Have you ever taken a hard look at your financial situation and wished you could push a RESET button? Almost everyone has. It’s not easy realizing that your financial obligations have gotten out of control, and it’s time to make tough decisions. What if you could discharge most of your debt? A Chapter 7 bankruptcy makes that possible, which is one reason why it accounts for the majority of Colorado bankruptcy filings.
If you’re thinking of filing Chapter 7, take a few minutes to listen to this short, informative video with R&H Bankruptcy Partner Elizabeth German. Then, dig a little deeper into Chapter 7 by reviewing the following questions and answers to clarify some of the issues involved in this important financial decision.
1. What are the advantages of filing Chapter 7 bankruptcy?
Chapter 7 bankruptcy is kind of like pressing a financial RESET button for your life. It was created to give those in a seemingly hopeless financial situation a fresh start.
Chapter 7 is considered a debt liquidation; a way to eliminate most of your debt in exchange for giving up non-exempt property. However, for most people who file, all (or nearly all) of their property is usually considered exempt.
Exempt property in a Chapter 7 bankruptcy includes items that could be considered necessities, up to a certain value, such as:
- most household goods and furnishings,
- motor vehicles,
- reasonably necessary clothing,
- a certain amount of jewelry,
- tools of the debtor’s trade, such as work equipment,
- a portion of equity in the debtor’s home,
- public assistance benefits, such as unemployment or social security accumulated in a bank account, and
- damages awarded for personal injury.
Non-exempt property are items that would be considered “extra” or luxury property which is not needed but can be sold by the trustee to pay off creditors. Such property includes:
- a second home, or a third motor vehicle,
- expensive art and family heirlooms,
- collections of stamps, coins, or other valuables,
- stocks, bonds, other investments, and
- expensive musical instruments, unless the debtor is a professional musician
Chapter 7 Advantages include:
- Temporarily halt repossession and foreclosure of property
- Force the return of some already seized properties
- Turn back on utilities that have been shut off
- Get relief from active wage garnishment
- Challenge potentially fraudulent creditors’ claims
- Cease creditor harassment and attempts to collect dischargeable debts
2. Which debts cannot be eliminated in Chapter 7?
The goal of Chapter 7 is to help someone put most of their debt behind them so they get a fresh start. However, not all debts are dischargeable in this kind of filing.
Section 523 of the United States Bankruptcy Codes lists numerous debts that cannot be discharged. The most common examples are:
- court-ordered payments such as alimony or child support
- certain tax debts, such as tax liens
- student loans
- court restitution orders
- debts for willful and malicious injury to another person or property
- debts for death or personal injury resulting from debtor driving under the influence of alcohol or drugs
- most non-tax debts owed to a governmental agency
- debts not listed in debtor’s bankruptcy filing
- joint marital debts awarded against you in a divorce proceeding
- marital property settlements
Note: If you have used certain property, such as your home or any automobiles, as collateral for a loan, you will lose that property unless you continue to pay the loan. Something else to remember: anyone who has co-signed with you on a loan is liable for your debt.
However, we may be able to handle these debts in a Chapter 13 bankruptcy.
3. Will I be able to own property after my Chapter 7 bankruptcy?
Since a Chapter 7 bankruptcy is considered a liquidation of assets, many people believe they cannot own any property. This is not true.
You can keep all property classified as exempt in bankruptcy. In addition, anything you acquire after filing bankruptcy is yours to keep as well. However, there are exceptions.
These resources may have to go to your creditors if you receive them within 180 days of your bankruptcy being granted if they are not exempt: property settlement, inheritance, or life insurance benefits are some examples.
4. Can I keep my house and car after filing Chapter 7?
In 2022, a new bill made it easier for bankruptcy filers in Colorado to keep their homes and automobiles. It was called the Homestead Exemption and Consumer Debt Protection Act, or SB 22-086.
A homestead exemption protects the equity you have in your home. Previously, debtors could only protect $75,000 or $105,000 (depending on age and disability status) of home equity. The new law raised the home equity limit to $250,000 (or $350,000 if you, your spouse, or a dependent is 60 years-old or older or suffers from some documented disability). This means that if the total current value of the home minus the amount still owed on the mortgage is less than $250,000, the bankruptcy court cannot sell the home. It is considered exempt property.
On the other hand, if the amount of home equity is $280,000, the bankruptcy trustee could allow you to pay off the extra $30,000 in a lump sum and keep the house. If you’re unable to come up with that, the trustee could sell the home, give you your $250,000 of equity, and use the remaining proceeds to pay off the mortgage and satisfy other creditors.
The same process applies to automobiles, except now the amount exempted is $15,000 each for up to two motor vehicles or bicycles (or $25,000 if you, your spouse, or a dependent is 60 or older or has a documented disability). However, if you do not own the car and have stopped making payments, you will not be allowed to keep it even if it fits under the $15,000 exemption. It’s critical to stay current on your car payments during the bankruptcy process if you want to keep your car.
If you own your car with no loan, then the equity is the total fair market value. This means that if the car is paid off, or has been a gift, and is worth more than $15,000, the trustee could seize it and sell it to pay off creditors.
5. Should I use an attorney for my Chapter 7 bankruptcy?
It is possible to file bankruptcy on your own without the assistance of an attorney. However, there are real benefits to hiring a knowledgeable bankruptcy attorney who can advise you on matters such as:
- issues that might impact what property you are allowed to keep,
- dealing with creditors objecting to your bankruptcy,
- the debt you are able to discharge, and
- how to return to financial health as quickly as possible.
All Colorado bankruptcies are handled in Denver at the federal district court. Legal paperwork can be filed by mail, in person, or electronically if you’re working with an attorney.
6. How will bankruptcy impact my credit?
The answer to this question isn’t always clear. If you already have a good credit score above 650 or so, then filing for bankruptcy can bring it down significantly in the short run. However, the notion that your credit will remain in pariah status for 7 to 10 years is a myth; only the fact you filed for bankruptcy remains on your credit report, under the public record section, for 10 years is true.
If you’ve been struggling with your financial situation for a long time before filing for bankruptcy, your credit rating is probably already low. A bankruptcy will not make it much worse.
Once you file for bankruptcy, you will receive plenty of opportunities to begin rebuilding your credit. At this point, it will be extremely important to use any new credit you are offered wisely, and pay off the balance of any new credit cards every month to avoid interest fees. If you do this, you can watch your credit score rebound significantly within two years of filing for bankruptcy.
7. How do I know if I am eligible to file for Chapter 7 bankruptcy?
Generally, in Colorado, you are eligible to file for Chapter 7 if your average monthly income for the past six months is below the median monthly income for a family of your size in our state. However, despite having an income that qualifies you for Chapter 7, a judge may not allow you to file if it appears that you have enough income to repay a substantial part of your debts under a Chapter 13 bankruptcy.
Other uncommon situations could arise that might prevent you from being able to file Chapter 7. For example, if you have discharged your debts in a previous bankruptcy in the past eight years, you will not be able to file another Chapter 7 until eight years has passed from the date of the prior Chapter 7 case being filed.
The current annual income threshold for Chapter 7 eligibility are:
- $70,100 for a single individual
- $91,076 for a family of two
- $105,388 for a family of three
- $124,206 for a family of four
- $134,106 for a family of five
… and so on, increasing by about $9,900 for each additional family member after five.
If you don’t think you can qualify for Chapter 7, or if you’re not sure it’s the right kind of bankruptcy for your situation, other types such as Chapter 11 or Chapter 13 could apply. Talk to an attorney to see what works best for you.
Contact Our Bankruptcy Attorneys
If you are considering filing for Chapter 7 bankruptcy in Colorado, contact the knowledgeable bankruptcy attorneys at Robinson & Henry. In addition to filing all required forms on your behalf, we will advise you on the best financial strategy for your situation and help you through the process so you emerge with the best possible outcome. Call 303-688-0944 for your case assessment.