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Chapter 7 is a court-supervised procedure where a trustee takes over assets of a debtor's estate. The trustee reduces assets to cash and makes payments to creditors. The person who owes money receives a court order, which is called a discharge. This releases them from having to pay some debts. Debts that cannot be discharged include most taxes, child support, alimony, most student loans and court fines, among others. The 2005 law requires an income means test to decide if a person's income qualifies them for Chapter 7.
Through Chapter 13 bankruptcy, creditors can be paid in an orderly manner if the person who owes money, the debtor, has sources of cash for payments. Chapter 13 allows the person to keep a valuable asset, such as a house. They can propose a 3 to 5 year repayment plan for their bills. Chapter 13 is also used by those who do not qualify for Chapter 7 under the income means test.
In addition to the means test, debtors must get credit counseling prior to filing. They also must take a money education course before they can get a bankruptcy discharge. Bankruptcy cases cannot be filed in state court. They must be filed in federal court. Minnesota has four bankruptcy courts located in Fergus Falls, Duluth, Minneapolis, and St. Paul.
National Consumer Law Center (2006). Answers to Common Bankruptcy Questions (79 K PDF). Boston: MA.
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