Consumer bankruptcy is a legal proceeding that is initiated when an individual or a business cannot meet their financial obligations. There are several different types of bankruptcy, all of which fall under federal law.
A consumer bankruptcy is filed when an individual cannot afford to pay back the debts they incurred for their personal needs. Once a bankruptcy proceeding is complete, the debtor is no longer liable for the debts they incurred. Upon completion of the proceedings, the bankruptcy court enters a discharge order releasing the individual from their debts.
The debtor then has a clean financial slate. However, the bankruptcy will remain on their credit report for up to 10 years.
A bankruptcy can have lasting consequences. Typically, it should only be used during times of extreme financial hardship as a last resort. There are many bankruptcy considerations an individual should review prior to filing for bankruptcy.
What is Chapter 7 Bankruptcy?
A Chapter 7 bankruptcy, which is also known as a liquidation bankruptcy, permits a debtor to discharge all debts they are permitted to legally discharge. There are rules regarding who qualifies for this type of bankruptcy as well as what debts may be discharged.
In order to be eligible for a Chapter 7 bankruptcy, a debtor’s income must be equal to or below the median income in their state. Every state has different income requirements.
If the debtor’s income is above the requirement, the court applies a means test based on the previous 6 months of the debtor’s income. If the debtor has the means to repay their debts, they are ineligible to file for a Chapter 7 bankruptcy.
Once the debtor files for a Chapter 7 bankruptcy, the bankruptcy court issues an automatic stay. This prevents creditors from attempting to collect on debts owed. It also prevents other legal actions, including:
- Any pending lawsuits;
- Wage garnishments;
- Filing of liens; or
- Seizure of property.
A Chapter 7 bankruptcy involves the debtor losing the majority of their property. The bankruptcy court appoints a trustee to oversee the case. This trustee determines if selling the property will produce enough money to pay off the creditors.
After the debtor has completed and filed all the necessary paperwork, the trustee schedules a creditors meeting. This is typically the only time the debtor is required to appear at the courthouse. Should the debtor not attend or not provide the required information, the case may be dismissed.
Following the creditors meeting, the bankruptcy court holds a discharge meeting. At the discharge meeting, the debtor’s unsecured debt is discharged. Some debts, including car loans or mortgages may receive different treatment.
At the onset of the bankruptcy, the debtor may choose one of the following options to handle the debts:
- Pay the creditor the replacement value of the item or property;
- Return the item or property, or;
- Reaffirm an old payment term or agree to a new payment term with the creditor.
There are some types of debt that are non-dischargeable in a bankruptcy. These include:
- Child support;
- Tax debt, however, some federal tax debts can be discharged if certain criteria are met;
- Debt created through fraud; and
- Student loans, unless the court determines there is undue hardship.
Once the bankruptcy is complete, the debtor’s creditors are no longer permitted to collect or attempt to collect on a debt that was discharged.
What is Chapter 13 Bankruptcy?
A Chapter 13 bankruptcy, which is known as a wage earner’s bankruptcy, is a way for a debtor to restructure their debt and make affordable payments. This option is typically for individuals who have higher incomes and wish to keep their property.
In a Chapter 13 bankruptcy, there are some debts that are eligible for discharge. However, others may require payment in full using a payment plan. These plans are typically set for between 3 to 5 years.
In order to be eligible for a Chapter 13 bankruptcy, an individual must meet the following requirements:
The debtor is an individual or the debtors are a married couple, including if they own an unincorporated business or are self-employed;
- Their total secured debts are less than or equal to $1,184,200.00;
- Their total secured debts are equal to or below $ 394,725;
- The debtor has not had a bankruptcy petition dismissed within the last 180 days due to failure to appear or comply with the court; and
- The debtor receives credit counseling through an approved counselor within 180 days of filing their petition.
The requirements for qualification may change. For this reason, it is always advisable to consult with an experienced bankruptcy attorney.
What are the Differences between Chapter 7 and Chapter 13 Bankruptcies?
There are several differences between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, a debtor either keeps or attempts to keep most of their property. They are also still required to make payments.
In a Chapter 7 bankruptcy, on the other hand, a debtor does not keep their property. Additionally, they are not required to make payments.
It is very important to consider the pros and cons of filing for bankruptcy. Like a Chapter 7 bankruptcy, a Chapter 13 bankruptcy can affect an individual’s credit for up to 10 years after filing.
It is also important to note that in a Chapter 13 bankruptcy payment plan, the debtor must stick to a strict budget without lines of credit. A large number of debtors drop out of the payment plan.
What are the Bankruptcy Exemptions in Montana?
Montana laws required the use of state bankruptcy exemptions rather than federal ones. These include:
- Homestead, or equity in a dwelling that is used as a residence:
- Up to $250,000;
- Equity in an automobile:
- Up to $2,500 in one vehicle;
- Personal property:
- Up to $4,500 in the following, with a value of up to $600 per item:
- Musical instruments;
- Sporting goods;
- Jewelry; and
- Health aids;
- A burial plot;
- Some insurance or sales proceeds of an exempt property;
- Up to $4,500 in the following, with a value of up to $600 per item:
- Tools of the trade:
- Up to $3,000 in trade implements or tools;
- Military uniforms and arms;
- At least 75% of earned but unpaid wages;
- Group life insurance policies or proceeds;
- Life insurances proceeds that are specifically exempt from creditors;
- Medical, surgical, or hospital care benefits;
- Annuities of up to $350 per month;
- Fraternal society benefits;
- Hail insurance benefits;
- Most ERISA benefits and IRA contributions;
- Public employee retirement benefits;
- Other professional retirement benefits, including:
- University system;
- Game warden; and
- Public benefits:
- Alimony and child support; and
- Other, including:
- Business partnership property.
It is important to note that the amounts listed may increase if the debtor is filing bankruptcy as a married couple. It is essential to consult with a bankruptcy attorney for more information on filing bankruptcy and declaring exemptions in Montana.
Do I Need a Bankruptcy Lawyer?
It is important to have the help of an experienced bankruptcy lawyer. Bankruptcy is a complex process and it is essential to file correctly for exemptions under Montana laws. A lawyer will be able to assist you throughout the process and ensure that all your paperwork is timely and correctly filed.