If bills keep piling up and your income no longer covers them, bankruptcy may offer a legal way to deal with debt. For individuals, Chapter 7 and Chapter 13 are two of the most common options.

They are not interchangeable. Chapter 7 may wipe out many qualifying debts without requiring a long repayment plan. Chapter 13 usually gives you several years to repay certain debts while keeping property and catching up on overdue payments. Which one makes sense depends on far more than how much you owe.

How Chapter 7 Bankruptcy Works in Minnesota

Chapter 7 is often described as liquidation bankruptcy, but that name can make the process sound harsher than it is for many filers.

When you file, a bankruptcy trustee reviews your property and finances. Exemption laws protect certain assets. If everything you own falls within the exemptions available to you, there may be nothing for the trustee to sell.

If you do own nonexempt property with enough value, some of it may be sold and the money used to pay creditors.

Chapter 7 can discharge many common unsecured debts, including credit cards, medical bills, and personal loans. It also tends to move faster than Chapter 13, which is one reason people with relatively simple debt problems may consider it.

How Chapter 13 Bankruptcy Uses a Repayment Plan

Chapter 13 works differently because it centers on a repayment plan.

You propose a plan that generally lasts three to five years. Instead of paying each included creditor separately, you make payments to a Chapter 13 trustee. The trustee then distributes the money according to the court-approved plan.

You don’t have to repay every unsecured debt in full. The amount depends on your income, expenses, assets, and the types of debt involved.

Chapter 13 can be especially useful if you are behind on your mortgage but want to keep your home. In many cases, the plan can give you time to catch up on overdue mortgage payments while you keep making regular payments as they come due.

Who May Qualify for Chapter 7 or Chapter 13

Chapter 7 eligibility often starts with income. If your income is above the applicable Minnesota median for your household size, you may need to go through the means test.

The means test looks at income and certain allowed expenses to determine whether your Chapter 7 filing would be presumed abusive. Being over the median does not automatically disqualify you.

Chapter 13 generally requires regular income because you need enough income to make the required plan payments. Debt limits also apply.

This is one area where guessing can go wrong quickly. Two people with similar salaries may still end up with very different bankruptcy options because their household size, expenses, assets, and debts are different.

What Happens to Your Home, Car, and Other Property

Filing for bankruptcy does not automatically mean you lose everything you own.

Minnesota residents may be able to use Minnesota exemptions or the federal bankruptcy exemptions, depending on their circumstances. Those exemptions can protect certain amounts of equity in property such as a home, vehicle, household goods, and other assets.

Secured debt needs a closer look. A bankruptcy discharge can eliminate personal liability for some debts, but it doesn’t automatically remove a valid lien on a house or car.

If you want to keep property with an attached loan, you usually need a plan for handling that debt. The right approach depends on the property, the loan, and the chapter you file.

How Chapter 7 and Chapter 13 Affect Debt Differently

Chapter 7 is often a better fit when unsecured debt is the main problem, and you do not need years to catch up on something like a mortgage.

Chapter 13 gives you more time. It may help if you are behind on secured debts, need to protect certain property, or have financial problems that Chapter 7 can’t address as easily.

Talk to a St. Cloud Bankruptcy Attorney About Your Options

You do not have to figure out which chapter to file before talking with a lawyer. At Kain + Henehan, we can review your income, property, debts, and goals before explaining which options may fit.

If you are considering bankruptcy, contact Kain + Henehan by calling (612) 438-8006 or filling out the online form to speak with a bankruptcy attorney about what Chapter 7 or Chapter 13 could mean for you.