointed has the authority to sell the available assets of the individual (also referred to as non-exempt property) to pay the creditors.
  • The individual retains exempted property from the reach of the creditors.
  • Discharge under this chapter applies to all common debt types e.g. credit cards and medical bills etc.

Chapter 13 (Reorganization)

Individuals possessing a certain amount of stable disposable income after accounting for the basics, file for bankruptcy under Chapter 13.  Under this chapter, the individual makes partial or full payments according to a repayment plan with the remaining debts being discharged at the stage of plan completion.  Common situations are:

  • The individual prefers to pay all outstanding debts on the basis of personal values or on moral grounds.
  • The debts of the individual fall outside the purview of a Chapter 7 discharge i.e. taxes, child support or student loans etc.
  • The individual has mortgages or loans that need to be completed for the individual to retain ownership of the property.

Property Exemptions under 2011 Minnesota Statutes

In Minnesota, the individual has the choice of availing of exemptions according to federal or state law.  The exemptions according to Minnesota’s statutes are:

  • The individual’s house up to $300,000 or if it is used primarily for agricultural purposes, $750,000.  However, if the individual bought the house within 1215 days of filing for bankruptcy, federal law limits the exemption to $146,450
  • One motor vehicle up to $2,000 or up to $20,000 in case the vehicle had been modified for accommodating a physical disability at a cost of not less than $4,500
  • Family bible, library and musical instruments
  • Clothing, utensils, one watch and food for the family
  • Household furniture, appliances, phonographs, radio and televisions up to $4,500
  • Machines and other implements used for farming purposes up to $13,000
  • Tools of the trade up to $5,000
  • Wedding rings up to $1,225
  • Some life insurance proceeds up to $20,000 and an additional $5,000 for each dependent
  • ERISA-qualified retirement benefits and IRAs up to $30,000

The Process

The individual files a petition with the required forms, documents and fees.  Employing a lawyer to guide the applicant through the complexities of the code remains a worthwhile option.  A Bankruptcy Trustee helps move the applicant’s case through the bankruptcy process until all formalities have been completed.  Once the case has been completed, creditors cannot make any attempts at collection from the individual.

Filing for bankruptcy often helps individuals and businesses make a fresh start.  In cases, it can even save the applicant’s home from being repossessed.  Further, it rids the individual of harassing calls and actions from creditors and provides the means of reducing or eliminating the individual’s obligations.  In short, it helps the individual to resume life in a reasonable and dignified manner.

Glossary

Term

Definition

Means Testing Means testing involves examining the individual’s income and consists of two parts. It determines the eligibility of an applicant filing for bankruptcy for Chapter 7 relief.  The first part comprises of a threshold based on the median income for the state in which the applicant resides.  The median income amount varies based on the number of people in the household of the applicant.  If the applicant’s income is above the median amount, Chapter 13 relief becomes applicable for the individual.  In such cases, the second part comes into play under which if the applicant has enough excess income to pay 25% of the unsecured debt after meeting all basic needs, Chapter 13 relief needs to be filed for.
Credit Counseling Credit counseling became mandatory under bankruptcy law reform and has the purpose of educating applicants about debt and promoting success.  The applicant must meet an approved credit counselor for a 90-minute session within 6 months of filing a bankruptcy petition.  Further, the applicant must complete money management classes before being granted a discharge from the court. 

In Chapter 13 cases, this also includes developing the applicant’s proposed debt repayment plan.

Bankruptcy Trustee A Bankruptcy Trustee helps move the applicant’s case through the bankruptcy process until all formalities have been completed.  The trustee administers the bankruptcy estate i.e. the property and related rights of the applicant filing for bankruptcy.  While the applicant keeps exempt property, the trustee has the power to decide whether other assets can be abandoned if they prove to be of no value to the estate.  For the non-exempt assets, the trustee converts these assets to cash by selling them.  The trustee also handles intangible property. 

The trustee convenes the meeting of creditors during which the trustee can ask questions to the applicant regarding the applicant’s financial status.  The trustee issues notices to the parties involved of the intent to sell property usually 20 days in advance.  Parties have the right to object to the sale.  The sale can be either a private one or a public auction.  The trustee can preserve the proceeds of the sale until payments have been made to the creditors.

 

Under a Chapter 7 case, the trustee sells the non-exempt property to pay the creditors and the court grants the individual discharge within a few months.  Under a Chapter 13 case, the trustee drafts the repayment plan and gets the court’s approval.  The individual obtains a discharge on completion of the repayment plan that usually lasts between 3 – 5 years.

Garnishment A Garnishment can be defined as a court order to withhold a portion of the debtor’s wages until the debt has been paid.  A maximum of 25% of the debtor’s wages can be taken by the creditors in total. 

Similarly, a bank levy allows a creditor to take money from the checking/savings account of the debtor to satisfy all or part of the debt without giving prior notice to the debtor.

Chapter 11 Reorganization If small or mid-size business enterprises end up making losses, the key question the owner faces remains that of salvaging the business or liquidating it.  The options available to owners could be to go for Chapter 7 liquidation or reorganization under Chapter 11. 

The former proves to be a viable option if the owner cannot reasonably expect to revive the business.  Conversely, if the owner believes that debts can be reorganized, the latter proves to be worthwhile in the event of the repayment plan being approved by the creditors.

Foreclosure This is a procedure under which the holder of a mortgage sells the property on the failure of the debtor to pay the mortgage debt and thereby, terminates the latter’s rights in the property.
Unsecured Debt Unsecured debts are those debts that are not linked to a collateral that can be repossessed by a creditor i.e. credit card debts, medical debts etc.
Meeting of Creditors Also known as the 341 Meeting (based on the section of the bankruptcy code), the meeting is called by the trustee.  Creditors of the applicant filing for bankruptcy are permitted to attend but seldom do so. 

The applicant shows his driver’s license, social security card, a recent payroll stubs (if employed) and a bank statement to the trustee, who asks various questions about the applicant and his financial status.

Discharge A discharge is an order from the court that terminates the individual’s liability to pay and the creditor’s ability to collect.
The Attorney’s Role An attorney is employed to guide the applicant through the process of filing the petition and understanding the complexities of the Bankruptcy Code.  The attorney will help the applicant in choosing the best way to file i.e. Chapter 7 or 13.  Using the applicant’s credit report, outstanding debt list, assets, income statements, income tax returns, bank account information etc., the attorney helps complete the data entry process of filing the petition.  When filing under Chapter 7, the applicant must pay all relevant fees before filing for bankruptcy.  For Chapter 13, the applicant can pay half of the attorney’s fees, all the filing fee and counseling costs and the remainder of the attorney’s fees is incorporated in the repayment plan.  Once the applicant has met with the court-approved credit counselor 6 months prior to filing for bankruptcy in court, the applicant is given a certificate number to give the attorney.  Thereafter, the meeting of creditors is called and after another debtor education class, the courts provide the discharge.
Other types of bankruptcies Besides Chapters 7, 11 and 13, there are 3 other chapter dealing with bankruptcies.  Chapter 9 deals with cities, Chapter 12 is for farmers and Chapter 15 deals with foreign businesses.

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