Introduction to Bankruptcy for Consumers
For a variety of reasons, it sometimes happens that a person or a couple find themselves in a financial situation that just seems impossible. Sometimes, it is due to an unexpected job loss. Other times, it happens because of crushing medical debt. Perhaps a business venture failed. And sometimes it happens because of poor decisions.
Webster’s Dictionary defines “bankrupt” as “reduced to a state of financial ruin; insolvent.” Since the founding of the United States, federal law has primarily governed the handling of bankruptcy cases. In fact, the Constitution explicitly grants to Congress the authority to “establish … uniform laws on the subject of bankruptcies throughout the United States.”
Under the authority granted by the Constitution, Congress established bankruptcy courts throughout the United States. Bankruptcy court judges are appointed for fourteen-year terms by the Circuit Court of Appeals in each judicial district. Minnesota is in the Eighth Judicial District. There are four bankruptcy court divisions in Minnesota: Saint Paul, Minneapolis, Duluth, and Fergus Falls. The location, also called the venue, where a particular bankruptcy case is heard is generally determined by the county in which the debtor resides.
What is Bankruptcy?
Bankruptcy is a legal proceeding started when a person or business is unable to repay debts or meet other obligations.
The federal law governing bankruptcy is divided into chapters, like a book. Some of the chapters govern and apply specific types of bankruptcies. The chapters that govern most consumer bankruptcies are:
| Chapter 7 | Individuals and businesses can both file under Chapter 7. When a business files under Chapter 7, it is referred to as liquidation and the business generally does not exist after the case is over. When a consumer files under Chapter 7, all the non-exempt property[ The federal bankruptcy code and the laws of several states provide exempts for certain defined types of property. When an exemption applies, the covered property is excluded from the bankruptcy estate. Minnesota does provide a statutory framework for exemptions. Debtors in Minnesota may use either the federal exemptions or the state exemptions, but not both.] the consumer owns is collected by the trustee and sold, with the proceeds paid to the creditors. The consumer-debtor is said to receive a “fresh start,” although that is a little misleading because the consumer-debtor will need to reestablish credit. |
| Chapter 13 | Individuals with regular income can file under Chapter 13, which is essentially a means by which individuals can restructure their debt and propose a Repayment Plan through which they can repay their debt over three or five years. Under Chapter 13, the consumer-debtor pays a set amount over the course of the Repayment Plan. At the completion of the Repayment Plan, whatever dischargeable debt[ Some kinds of debt are not dischargeable through bankruptcy. This includes unpaid taxes, student loans (generally), court-ordered restitution, and some types of court judgments.] remains will be cancelled (called a “discharge”). |
| Chapter 12 | Family farms and fisheries can file under Chapter 12, which can be thought of as “Chapter 13 for family farms. |
There are other types of bankruptcy cases, but Chapters 7, 13, and 12 are the ones applicable to most consumers.
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- https://www.merriam-webster.com/dictionary/bankrupt
U.S. Constitution, Art. 1, § 8, cl. 4.
The federal bankruptcy code and the laws of several states provide exempts for certain defined types of property. When an exemption applies, the covered property is excluded from the bankruptcy estate. Minnesota does provide a statutory framework for exemptions. Debtors in Minnesota may use either the federal exemptions or the state exemptions, but not both.
A bankruptcy filing will remain on a consumer credit report for up to ten years, although the impact of filing bankruptcy on credit scores is greatest in the first few years.
Some kinds of debt are not dischargeable through bankruptcy. This includes unpaid taxes, student loans (generally), court-ordered restitution, and some types of court judgments.
