When most people think of bankruptcy, they imagine seeing everything that they own auctioned off to pay creditors. However, there are two different bankruptcy processes which are typically available to individuals; Chapter 7 (in which all non-exempt assets are sold) and Chapter 13, in which a debtor proposes a payment plan that will cover some of the debts owed.
In Chapter 13 bankruptcy, a debtor creates a 3-5 year repayment plan for his or her debts. If the court approves the plan, and the debtor completes it, any remaining debt is forgiven. The debtor’s assets are not sold in Chapter 13 bankruptcy.
To be allowed, the Chapter 13 bankruptcy payment plan must provide creditors at least as much money as they would get in Chapter 7 bankruptcy. In Chapter 7 bankruptcy, creditors get all of the debtor’s assets except those which are exempt. Thus, a debtor must have a regular source of income, and some disposable income, to proceed with Chapter 13.
The repayment plan must pay certain “priority debts” in full. Priority debts include child support, alimony, taxes and wages that you owe to employees. The plan must also account for regular payments on secured debts, such as a mortgage. Finally, any remaining disposable income must be put towards unsecured debts such as credit card bills. People with secured debts of over about $1 million or unsecured debts of over about $335,000 generally cannot file for Chapter 13 bankruptcy in Minnesota.
If you are considering bankruptcy, you need a lawyer who can help you to decide which chapter to file under. This article is not legal advice; if you need legal advice, please contact us.