Colorado Bankruptcy: Answers to 28 Common Questions

October 12, 2022 | Bill Henry

Bankruptcy has long been considered the black sheep of the debt resolution family. However, that’s one of many misconceptions about bankruptcy. While personal bankruptcy filings have declined since the Great Recession, they remain at about 756,000 a year.

While bankruptcy may be taboo to discuss at a party, it’s definitely an option that creates a safe haven for people who can no longer meet their debt obligations. No one looks at bankruptcy enthusiastically, but when it becomes the only choice, intelligent financial decision-making can save you in a time of crisis.

Bankruptcy is Not a Financial Death Sentence

It is common for credit scores to drop immediately after bankruptcy. This can cause stress and make it difficult to obtain a loan in the future. This guide answers common questions regarding the ache of credit scores after bankruptcy so you’re informed before you decide to file.

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1. When will my credit score increase and what will it be after bankruptcy? 

Just as there is no real secret pill to lose weight, there is no easy secret to know if your credit score will be restored after filing for bankruptcy.

There can be a dramatic shift in your score after the bankruptcy if you had a stronger credit score to start with, usually 650 or greater. There may not be a noticeable decrease if your score was already low.

Some credit reporting tools will estimate your 12-month post-bankruptcy score and an estimate of the decrease.

MYTH: Your credit score stays low for seven to ten years following bankruptcy.

TRUTH: The Bankruptcy Filing as a public record stays on your credit report for seven to ten years. 

Re-Establishing Your Credit After Bankruptcy

If you are diligent, it is possible to get your credit back in the 700s within two years of filing bankruptcy. You can use a free credit score site to get your current score and use a credit card wisely by paying off the balance each month. You’ll notice a change in your score if you stay vigilant.

An experienced bankruptcy attorney can guide you on how to to monitor your credit to make sure the debts included in the bankruptcy do not detrimentally affect your credit score. In fact, it’s illegal for these debts to show up once your case is filed.

2. How long do I have to wait to buy a house after bankruptcy?

Bankruptcy is usually completely erased from your credit score in 7-10 years. However, you can still apply for a home loan with the appropriate steps.

Most professionals suggest you wait at least two years before applying for a home loan. This gives your credit time to improve and reflect successful payments. During this time, you can begin using a credit card carefully and completely pay it off each month to increase your score.

Most mortgage companies consider 401(k) and retirement plan assets as positive factors toward repayment. A large down payment also helps. Likewise, it improves your chances of securing a loan if you can show a good debt-to-income ratio.

With these factors in mind, you may be able to get a strong mortgage deal in 24 months after bankruptcy.

3. Is my bankruptcy public?

Bankruptcy records are technically considered public records. However, this does not mean they will be widespread public knowledge.

Bankruptcy courts use a system called PACER (Public Access to Court Electronic Records) to provide people with the ability to look up case information. This public sphere for the courts ensures judges act within their proper legal bounds and the court system remains accountable.

Even though bankruptcy proceedings are searchable, someone would have to actively seek out your name in records. Therefore, the only people seeing your information will be those seeking your credit information for loans.

4. Will I lose my house?

During bankruptcy, your assets are collected in what is called a bankruptcy estate. If you file Chapter 7 bankruptcy, the trustee has the power to sell your assets and divide the proceeds with your creditors.

Your home, however, may fit into what is called a homestead exemption. A homestead exemption protects the equity you have in your home. In Colorado, you can exempt up to $250,000 of the property’s equity ($350,000 if you, your spouse, or a dependent is disabled or 60+ years old).

This means that if you have $200,000 in equity, you can use the exemption to protect all of your equity. If your equity exceeds the homestead exemption, you will not necessarily lose your house. Here’s what could happen:

If you stay in Chapter 7, there is a chance the trustee might allow you to pay out the equity in a lump sum, but they do have the authority to sell the property if they chose to.

If you switch to Chapter 13 bankruptcy, you can essentially pay back the equity that exceeds the exemption over 36-60 months if you don’t want to risk your home being sold or cannot afford a lump sum payment of the equity to the Chapter 7 trustee. The money paid into the Chapter 13 will go toward paying off some of your other unsecured debt.

You likely have other questions about homestead exemptions, which we can answer. Our experienced bankruptcy attorneys can guide you to the best possible solution for your unique circumstances.

5. Will I lose my car?

Like the homestead exemption, there is a similar exemption in place for your car. The most important fact here is that if you do not own your car, or you are not currently making payments, you cannot keep your car even if it does fit in an exemption. Therefore, it is important that you stay up to date on your car payment if you plan to keep it.

First, determine how much equity is in your car. If you own your car with no loan, the equity in your car is its total fair market value. If you have a loan, equity is the total fair market value minus the amount left on your loan. Finally, if you drive a leased vehicle, you have no equity. If you have no equity, your lender may repossess your car.

In Colorado, you can keep up to two motor vehicles or bicycles and exempt $15,000 in equity ($25,000 if you, your spouse, or a dependent is disabled or 60+ years old). C.R.S. § 13-54-102 (I)(j)

Just as if you have equity in your car over the allowed exemption, you can use a Chapter 13 bankruptcy to protect the car and pay back the equity through the bankruptcy.

6. Will I lose my retirement?

For the most part, Congress has provided an exemption to allow you to keep your retirement plans after filing Chapter 7 or Chapter 13 bankruptcy. However, this is not always the case.

The general rule is that any Employee Retirement Income Security Act (ERISA)-approved plans are exempt. This includes individual retirement accounts (IRAs), 403(b)s, and 401(k)s. Usually, the exemption amount is unlimited. In other words, the amount in these accounts will not affect how much you must pay creditors. These general rules do, however, have certain limitations.

There is a limit to how much can be exempted per person. For traditional and Roth IRAs, the current limit is $1,512,350. If you have more than this in your combined IRA accounts, it is possible the excess can be used to pay off creditors.

Further, there are limitations to retirement accounts that are paid into your account as income. These accounts are not considered exempt. If the trustee can take some of your income-paying retirement accounts without removing your ability to support yourself, they will.

These limitations can be confusing. Your bankruptcy attorney will discuss with you which accounts are potentially in danger or whether bankruptcy makes financial sense in your situation.

7. Will creditors still be able to garnish my paycheck after I file for bankruptcy?

As you may already know, creditors can often gain access to your wages if you discontinue payment. Filing for bankruptcy creates an automatic stay that stops these wage garnishments.

Of course, this won’t stop court-appointed payments such as child support; however, it may stop creditors from taking your hard-earned money.

The automatic stay ends if your bankruptcy case is dismissed, and creditors can begin to garnish your wages again.

What about garnished wages that have already been taken?

If the wages taken by an unsecured creditor total more than $600 in the 90 days prior to your bankruptcy filing, then a Chapter 7 trustee will usually seek to recover those funds to distribute among the rest of your creditors. That way that money is paid toward the debts on which you are declaring bankruptcy. This does not mean that the creditor has the right to come after you again for those funds.

If the Chapter 7 trustee chooses not to try to get the money back from the creditor, anything taken before the case was filed cannot be recovered.

What about garnished wages after I filed for bankruptcy?

If there is a garnishment after your bankruptcy case is filed, you can ask for that money back. This can be complicated so it is recommended to have an attorney guide through that process.

8. Do people ever recover from bankruptcy?

Yes, of course! Bankruptcy is an overwhelming experience, but there is a life after it. Bankruptcy provides an opportunity to build again.

There are many things a person can do to rejuvenate their credit and find themselves back on their feet in a few short years after bankruptcy.

First, you have to let go of the fact that you had to file. Next, most professionals suggest using a credit card to make one purchase a month and pay off the entire amount so you don’t accrue any interest charges. This will begin to build back your credit piece by piece. Third, keep an eye on your credit score to understand what is happening with its growth.

Bankruptcy can get you back on the road to financial freedom. You’ll be amazed by how much stress is alleviated once you get out of the burden of debt.

9. How do I know if I should file for bankruptcy?

It is important to meet with a bankruptcy attorney to consider all of your debt resolution options. Too often, individuals deplete retirement accounts and other funds in an effort to pay off their debt only to learn later they could have saved that money by filing for bankruptcy.

Have I exhausted all other options?

If you have the ability to use loan forgiveness or work out payment plans with your creditors, bankruptcy may not be your best option. Many creditors are willing to work with you as they end up in a better place in the end as well.

Further, you must ask whether the debts you’re struggling to pay off can be discharged. Many such debts are considered priority obligations and cannot be discharged by the court.

Do I even qualify for bankruptcy?

The next important factor to consider is whether you even qualify for Chapter 13 or Chapter 7 bankruptcy.

In Chapter 7, you usually must show that your income is low enough to qualify. Those with income under the state median typically automatically qualify. Otherwise, your disposable income is compared to your debts to determine if you can pay for a portion of them.

The maximum amount here can change based on the state and even the city. An experienced bankruptcy attorney will help you understand your local rules.

In Chapter 13, only individuals can file for bankruptcy. Therefore, businesses can only use this route if they file as an individual. Typically you will have to write up a plan that compares your income to your debt to see if you have the ability to pay it off in due time.

You will also be required to show that you are current on your income taxes. If this all works out, a court may allow you to follow through with your payment plan.

If I qualify, how will my bankruptcy affect my property?

What property do you currently own that could be sold in Chapter 7 bankruptcy?  Do you have a home that may be foreclosed on or a car that could be repossessed? Is there a lawsuit pending wherein a creditor may garnish your wages?

These are the types of considerations you and your bankruptcy attorney will make as you work toward finding the right choice for you.

10. How can I avoid going to jail over my debts?

Usually, no one goes to jail for unpaid debts. That is a thing of the past. However, there are certain things on top of not paying a debt that land people behind bars.

Jail Time for Violating a Court Order

The first, and perhaps most common, is when people intentionally violate a court order. If the court has ordered the payment of certain debts or child support and you disobey this order, you may face jail time. However, most judges want to see that you have the ability to pay your debts, which is tough to do in jail. Contempt will usually only put you in jail if you intentionally do not pay.

Other Unpaid Debts That Can Lead to Jail Time

Perhaps the more obvious way to end up in jail is to stop paying income taxes. This is one payment that should not be missed. Finally, if you are involved with a debtor investigation and you do not show up as ordered, you can be thrown in jail to ensure your cooperation.

In short, it is very unlikely you will end up in jail regardless of nonpayment if you are diligent in obeying other laws.

11. How long does a bankruptcy take?

Like most court proceedings, bankruptcy tends to take time. However, the duration can be different depending on which type of bankruptcy you file. Can you survive a three- to five-year process, or do you need help within a few months?

A typical time frame for Chapter 7 is 90 to 120 days from the filing to the granting of the discharge of your debts.

Chapter 13 bankruptcy can take between 3 and 5 years depending on your income and the amount of the monthly payments to repay your creditors.

Many people assume that they cannot get financial recovery until they get their discharge. Just because a Chapter 13 bankruptcy takes 3 to 5 years to obtain a discharge does not mean you will have bad credit during that time, nor does it mean that you will not be able to get financed for a car or a loan.

12. Do famous people file for bankruptcy?

Absolutely! Here’s a very short list of celebrities who have filed for bankruptcy.

  1. Henry Ford. America’s businessman wasn’t always financially savvy. His first attempt at manufacturing vehicles resulted in the need to file for bankruptcy. Next, his second endeavor, the Henry Ford Company resulted in bankruptcy because too few cars were produced. Even so, this company ended up successfully recovering and changing its name to Cadillac Automotive.
  2. Burt Reynolds. This iconic actor, famous for movies like Smokey and the Bandit, Deliverance, and The Longest Yard, was forced into bankruptcy after losing control of his purchases. He quickly emerged from bankruptcy in 1998.
  3. Walt Disney. His first attempt at Disney studios was not quite as successful as it is now. However, 1928 brought the creation of Mickey Mouse and a save from the first bankruptcy.
  4. Terrell Owens. After making $80 million in 15 years from playing for the NFL, TO found himself in financial trouble after advisors led him to too many risky ventures. TO filed for bankruptcy in 2012.
  5. Milton Hershey. It took two failed attempts in the sweets industry before Milton Hershey turned around and perfected Hershey’s famous recipe.
  6. Stephen Baldwin. This Baldwin brother filed for bankruptcy in 2009 after defaulting on more than $800,000 in mortgage debts. This did not stop him from successfully appearing in several movies since.
  7. Willie Nelson. Even the country singer found himself in dire straits when the government seized his records in 1997. Willie had to pay back over $16 million, but he jumped back with a commercial acting gig and a new album.
  8. Mike Tyson. The world-famous boxer and actor made $300 million, but after some new cars and a divorce, he filed for bankruptcy in 2003. Tyson continues to act in order to better his financial situation.
  9. MC Hammer. The singer bought a $1 million mansion in the 90s after the success of “Can’t Touch This.” In 1996, however, he filed for bankruptcy after he couldn’t stop spending. However, he came back as a pastor who lives on a California ranch.

13. Will I ever get credit again?

You will. Bankruptcy is not a life sentence. While it does negatively impact your credit score after filing, your credit score can be back into the 700s two years later.

You will actually begin to receive lots of offers for credit cards and car loans once the bankruptcy is filed. If you responsibly manage your credit card use, you will be in a better credit and financial position than when you started.

14. How can debt settlement cost me more money than bankruptcy?

Often you will see ads for an alternative to bankruptcy called debt settlement. It may seem very favorable at face value. You simply pay the debt settlement company, and they pay your creditors. However, going into this without understanding its implications is not wise.

Credit Score Implications

First, you should understand the way a debt settlement company operates. If you go with a debt settlement company, it will probably have you make reduced monthly installments to it. The company will advise you to stop paying your creditors, and the company will not begin to pay your creditors until your account with the debt settlement company reaches a certain threshold. That means your creditors are left unpaid and your credit score will be negatively affected. Depending on the length of this delayed pay period, you may find that your credit score takes a significant hit.

Potential for Wage Garnishment

The debt settlement company cannot guarantee your creditors will agree to a reduced amount to settle your debt. If not all of your debts are encompassed under the agreement, those not included can seek to enforce the obligation against you by filing a lawsuit and potentially garnishing your wages or bank accounts.

Serious Tax Implications

The IRS considers forgiven debt to be income and requires you to pay income taxes on it. Creditors will send you a Form 1099-C to report your canceled debts with the IRS. Even if you do not receive this form, you must include the information in your tax return.

You could end up in more debt to the IRS and have a much lower credit score if you choose debt settlement.

15. Can I get rid of my tax debt?

Bankruptcy cannot discharge most tax debt. Chapter 13 bankruptcy requires you to finish paying the amount in a new payment plan. Chapter 7 leaves you with the same amount due in the end. However, if you can satisfy several elements you may be able to discharge your tax debt:

  • the taxes must be income taxes
  • the tax year must be over 3 years old
  • the tax returns must have been filed two years before the filing of the bankruptcy
  • there must have been no assessments in the last 240 days

If you can satisfy these elements, the court may discharge these debts for either type of bankruptcy. In Chapter 13, however, you may still be required to pay these taxes if they are considered a priority debt.

A Colorado court recently held that if there was a substitute for a return filed on your behalf by the IRS, the debts can never be discharged.

16. Does bankruptcy help with student loan relief?

It is very difficult to discharge student loans. However, if a person can show that not discharging their loans would cause “undue hardship” they may be able to reach this goal.

What is undue hardship? How bad does your situation have to be?

Most courts use three elements for determining undue hardship:

  1. An inability to maintain a “minimal standard of living” for self and dependents,
  2. evidence that this condition will remain for the duration of the repayment period, and
  3. good-faith efforts were made to repay the loan.

What evidence do I need to prove these elements? How many successful payments will a court consider a “good faith effort?” What will the court feel is a minimal standard of living? Your bankruptcy attorney will know best whether your student debt stands a chance.

17. Can I get rid of my divorce debt?

Divorce is difficult enough without adding bankruptcy to the mix. However, timing can be an important factor in this decision.

Filing Joint Bankruptcy Can Improve Your Outcome

Many people may file for divorce without considering the implications of not filing for bankruptcy first. Filing jointly for bankruptcy may allow you to double your exemption amounts. It also may save you money on filing fees as you only have to file once. So, the first decision to make is whether to file for bankruptcy before or after the divorce.

Bankruptcy and Domestic Support Obligations

The law does not allow you to discharge support obligations like alimony and child support. If you are considering whether you can avoid this debt, bankruptcy will not get rid of these financial responsibilities.

Bankruptcy and Property Division During Divorce

Bankruptcy will not likely help you if you’re trying to get out of paying your ex-spouse part of the asset division. If you have incurred debt in the course of a divorce or separation, like property division, you probably will not be able to discharge the debt. However, this exception to discharge does not apply in Chapter 13 bankruptcy.

Therefore, Chapter 13 bankruptcy may be the only option to discharge such a debt. You will want to discuss these concerns with an attorney who can help you determine whether and how your divorce debts can be relieved.

18. Can I get rid of business debt?

If you’re considering bankruptcy and own a business, it’s important to know that creditors can still come after your LLC or corporation if you file for Chapter 7.

However, many debts incurred in the course of running a business can be discharged, including supplier debts, credit card bills, and personal loans.

Even so, if you have secured debts providing your property as collateral, these debts will not be discharged regardless of bankruptcy. A person can file for business bankruptcy under Chapter 7; however, this requires an attorney to file for you.

Chapter 13 May be Your Best Option

If you are concerned about losing your business, it may be smarter to file for Chapter 13 bankruptcy. Under Chapter 13, a repayment plan (rather than a liquidation) may allow you to handle some of your larger tax debts and other liabilities without losing your company.

19. Can bankruptcy prevent foreclosure?

An automatic stay takes effect immediately after you file Chapter 7 or 13 bankruptcy. That automatic stay will serve to postpone the sale of your home at the next auction. That delay is legally enforceable for up to four months.

The stay, however, can be shortened with a motion to lift it. Of course, you will still have time until the motion to lift the stay is resolved.

If you have notice of foreclosure, you cannot simply wait out the time and file bankruptcy just before the auction. The court will simply lift the stay and allow the auction to continue.

Chapter 13 bankruptcy may be the safest option here. It gives you an opportunity to pay off those late payments over a lengthened period of time and, if you follow the plan, you will keep your home.

20. Can I slow down the foreclosure process to work on a short sale?

A short sale can mitigate your liability to your mortgage creditor. In a short sale, you sell your home for less than the balance of debts secured by liens against your property.

Typically, a lender will not immediately begin the foreclosure process after a missed payment. This means you may have about three to four missed payments to decide if you want to engage in a short sale before bankruptcy is ever a consideration. If you have not been given enough time here, bankruptcy will likely only serve to stall the foreclosure process until your mortgage creditor can lift the stay and auction off your home.

Therefore, it is risky to depend on bankruptcy to provide you with time, but it may help. Discuss these options with an attorney before making a decision that could result in your losing your home and destroying your credit.

21. How will filing for bankruptcy affect my spouse or significant other?

This question may require a different answer depending on where you live. In common law states, like Colorado, if your name is on a deed, you own that property. If you and your spouse are both on the deed or title, you own a half interest in the property. If there is no title, you own it if you can prove you paid for it.

In bankruptcy, several problems may arise in common law states. First, if the property with joint ownership cannot be easily divided, it may be sold and half of the proceeds applied to your debts. Of course, the trustee must show that the benefit of selling this property outweighs the detriment to your spouse.

Second, although your debts may be discharged, this does not affect how much your spouse is responsible for. Thus, he or she may be required to pay off any joint debts without the help of your combined salary.

22. Will filing for bankruptcy stop harassing creditors?

The automatic stay following a bankruptcy filing discontinues all actions from your creditors in attempting to collect a debt. Thus, phone calls from your creditors will stop.

What if a creditor doesn’t follow this order and calls anyway?

The first step is to simply tell the creditor that you have filed for bankruptcy. It is possible they are simply unaware that you have begun this process. If the calls persist, the next step is to notify your bankruptcy attorney.

An experienced attorney will see that your creditor is sanctioned for harassing you against an automatic stay.

You may also be able to collect at least $1,000 for the harassment, but if you suffered actual damages from, say, a medical episode due to the harassment, you can also ask for punitive damages from the court which can be quite substantial.

23. Should I run up my credit card before filing for bankruptcy?

No. Bankruptcy can discharge almost all credit card debt. The exception is debt accrued with fraudulent intent.

Making credit card purchases just before filing bankruptcy with the knowledge you will soon file is fraudulent. The court will likely see what you did and refuse to discharge the debt.

Of course, you may try to show that you did not intend to defraud the creditor. However, if you made luxury or high price purchases, the court will see through that and presume fraud.

24. Can I transfer assets before filing for bankruptcy?

When you file for bankruptcy, a trustee can sometimes recover transferred property as part of the bankruptcy estate. Of course, like most answers to legal questions, this depends on the circumstances. When did you make the transfer? How did you spend the proceeds? Why did you make the transfer? Was the property exempt?

If your property is exempt, there is really no “bad faith” reason for you to transfer or sell that property. You cannot settle debts with the exempt property.

However, it is important that you get the fair value price for this property. If you did not, it may be obvious you were just trying to dump the property to hide it from the trustee.

Thus, consult a bankruptcy attorney before you sell or transfer any assets.

25. Is filing bankruptcy expensive?

Filing anything in court can be an expensive process. Filing fees alone can make bankruptcy an unattractive option.

Current bankruptcy filing fees for Chapter 7 are $338 and $313 for Chapter 13. These costs do not include attorney fees should you hire one or court-required credit counseling classes.

If you cannot afford the filing costs, the court may give you permission to pay them in installments. In rare circumstances, the court may even waive the fee entirely for indigent individuals. This means you must make less than 150 percent of the poverty line and you must be unable to make the necessary installments.

Credit counseling courses cost around $50 per class, but there are places that do offer it cheaper. The cost of an attorney is dependent upon your specific circumstances and which bankruptcy you file.

26. What happens to my co-signer if I file for bankruptcy?

If you got someone to co-sign on a loan with you, bankruptcy can affect them.

Chapter 7 and 13 bankruptcy either discharge personal debts or allows longer repayment of personal debts. Therefore, an automatic stay in Chapter 7 may protect you from those harassing creditors, but it will not stop them from calling your guarantors, aka your co-signer.

How can I protect my co-signer from my bankruptcy?

First, you can choose to give up the benefit of a discharge and accept personal liability. This is called reaffirming your debts. Second, Chapter 13 bankruptcy may provide more protection. In Chapter 13, the automatic stay will apply to your guarantors as well as protect you so long as you continue with your repayment plan.

Of course, as stated above, your creditors may be able to lift the automatic stay in certain circumstances. We strongly encourage you to talk with a lawyer to ensure your parents, siblings, or other guarantors are not affected.

27. Will the bankruptcy trustee come to my house and look through my things?

Although this is unlikely, there are times when a trustee may visit your home. Typically, this happens if you fail to report certain assets or properly provide property values. If you are honest and properly report your assets, you will protect yourself from such intrusion.

A trustee will never show up unannounced. They must schedule their visit, and you must also be there as requested. Trustees cannot take things items from your home without your permission.

Your attorney will help you to make certain you have appropriately and accurately reported your assets so no one will need to come to your home.

28. Can bankruptcy prevent or slow an eviction from an apartment?

The automatic stay described above again may protect you from, or at least delay, an eviction. However, if a landlord has already received a judgment for possession in unlawful detainer, you may be too late.

It is unlikely you will be able to stop eviction after judgment. Of course, if you file bankruptcy before judgment, your landlord will have to stop any efforts to obtain your payments. This includes eviction and possession proceedings.

Questions About Bankruptcy?

Bankruptcy is a path toward rebuilding your credit. An experienced bankruptcy attorney is essential to a successful bankruptcy filing. Our Bankruptcy Team will help you determine whether bankruptcy is right for you, and, if it is, which chapter best fits your needs. Call 303-688-0944 to begin your free case assessment.

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