Bankruptcy Horror Stories: Real-Life Case Studies of Filing Without an Attorney in Colorado

Elizabeth German
By: Elizabeth German
PublishedJun 1, 2023

UpdatedJuly 16, 2023
11 minute read

“Bankruptcy” is a scary word. Many people associate it with complete financial ruin. But do you know what Walt Disney, Cyndi Lauper, and Marvin Gaye have in common? All three filed for bankruptcy, took full advantage of the clean slate it offered, and went on to become wildly successful.

If you feel like you’re drowning in debt, bankruptcy can offer you a life preserver. However, bankruptcy law is complex. While filing for bankruptcy on your own could save you some money up front, you could lose much more when all is said and done. Read this article to learn why you should never file for bankruptcy without the help of a Colorado bankruptcy attorney.

Topics We’ll Explore

  1. The Role of a Bankruptcy Attorney
  2. The Risks of Filing for Bankruptcy Without an Attorney
  3. The Benefits of Working with a Bankruptcy Attorney
  4. Understanding Bankruptcy Law and Procedure
  5. Chapter 7 Bankruptcy
  6. Chapter 13 Bankruptcy
  7. What Should I Expect From a Bankruptcy Proceeding?
  8. When Filing Bankruptcy Without an Attorney Goes Wrong
  9. Don’t Risk Financial Freedom – Hire a Bankruptcy Attorney

Bottom Line

Filing for bankruptcy without the expertise of a Colorado bankruptcy attorney can put your home, car, and other valuable assets at great risk.

A woman puts her hands on her head in frustration while looking down at a desk scattered with papers and a $1 bill.

Bankruptcy is a legal proceeding initiated when a person or business can no longer repay outstanding debts or obligations. If you simply cannot afford to pay your bills, bankruptcy can help by discharging debt or making a plan to repay it. 

Individuals, spouses, corporations, and other entities can file a bankruptcy petition.

The Role of a Bankruptcy Attorney

A bankruptcy attorney will help you decide if this form of debt relief is right for you and, if so, which chapter you may qualify for. As your counselor, he or she will be there to explain the bankruptcy process and make sure you understand your legal rights and obligations. Your attorney will also collect all the necessary financial records, prepare and submit the filing paperwork, represent you in court, and ensure your debt is legally released. 

The Risks of Filing for Bankruptcy Without an Attorney

Technically, there is nothing stopping you from filing your bankruptcy petition on your own. The law allows debtors to represent themselves in bankruptcy proceedings.

However, you do so at your own peril. The bankruptcy court will hold you to the same standard as it would a licensed, practicing Colorado bankruptcy attorney. And filing for bankruptcy isn’t as simple as filling out a few forms. There is no such thing as a standard bankruptcy.

You can do all the reading you would like, but unless you have the exact same assets as those hypotheticals give you, you really need someone to assess your current situation and give you guidance.

Here are some pitfalls I’ve seen people encounter when they file for bankruptcy without hiring an attorney.

File the Wrong Chapter

A common mistake debtors make is underestimating the value of their property. If you realize after filing for Chapter 7 bankruptcy that your assets are worth more than you thought, the court may require you to convert to a Chapter 13 filing.

A lot of people start at Chapter 7 and think ‘I can keep my house, I can keep my car,’ but they should have started out as a 13. Then they’re either forced to have their assets sold, or they’re putting their house and car at risk. That’s when I have had to come in and convert them to Chapter 13 to try to protect them.

To compound this, a trustee may use these kinds of scenarios as evidence that you filed for bankruptcy in bad faith. This means that the debtor is filing with the intent to abuse the bankruptcy system and shirk his or her financial obligations.

As an example, the trustee could claim that you filed for Chapter 7 to gain the benefits of the automatic stay before converting to Chapter 13 to allow dismissal of the case without court approval.

Chance Fraud Allegations

People regularly borrow money from friends or relatives in hard financial times. The people closest to you understand your struggles and are there to lend a hand even when banks won’t. However, if you repay your friends and family within a year before filing bankruptcy without paying all of your other creditors as well, the court may reverse that payment and take the money back away from your loved ones.

In bankruptcy, the clawback provision allows trustees to look at any financial transactions you made before filing bankruptcy. This is to determine whether you improperly transferred or gave away property that should be part of the bankruptcy estate. Any transaction considered to be preferential or fraudulent transfers of property can be subject to clawback.

Payments to insiders are called preferential payments. Your family and close friends are considered “insiders” in bankruptcy law. 11 U.S.C. § 101(31). This means the court knows that you will likely choose to repay them before other creditors. Therefore, any payments you make to friends or family before filing for bankruptcy will be heavily scrutinized.

If you pay your family back within a two-year period or transfer assets without consideration, those things can be clawed back and put their interest at risk.

A transfer is considered fraudulent under Colorado law if the trustee can prove that it was made:

  1. to hinder, delay or defraud the creditors;
  2. at a time when you were insolvent (unable to pay debts) or were left with an unreasonably small capital; and the transfer was for less than a reasonably equivalent exchange of value.

C.R.S. § 38-8-105

If it turns out that you did give away or transfer property inappropriately, the trustee can then “claw it back” by undoing the transaction and bringing that property back into your estate.

The trustee can then sell any nonexempt property to pay back creditors, which means you lose it.

How I Helped a Client Avoid a Fraudulent Transfer

I had a client who failed to disclose that she had sold her house within the last four years. A trustee could have capitalized on her honest mistake and claimed this was a fraudulent transfer, which may have left her without a place to live. Thankfully, I was able to intervene and protect her from those claims.

These things can happen even with an attorney, but at least we were in her corner and could figure out a way to navigate that.

Bankruptcy is a high-stakes endeavor. Anyone who files a petition without the help of an attorney could risk loss of transportation or even homelessness.

The worst-case scenario is not getting a discharge and loss of property, which is enough for me to say, you need an attorney.

The Benefits of Working with a Bankruptcy Attorney

From meeting deadlines to knowing the legal process inside and out, my team can put you in the best possible position once you have come out on the other side of bankruptcy. You can take full advantage of your fresh start and get your finances back on track.

Here are a few benefits of retaining a Colorado bankruptcy attorney.

Understand Your Options

Filing for bankruptcy brings up a slew of choices that you’ve never had to consider. Even deciding which chapter of the U.S. Bankruptcy Code to file under can feel overwhelming. A Colorado bankruptcy attorney will assess your current situation and long-term goals and advise you on which plan offers the best avenue to financial freedom.

We Handle the Creditors

Let’s face it–being in debt is stressful. Your phone is likely ringing off the hook with calls from creditors demanding payment. A bankruptcy attorney can take some of that stress off your plate. Once you have an attorney, you can tell creditors to contact the attorney and they will usually stop calling you or contacting you. You’ll be able to breathe a little easier with them off your back for the time being.

Avoid Critical Errors

Bankruptcy proceedings weave a complex tapestry of federal and state laws. Even a seemingly benign mistake can disrupt the entire process. A bankruptcy attorney can explain your rights and guide you through each step of the process. This will ultimately save you both time and money–which is the entire point of bankruptcy.

Gain a Fierce and Knowledgeable Ally in Court

The trustee’s primary job is to make sure the creditors get paid as much as possible. The trustee isn’t thinking about the financial strain this will cause you. Your bankruptcy attorney will advocate for your best interests. 

Understanding Bankruptcy Law and Procedure

All bankruptcy cases are handled in federal courts and operate according to rules outlined in the U.S. Bankruptcy Code.

There are different types of bankruptcies, which are usually referred to by their chapter in the U.S. Bankruptcy Code:

  • Individuals may file Chapter 7 or Chapter 13 bankruptcy, depending on the particulars of their situation.
  • Businesses may file Chapter 7 bankruptcy to liquidate or Chapter 11 to reorganize.

In this article, we will primarily explore the circumstances under which individuals may file for Chapter 7 or Chapter 13 bankruptcy.

Chapter 7 Bankruptcy

Chapter 7 of the U.S. Bankruptcy Code governs liquidation bankruptcy proceedings. In a Chapter 7 proceeding, the court can liquidate (sell off) some of your property and distribute the proceeds to your creditors.

Under Chapter 7, the bankruptcy court will appoint a trustee to supervise the administration of your estate. Some of your property may be subject to liens and mortgages that pledge the property to other creditors. However, the Bankruptcy Code will allow you to keep certain “exempt” property. Colorado bankruptcy exemptions can include clothing, household items and furniture, and a certain amount of equity you may have in a home or vehicle. If an item is completely covered by an exemption, you will be able to keep it. The bankruptcy trustee is not allowed to sell it in order to pay back your creditors.

In exchange for your cooperation, full disclosure, and turnover of non-exempt assets, you are entitled to receive a discharge of most existing debts. 

Who is Eligible to File for Chapter 7 Bankruptcy?

Federal law requires you to complete and pass the “means test” to file for bankruptcy. If you make too much money, you will not qualify for a Chapter 7 bankruptcy. You are only required to take the means test if you have primarily consumer debts, not business debts. Additionally, some veterans and military members are not required to take the means test.

We’ll explore more about the means test in a moment, but, first, let’s quickly cover the difference between business and consumer debts. 

How Do I Know if I Have Business or Consumer Debt?

When it’s obvious that a business is filing for bankruptcy–i.e., a partnership, limited liability company (LLC), or corporation–the filing will be a business bankruptcy.

However, it isn’t always that straightforward. A business owner filing for personal bankruptcy probably also has some business debt as well. Someone with primarily consumer debt will file a consumer bankruptcy, even if he or she has some business debt. Whichever debt type you have more of will determine how you file.

For example, let’s say you borrowed money to purchase tools for your HVAC company. This loan would be considered business debt.

By contrast, consumer debt refers to personal debts that are owed as a result of purchasing goods for individual or household consumption. 

Consumer debt can include: 

  • credit card debt
  • student loans
  • auto loans
  • mortgages
  • payday loans

What is the “Means Test?”

The “means test” considers several factors, including:

  • whether you make less than your state’s median income
  • whether you have disposable income available to pay back some or all of your debt in a Chapter 13 case, and
  • how long your Chapter 13 repayment plan will last (three years if you fall below the median income and five years if above.)

Calculating Your Gross Income

You will automatically qualify for Chapter 7 bankruptcy if your family’s gross income is lower than the median income for a Colorado family of the same size. You will add all gross income earned during the last six months and multiply it by two.

For cases filed on or after April 1, 2023, the median family income in Colorado is:

  • $75,710 for a one-person household
  • $93,175 for a two-person household
  • $104,785 for a three-person household
  • $122,707 for a four-person household

Add $9,900 for each individual in your household in excess of four. Source: U.S. Census Bureau

What If I Make Too Much?

You still may qualify. The next part of the means test involves deducting allowed monthly expenses (housing, utilities, transportation, etc.) from your current monthly income. This will determine your monthly “disposable income.”

The higher your disposable income, the less likely you are to qualify for Chapter 7 bankruptcy.

Instead, your bankruptcy option will be paying your disposable income to creditors through a Chapter 13 repayment plan–if you qualify. Let’s explore that.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy differs from a Chapter 7 bankruptcy in that the former involves selling off certain assets and using the funds to repay your creditors. A Chapter 13 bankruptcy is considered a reorganization of your existing debts, rather than a liquidation as in Chapter 7.

As with a Chapter 7 bankruptcy, a trustee supervises the administration of the estate.

In a Chapter 13 bankruptcy, your attorney will submit a repayment plan to the bankruptcy court for approval. Once the court confirms the plan, you (the debtor) are bound to the creditors. All property of the estate vests in the debtor unless the plan states otherwise – in other words, your creditors don’t have any rights to the property. You must also begin making payments to the trustee within 30 days of the date the plan is filed.

After you have completed the payments, the court will discharge all debts described in the plan. TENTH CIRCUIT SURVEY: Bankruptcy Law, 75 Denv. U.L. Rev. 731, 732-733

If you make above the median income, your Chapter 13 plan may not require you to make payments for longer than five years. 11 U.S.C.S. § 1322(d)(1)

What Should I Expect From a Bankruptcy Proceeding?

A bankruptcy case normally begins when you file your petition with the U.S. Bankruptcy Court for the District of Colorado. Federal courts have exclusive jurisdiction over bankruptcy proceedings, which means you may not file for bankruptcy in a state court.

Filing your bankruptcy petition automatically prevents, or “stays,” debt collection actions against you and your property. As long as the stay is in effect, creditors cannot bring or continue lawsuits, garnish your wages, or even make telephone calls demanding payment.

Once you have filed, the court will assume legal control of your debts and any property not covered by your Colorado exemptions. The court will also appoint a trustee to oversee your case.

What is a Trustee’s Role in a Bankruptcy Case?

Quite simply, the trustee’s job is to make sure that your creditors are paid as much as possible. This person will collect payments, monitor your case, and report to the court on how well you are meeting your obligations.

If you are not fulfilling your responsibilities, the trustee can ask the court to dismiss your case. The trustee can also ask the court to increase your payments to creditors if your income increases.

The Meeting of Creditors

Your attorney must also file an accurate and complete list of your creditors. This list will include the name, mailing address, and zip code of each creditor listed on your schedules.

The court will schedule what is known as the meeting of creditors on the day you file. Known as the 341 meeting, this is a mandatory meeting between the debtor, the trustee, and any creditors who choose to appear. 11 U.S.C. §§ 341 and 343

The Chapter 7 341 meeting is scheduled 21 to 40 days from the date of filing the petition. The Chapter 13 341 meeting is scheduled 21 to 50 days after filing. F.R.C.P. 2003

Your meeting will be held at a location close to the county you reside in. For example, if you live in Denver County, your meeting will likely be held at the Byron Rogers Federal Building near 19th and Stout Street. Source: U.S. Bankruptcy Court District of Colorado

The 341 meeting is not a court proceeding. The trustee presides over the meeting and will record your testimony under oath. At the meeting, the trustee will verify your identity and social security number, review the information you provided, and request clarification or additional information, if needed.

Any creditor who attends the meeting may also question you on a broad range of topics. 11 U.S.C. § 343

What Happens Next?

After the meeting, your creditors and the trustee have 60 days to object to discharging an individual debt or your bankruptcy as a whole.

A creditor will typically let you know about any problems well before the deadline. So if no one showed up to your meeting of creditors or sent you a letter, you’re likely in good shape.

File Your Financial Management Certificate

Before you can get a discharge in a Colorado bankruptcy case, you must first complete a financial management course and file a certificate with the court. These courses are only available from nonprofit credit counseling agencies that have been approved by the U.S. Department of Justice.

This is the last step before the court finalizes your bankruptcy and discharges your debts. These courses offer useful financial education to help you manage your finances in the future.

The court will close your case if you do not file this certificate. You will then have to file a motion to reopen the case and pay the required reopening fee to get your debts discharged.

What Happens if I Don’t Get a Discharge?

If the court does not grant your discharge, the trustee may close your file and withdraw from your case. If this happens, your creditors can continue to come after you. You also may have to pay the trustee a fee to reopen your case.

The best way to avoid this from happening is to work with a bankruptcy attorney. 

When Filing Bankruptcy Without an Attorney Goes Wrong

If executed correctly, bankruptcy will relieve your financial burdens and give you a new lease on life.

However, if even one part of the process goes awry, the consequences could be disastrous and long-term–even including jail time. Let’s look at one example.

Lack of Representation is Not a Defense

Chiropractor Ronald Sather was determined to avoid paying taxes. He went to great lengths to accomplish this goal–including filing three bankruptcy petitions.

In the first petition, which he would later voluntarily dismiss, Sather stated that he owned only $6,365 in total assets and earned $2,000 a month. However, he actually owned at least $394,782 in assets and earned more than $9,000 a month from his chiropractic business.

Sather’s actions eventually caught up with him, and he was charged and convicted on eight various criminal counts–including bankruptcy fraud. He was sentenced to more than three years in federal prison.

Tenth Circuit Rejects Sather’s Appeal

Intent is a key element of a criminal bankruptcy fraud charge. Prosecutors have to prove that you intended to abuse the bankruptcy process in order to avoid paying your debts. On appeal, Sather claimed that the court had failed to prove intent because he was not represented by an attorney in his bankruptcy proceedings. He therefore did not realize that his admittedly false statements were “legally false.” United States v. Sather, 3 F. App’x 725, 728 (10th Cir. 2001)

But the Tenth Circuit didn’t buy it:

The government established that Mr. Sather made false statements on his 1997 bankruptcy filing…Although Mr. Sather attempted to explain his intent in filing conflicting and false petitions, the jury was free to weigh the evidence and draw an inference of intent to defraud from the evidence. The evidence was sufficient to support a finding of intent to defraud beyond a reasonable doubt. United States v. Sather, 3 F. App’x 725, 729 (10th Cir. 2001)

Don’t Risk Financial Freedom – Hire a Bankruptcy Attorney

Bankruptcy may feel like an ending, but it can be a new beginning – especially when you have the experience and tenacity of my bankruptcy team on your side. Don’t risk losing everything you own. Call 303-688-0944 today to begin your case assessment.

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