What Happens to Your Income During Bankruptcy in Minnesota?

Filing for bankruptcy in Minnesota can often raise questions about how it will impact your income. Understanding the nuances of income during bankruptcy is crucial for individuals and families looking to regain their financial footing.

In Minnesota, the type of bankruptcy you choose—Chapter 7 or Chapter 13—significantly influences how your income is treated.

Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, commonly known as liquidation bankruptcy, your non-exempt assets may be sold to pay creditors. However, your monthly income is assessed through a Means Test, which compares your income to the median income for a household of your size in Minnesota.

If your income is below the median, you can typically qualify for Chapter 7, allowing most of your unsecured debts, such as credit card debts and personal loans, to be discharged. If your income exceeds the median, the court will assess whether you can afford to repay some of your debts and might redirect you towards Chapter 13 bankruptcy instead.

It’s important to note that certain forms of income are exempt from being included in the Means Test, such as Social Security benefits, unemployment compensation, and some income from child support or alimony.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is often referred to as a reorganization bankruptcy. In this scenario, you don’t liquidate your assets; instead, you propose a repayment plan to allow you to pay off your debts over a designated period, usually three to five years. During this time, your monthly income is crucial in determining how much you will need to pay back.

In Chapter 13, you must demonstrate a stable income to qualify, as your repayment plan is based on your disposable income after necessary living expenses. Your income will also be reviewed to ensure you can afford the obligations outlined in your repayment plan.

Impact on Disposable Income

Both Chapter 7 and Chapter 13 can affect your disposable income. In Chapter 7, if you have very little disposable income, you may have more debts discharged without additional financial burdens. In Chapter 13, your income determines how much you’ll need to make monthly payments, which can be a significant lifestyle adjustment.

Moreover, any side income or additional employment should also be reported during these proceedings as it could influence your repayment plan or classification under the Means Test.

Consequences of Bankruptcy on Future Earnings

It’s important to understand that while filing for bankruptcy can provide relief from overwhelming debt, it may also affect your future earnings. Lenders often scrutinize bankruptcy filings when you seek loans, which may lead to higher interest rates or difficulty obtaining new credit. Nonetheless, rebuilding your credit and financial management skills after bankruptcy is possible, often leading to a more stable income in the long run.

Conclusion

Understanding how your income is treated during bankruptcy in Minnesota is crucial for making informed financial decisions. Whether you are considering Chapter 7 or Chapter 13, it is beneficial to consult with a qualified bankruptcy attorney to help navigate these complexities and protect your financial future.