What Is Chapter 7 Bankruptcy?

In a chapter 7 bankruptcy case, individuals petition to have the court remove all their debt by selling off non-exempt property. This is one of the most common ways people erase their debt and get a fresh start—and with Minnesota’s lenient exemption laws, there’s a good chance you can get out of debt without liquidating valuable assets like your home or car.

What Are the Pros & Cons of Chapter 7 Bankruptcy?

Filing for chapter 7 bankruptcy isn’t for everyone, and you should always discuss your situation with a legal professional to weigh all options first.

Pros of Chapter 7 Bankruptcy

  • Ending Collection Calls & Garnishments – One of the most freeing benefits of chapter 7 bankruptcy is getting creditors off your back, so you can begin building wealth again. You’ll stop creditors from taking money out of your hard-earned check to pay down debts.
  • Fastest Option to Get Rid of Debt – It’ll only take 3-4 months for your debts to discharge after filing for Chapter 7 bankruptcy. Compared to the 5+ years it might take for other options, this is the quickest way to get your life back.
  • Paying Creditors Using Assets Rather Than Income – People barely making rent don’t have the finances readily available to set up a payment plan with creditors. Chapter 7 allows you to liquidate certain assets to get out of debt quickly. 

Cons of Chapter 7 Bankruptcy

  • Exemption Laws May Not Be in Your Favor – Each bankruptcy case is different. Review your options with an attorney to see if you’d be better off paying down your debt instead of using assets to satisfy creditors. You could risk losing assets if they exceed a specific value.
  • Minnesota’s Income Requirements – Chapter 7 bankruptcy is typically for those without a steady income. Your income must be below a certain amount to qualify for this form of bankruptcy.
  • You’re Limited on How Often You Can File – Keep in mind that you won’t be able to file for chapter 7 bankruptcy if you find yourself in the same situation a couple of years later. You can only file once every eight years, so it’s crucial you know this is the right option.

What Debts Are Discharged in Chapter 7 Bankruptcy?

Dischargeable Debts

  • Credit card debt
  • Medical bills
  • Utility bills
  • Personal loans to friends and family
  • Business debts

Debt You Can’t Discharge

  • Child support
  • Alimony
  • Student loans

Chapter 7 bankruptcy may not be the right option if you’re seeking to erase student debt or overdue child support payments.

What Property Can You Keep in Chapter 7 Bankruptcy?

One of your primary concerns when deciding to file for chapter 7 bankruptcy is undoubtedly what assets you’ll have to liquidate. If you think you’re going to lose your house and car to get out of debt, you may be relieved to learn Minnesota offers some of the most flexible exemption laws in the country. You can choose federal or state exemptions, but you’ll find Minnesota more lenient. Here are the following bankruptcy exemptions under Minnesota Law: 

  • Homestead – Able to protect up to $450,000 of home equity and up to $1,125,000 for farms
  • Vehicles – Protect up to $5,000, or up to $50,000 for any car or vehicle modified at a cost of up to $3,750 to accommodate for disabled persons
  • Personal Property – The law incorporates an extensive list of personal property, including:
    • Musical instruments
    • Pew and burial lots
    • Household items up to $11,250 in value
    • Wedding rings up to $3,062.50
    • Farm machines up to $3,062
    • Tools of the trade up to $12,500
    • University apparatus, such as teachers’ books
  • Employee Benefits – Protect all plans and contracts up to $75,000
  • Wages – 75% of gross earnings or 40 times the hourly wage
  • Insurance Proceeds – All money a surviving spouse or child receives from insurance, up to $50,000. The exemption amount is increased by $12,500 for each dependent of surviving spouse or child.
  • Government Assistance – All public assistance by the government is 100% exempt, such as unemployment and workers’ comp, among other benefits.

How Long & Costly Is Chapter 7 Bankruptcy? 

Chapter 7 bankruptcy is the quickest type of bankruptcy, and debtors can be relieved of their debt within 90-120 days. The initial filing fee is $338; however, you can opt to make payments on this fee if you can’t at the time it’s due. Your first installment will be $169. For more information on costs, visit the United States Bankruptcy Court District of Minnesota’s website. 

Who Can File for Chapter 7 Bankruptcy?

You must meet specific requirements to qualify for chapter 7 bankruptcy. First, you couldn’t have filed for chapter 7 bankruptcy within the last eight years. You also must meet Minnesota’s income requirements.

To do this, you must show that your income is lower than the median Minnesota household of the same size. For this reason, chapter 7 bankruptcy is typically for those drowning in credit card debt and past bills, preventing them from generating wealth.

How to File for Chapter 7 Bankruptcy

To file for chapter 7 bankruptcy, you must go through the following steps:

  • Step 1: 180 days before you file, you must seek help from a credit counseling agency to obtain a budget analysis.
  • Step 2: Following your analysis, you will file for bankruptcy with the court and present other required forms. Here, you will itemize all your debts and detail additional information, including your income, expenses, and other financial matters.
  • Step 3: Now that you’ve filed for bankruptcy, creditor calls will stop, you won’t have money taken out of your check anymore. You can start your journey toward being debt-free.
  • Step 4: Next, the court-appointed trustee will examine your assets and review what you’ve chosen to have exempt. The trustee will call a creditors’ meeting to inquire about your case. After this meeting, the trustee will begin liquidating your assets and paying off creditors.
  • Step 5: After liquidating your assets, you’ll be required to attend a hearing in bankruptcy court that reviews your discharged debt.
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