Bankruptcy Basics

What is bankruptcy?

Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.

How do I decide if bankruptcy is right for me?

You should consider bankruptcy when: the interest charges on debts are so large that the monthly payments you can make cover only the interest; there are unpaid bills that will be difficult or impossible to pay off in the foreseeable future; there is a threat of foreclosure of a house or repossession of a car; you are receiving frequent calls from creditors or summonses for civil court actions for nonpayment of debt.

Ask yourself “Am I able to pay all of my obligations to creditors as they come due (i.e. on time)?” If your answer is that you cannot pay all of your bills on time, you should consider bankruptcy further. Part of the analysis in deciding if bankruptcy is right for you is to ask, “How much debt was I in at this time last year?” If you are in less debt this year than last year, then you are making headway on reducing your debt, and bankruptcy may not be the best decision for you. On the other hand, if your current debt is the same or more than it was last year, then this is one indication that you should consider the pros and cons of bankruptcy.

Finally, as a general rule of thumb, you probably need to have more than about $10,000 of debt to consider filing. If you have less debt than that, I would consider other options more carefully.

What can bankruptcy do for me?

Bankruptcy may make it possible for you to:

Eliminate the legal obligation to pay most or all of your debts. This is called a “discharge” of debts. It is designed to give you a fresh financial start.

Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)

Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.

Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.

Restore or prevent termination of utility services.

Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.

The benefit of bankruptcy is the reduction or elimination of your debt. Often, this is a huge weight lifted off your shoulders. Calls from creditors and the associated pressures stop immediately. The fresh start you are given can release the emotional burden of the debt that you have been struggling with.

What can bankruptcy not do?

Bankruptcy cannot, however, cure every financial problem. Nor is it the right step for every individual. In bankruptcy, it is usually not possible to:

Eliminate certain rights of “secured” creditors. A “secured” creditor has taken a mortgage or other lien on property as collateral for the loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money if your property is taken. Nevertheless, you generally cannot keep the collateral unless you continue to pay the debt.

Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, student loans, court restitution orders, criminal fines, and some taxes.

Protect cosigners on your debts. When a relative or friend has cosigned a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan.

Discharge debts that arise after bankruptcy has been filed.

What are the different types of bankruptcy?

There are four types of bankruptcy cases provided under the law.

Chapter 7 is known as “straight” bankruptcy or “liquidation.” In a bankruptcy case under Chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a Chapter 7 bankruptcy is to wipe out (discharge) your unsecured debts in exchange for your giving up certain property which exceeds certain limits called “exemptions”. “Exempt” property is property which the law allows you to keep when you file bankruptcy. In most cases, all of your property will be exempt (see What Property Can I Keep, below). But property which is not exempt is sold, with the money distributed to creditors. If you want to keep property like a home or a car and are behind on the payments on a mortgage or car loan, a Chapter 7 case probably will not be the right choice for you. That is because Chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover
your debt.

Chapter 13 is called “debt adjustment.” In a Chapter 13 case, you are required to make one monthly payment to the Chapter 13 Trustee, to repay some portion of the debt you have. You file a “plan” showing how you will pay off some of your past-due and current debts over three to five years.

Chapter 11, known as “reorganization,” is used by businesses and a few individual debtors whose debts are very large. This probably won’t apply to you. Chapter 12 is reserved for family farmers. This probably won’t apply to you.

Most people filing bankruptcy will want to file under either Chapter 7 or Chapter 13. Either type of case may be filed individually or by a married couple filing jointly.

Why Would I Choose Chapter 13 over Chapter 7?

Generally you wouldn’t. However, Chapter 13 is preferable to Chapter 7 when: you own your home and you are in danger of losing it to foreclosure, but you could get caught up if given time; you are behind in your automobile payments, but can catch up if given time; you have valuable nonexempt property which you would like to retain and you can afford to pay creditors from your income over time; you have debts which are dischargeable in Chapter 13 but not Chapter 7 (e.g., debt incurred through fraud); you owe the IRS or the state for taxes.

In some cases, if you have high income and an ability to repay your debts over time, you may not be permitted a discharge in Chapter 7 and Chapter 13 is
your only option.

Is my income too high to qualify for Chapter 7?

The new bankruptcy legislation applies income limitations for individuals and couples filing for Chapter 7 bankruptcy. As a general rule, if you make less than the median income for the state of Colorado, you pass the income test

For an individual, the income limit is about $41,000. For a family of 2, the limit is about $56,000. For 3, the limit is about $62,000 and for 4 it is about $68,000. From there, it goes up about $5000 per year for each additional family member. This is an issue you will want to review with your attorney before filing. In some cases, you are still eligible to file a Chapter 7 even if your income is above the limitations. If your income is too high for Chapter 7, we can still help you with other options. We can negotiate your debts with your creditors and you can also file Chapter 13. By filling out the online consultation, or coming in to see us, we can give you your best option.

What Property Can I Keep in Colorado?

In a Chapter 7 case, you can keep all property which the law says is “exempt” from the claims of creditors. Colorado exemptions include:

  • $45,000 in equity in your home; (the “homestead exemption”)
  • $3,000 in equity in your car;
  • household goods up to a total of $3,000;
  • $10,000 in things you need for your job (tools, books, etc.);
  • $1,000 in jewelry;
  • $1,500 in collectibles, CDs, and/or art;
  • any amount in an IRA, 401(k), or pension plan;
  • your right to receive certain benefits such as social security, unemployment compensation, veteran’s benefits, public assistant, and pensions – regardless of the amount.

The amount of the exemptions are doubled when a married couple files together, with the single exception of the homestead exemption. The homestead exemption is $45,000 even if you file as a married couple.

In determining whether property is exempt, you must keep a few things in mind. The value of the property is not the amount you paid for it, but what it is worth now. Especially for furniture and cars, this may be a lot less than what you paid or what it would cost to buy a replacement. You also need to look at your equity in property. This means that you count your exemptions against the full value minus any money that you owe on mortgages and liens. For example, if you own a $100,000 house with a $60,000 mortgage, you count your exemptions against the $40,000 which is your equity if you sell it.

While your exemptions allow you to keep property, even in a Chapter 7 case, your exemptions do not make any difference to the right of a mortgage holder or car loan creditor to take the property to cover the debt if you are behind. In a Chapter 13 case, you can keep all of your property which meets the requirements of the bankruptcy law. In most cases, you will have to pay the mortgages or liens as you would if you didn’t file bankruptcy.

Will I lose my home or car if I file bankruptcy?

In a Chapter 7, if you want to keep your home or car, you must be current on your mortgage and car payments. If your equity in the property is fully exempt, than you may keep your home or car so long as you continue to make the monthly payments required. For example, the exemption for home equity is $45,000. If you own a home worth $150,000 and you owe $110,000, you have $40,000 of equity in your property. In this case, you could file a Chapter 7 and keep your home as long as you are current on your payments and continue to make them on time. In reality, equity is measured after accounting for the cost of sale (e.g., Realtors and fix up costs). So even if you could sell this house for $160,000, the equity will still be exempt ($160,000- about $16,000 in costs of sale = $144,000. After you pay the mortgage off, you would have only $34,000, which is exempt.)

The exemption for equity in an automobile is $3,000. If your car is worth less than that, you are in good shape and can keep it. If your car is worth $15,000 and you owe $14,000, your equity is $1,000 and this is exempt. If your car is leased, you have no equity in it, so you may keep it so long as you
are current on the payments.

If you are not current on your home or car payments, or if you have too much equity, you may still be able to keep your car and home by filing a Chapter 13.

On the other hand, if you wish to surrender your car or home, you may do so without being liable for any more money.

What if I have too much equity in my home?

If the equity in your home exceeds the homestead exemption, you still have options. Please call me to discuss the situation. You may be able to settle the debts you have with your creditors. You can do this by taking a second mortgage or selling your home and using the funds to settle. Also, you are still eligible to file a Chapter 13 and still keep your home.

Can I own anything after bankruptcy?

Yes! Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true. You can keep your exempt property and anything you obtain after the bankruptcy is filed. However, if you receive an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt.

Will Bankruptcy Wipe Out All My Debts?

Yes, with some exceptions. Bankruptcy will not normally wipe out:

  1. money owed for child support or alimony, divorce debts, fines, and some taxes;
  2. debts not listed on your bankruptcy petition;
  3. loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;
  4. debts resulting from “willful and malicious” harm;
  5. student loans owed to a school or government body;
  6. mortgages and other liens such as car loans, unless you surrender the collateral.

Will I Have to Go to Court?

In most bankruptcy cases, you only have to go to a proceeding called the “meeting of creditors” to meet with the bankruptcy trustee and any creditor who chooses to come. This meeting occurs about 4-6 weeks after filing. We will be there with you, we’ll tell you what to bring, what questions you will be asked and how to handle yourself in front of the trustee. Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and your financial situation. Occasionally, if complications arise, or if you choose to dispute a debt, you may have to appear before a judge at a hearing. If you need to go to court, you will receive notice of the court date and time from the court and/or from your attorney.

How Will Bankruptcy Affect My Credit?

The fact that you’ve filed a bankruptcy can appear on your credit record for ten years. However, if you are behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse. But, since bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit.

Can I Get Credit After Filing Bankruptcy?

Yes, although the decision will vary depending on the lender. As a general rule, you may need credit in the future for three things: to purchase a car, a house, and/or to obtain a credit card.

Automobiles: You will be able to purchase any automobile within your price range, from any dealer in town after you receive your final bankruptcy order (the “discharge order”), but you will pay a higher interest rate (typically 19-21%). If you have a cosigner, then the finance company will rely on that
person’s credit and you can get a reasonable rate

Credit Cards: Many people don’t ever want to see a credit card again after filing bankruptcy. And I recommend you live on a cash basis and don’t use credit cards. Use a debit card when you can. However, many others do, because it can be hard to do things, such as make airline or hotel reservations, without one. There are three ways to obtain a credit card or two after filing bankruptcy:

  1. You can “reaffirm” one of the cards that you already own. This means you agree to pay it back despite the fact that you are filing bankruptcy and the credit card company agrees to continue to allow you to charge on the card; or
  2. You can obtain a “secured card.” You will receive several applications for secured cards if you file for bankruptcy. You put, for example, $500 down in a CD at a bank and they give you a credit card with a $500 balance. As you demonstrate an ability to pay on time, they raise the credit
    limit. Within a year or two, it is common that they extend you credit in an amount 3-5 times the value of the CD you put up as collateral.
  3. Also, there are a few companies out there that will give an unsecured credit card to individuals who have recently filed bankruptcy. Ask me about these.

Homes: You can qualify for a home purchase mortgage within two years of filing a bankruptcy, so long as your credit is spotless for the two years following your bankruptcy filing.

What Other Options are Available to Me?

Bankruptcy is never your only option. Other options include consumer credit counseling, and getting a second mortgage on your home to consolidate your payments and debt negotiation and settlement.

Debt Settlement for Colorado Clients

Debt settlement and negotiation (we use the terms “debt settlement” and “debt negotiation ” interchangeably) is the art of reaching an agreement with your creditors where they accept less than the full amount of the debt owed to them, generally 50-65 cents on the dollar, in full satisfaction of the debt. The discount they give you is in exchange for a lump sum of money as opposed to collecting the debt from you over time. You are then released from further obligation on that debt. The primary benefit of debt settlement is that you eliminate debt at a discount without filing bankruptcy. It is an alternative to Chapter 13 (when, for example, you earn too much to file for chapter 7, or you have non-exempt assets that you do not want to liquidate) that is done privately. The timeframe for debt settlement is usually in less than 24 months (compared to a Chapter 13 where you pay out over 3-5 years), so you can begin to rebuild your credit more quickly than in a Chapter 13.

Debt settlement for Colorado residents generally requires that you have a lump sum of money available to settle with. You are an optimal candidate for debt settlement if you have credit card and unsecured debt in excess of $40,000 and you have a lump sum of cash available to pay off creditors for 50-65 cents on the dollar.

There are drawbacks to debt settlement. You do not have the protection of the Court, and there may be tax consequences. If you have a positive net worth, the amount saved will be taxed. Also, the debt settlement industry is unregulated, so anyone can call themselves a “debt negotiator.” Many such companies are outright scams. If they promise too much, beware! Also, if they say they can do it over 3 or more years, it is most likely a scam. However, if it is done by an experienced attorney you have far more protection and the chance of successful settlement is much greater. If you think you are a good candidate for debt settlement, please contact Steve

Consumer Credit Counseling Services (CCCS):

CCCS is an organization originally set up by an association of consumer credit card companies. CCCS lets you make one monthly payment to them and they pay your credit cards directly. The benefits are that the payment you make to them may be less than what you currently owe each month, and in some cases they can reduce interest rates, negotiate extensions forgive late fees. There are, however, two significant disadvantages of CCCS. First, CCCS programs look bad on your credit. Ask any mortgage broker, banker or finance person and they will tell you that CCCS looks just as bad on your credit as a bankruptcy. Second, the monthly payments to them are usually difficult to make. They ask that you list your monthly living expenses and your income – whatever is left over is your payment. They generally do not allow much room for miscellaneous monthly expenses, such as when your car breaks down. Under a program like this, you will be strapped for cash for the next 3-5 years and you will receive virtually no benefit on your credit report.

Second Mortgages:

Second mortgages, if you have a house with some equity, and you still have good enough credit to obtain a loan, can be valuable. They can reduce your monthly payments on debt by consolidating some or all of your debt into one new loan with one payment. The downside to a second mortgage is that you are replacing unsecured debt (i.e. credit cards) with secured debt (the new second mortgage). If you are unable to make the second mortgage payment, you may lose your house in foreclosure, because you will not be able to extinguish this debt in bankruptcy. I have seen some people come to me to consider a bankruptcy, then decide to do a second mortgage instead, only to find that they can’t make the payments and are on the verge of losing their home. When they come back to me for help, there is little I can do. So, it is important to realistically look at your ability to pay a second mortgage. It is not an
option I recommend very often.

Do spouses have to file bankruptcy together?

No, spouses may file jointly or individually.

Can I put my assets in someone else’s name before filing?

No. You will be asked in federal court, under oath, whether about asset transfers prior to filing bankruptcy. If you have transferred assets, and received little or no value for the asset, you could be accused of fraud, or bankruptcy crime. Discuss with your attorney any assets you have that you believe may be non-exempt. You attorney can show you legal ways to protect your assets, so that when you go to Court, all you have to do is tell the truth.

Does a previous bankruptcy prevent me from filing?

You may not be eligible to file a petition if, within the preceding 180 days, you voluntarily dismissed a bankruptcy case or failed to appear in a bankruptcy case. No Chapter 7 discharge will be granted where a previous discharge was granted within the past 6 years.

What effect does bankruptcy have on a co-signer?

A non-filing co-debtor remains liable. However, you may be able to protect the co-debtor by filing a chapter 13.

How is an “authorized user” different from a co-signer?

An authorized user is different from a co-signer, because although this individual is allowed to use the credit card, they are not liable for the repayment. If you do not know whether you are a co-signer or an authorized user, you can verify this by asking to see your signature on a document that shows you accepted liability for payment of the debt. If they do not have your signature, you are not a co-signer. An authorized user is never liable for charges of the primary card-holder, but if they are an adult, they may be liable for the charges they made. If you are an authorized user on your mom’s card, for example, you may want to have your name removed prior to filing bankruptcy, to make sure it does not show up on your mom’s credit.

How are store cards handled in bankruptcy?

Debts from “store cards” (such as Sears, Best Buy, Circuit City, furniture and jewelry stores) are handled differently from a general charge account like a visa or mastercard. When you purchase a TV from Sears, for example, Sears takes a security interest in that TV. This means, that if you file bankruptcy, Sears can ask you to pay today’s fair market value for the TV if you want to keep it. Alternatively, you can surrender the TV to Sears and not owe them any money. Generally, a store creditor will give you time to pay the fair market value of the item purchased, and you can make reasonable monthly payments if you want to keep the goods.

Can I keep my checking account?

Yes

Will anyone come to my house?

Although it is possible, I have never seen this happen in the hundreds of cases I have handled.

Do I have to list all of my debts?

You are required by law to list all debts that you have when you file for bankruptcy. However, you may reaffirm a debt if you wish, and after you have received counsel from your attorney. This means that you agree to pay it back despite the fact that you have filed bankruptcy, and we generally do not recommend it.

What if I own a business?

If you own a business, your bankruptcy will be a little more complicated. In most cases, you can keep your business and the assets if you wish. But each case is unique, and will definitely require legal representation to give you an accurate representation of what you can expect.

Can I discharge taxes in bankruptcy?

Taxes are rarely dischargeable. If the taxes are trust fund taxes, like 941 taxes or sales taxes, they simply are not dischargeable. If the taxes are secured by real estate, they are not dischargeable. For unsecured income taxes, a whole series of events must take place in order for the taxes to be dischargeable. This area of bankruptcy law is complex, and you must meet with a highly qualified bankruptcy attorney to make this determination.

What if I have a personal injury settlement?

Personal injury cases must be disclosed to the Court. In Colorado, proceeds for personal injury are exempt, and cannot be taken by your creditors. However, reimbursement for economic damages (like lost wages) can sometimes be attached by creditors. Make sure you discuss this with your attorney prior to filing.

What should I bring when I meet with you?

When you come in to see us, we ask that you bring the following things: 1) A recent statement from each of your debts (we can order a credit report, but bring in everything you can find) 2) a copy of the last 3 years of tax returns 3) as many of your recent pay stubs as you can find (the Court requires that you provide copies of the last 6 months of pay stubs) and 4) a check, cash or money order in the amount of $50 for the initial consultation.