The word "bankrupt" means being unable to pay your bills as they come due. Today, our economy is based more on consumer debt than at any other time in our country's history. In this age of easy credit and seemingly constant encouragement to buy, consume and charge, it is not surprising that so many people are drowning in debt. This debt is insurmountable for many people and causes stress, family problems and feelings of hopelessness. Many times this debt is caused by the loss of a job or a sudden medical problem, but often it is simply poor planning.

If this is a temporary situation, it may not require legal help. Often alternative solutions such as working out special payment plans with your creditors or contacting a credit counseling agency can avoid the need for bankruptcy. Filing for bankruptcy usually is, and should be, the last resort when no other solution to your financial difficulties exists. Congress recognized that responsible, well-intentioned people could, from time to time, run into serious financial problems. Allowing citizens to recover from an overwhelming burden of debt, to start fresh and to look to the future, creates more productive members of society --- which is good for society as a whole.

For the average consumer, there are two basic types of bankruptcy: The Chapter 7 liquidation (also known as "fresh start" or "straight" bankruptcy) and the Chapter 13 reorganization (also known as "consolidation"). Each individual's situation and preferences determine which is appropriate.

Chapter 7: A filing under Chapter 7 is called a liquidation, which is the most common type of bankruptcy proceeding. Chapter 7 bankruptcy lasts approximately four months from the time it is filed in court until the case is over. Chapter 7 bankruptcy discharges ("cancels"or "wipes out") most debts completely. Some debts, however, cannot be discharged, such as certain taxes, most student loans (except under an undue hardship), child support, maintenance/alimony, court-ordered fines, penalties and restitution, debts incurred through fraudulent conduct, debts incurred by causing intentional injuries, debts incurred from injuries caused by driving while intoxicated and debts that were incurred after the filing of the bankruptcy.

Additionally, secured debts cannot always be discharged. A secured debt is a debt for which some type of property (home, car, furniture, jewelry, etc.) has been pledged to be given to the lender in the event that the loan is in default or is not being paid. This property is called collateral. In a Chapter 7 bankruptcy it is not possible to force the lender to modify a secured debt (it can be done in a Chapter 13 and will be discussed later). In other words, a debtor in Chapter 7 must generally pay the secured lender pursuant to the terms of the original contract or return the collateral.

The main requirement to qualify for Chapter 7 is that the total household income for the debtor(s) cannot exceed the total reasonable and necessary living expenses for that household. If the income exceeds expenses for that household, the debtors do not qualify for a Chapter 7 and must file a Chapter 13 (or Chapter 11) if they want relief from the Bankruptcy Court.

Once a Chapter 7 liquidation is filed, a trustee is appointed who then collects the “non-exempt” property of the debtor, sells it and distributes the proceeds to the creditors. Generally, the Trustee will allow the debtor(s) to pay cash for the non-exempt property that the debtor(s) wants to keep. Each debtor is entitled to certain exemptions (another word for protections of property that can be retained while filing for bankruptcy), which vary from state to state. These exemptions have limits and are determined by the amount of "equity" in specific property. Equity is defined as the value of certain property minus the amount owed on that property (a house valued at $125,000 which has a $100,000 loan on it has $25,000 in equity). The following are some of the exemptions on equity in property that are provided under Colorado law to debtor(s) in Chapter 7 & 13 bankruptcies:

(the amount of the above exemptions are doubled when a married couple files bankruptcy together --- except for the $45,000 real estate exemption)

Once a person is discharged under a Chapter 7, they cannot file another Chapter 7 bankruptcy again for six years (they can, however, file a Chapter 13 within that 6 year period).

Chapter 13: A filing under Chapter 13 reorganization is a repayment plan to creditors under the supervision of the Bankruptcy Court (and more specifically the Chapter 13 Trustee) for debtors with regular income. The debtor must formulate a Plan of repayment, which lasts for three to five years. The debtor submits a portion of his/her future earnings to the Chapter 13 Trustee, who then in turn, distributes these funds to the creditors pursuant to the Plan. The Plan must be entered into in good faith and must be confirmed by the Court.

There are three main reasons or benefits to filing Chapter 13 reorganization. First, the most common reason for filing Chapter 13 is to save a house from an impending foreclosure. Chapter 13 reorganization allows you to repay mortgage arrearages over the duration of the Chapter 13 Plan as long as you pay the future mortgage payments on time. Second, as mentioned above, you can modify the rights of a secured creditor in a Chapter 13 by paying the value of the collateral (other than real estate) plus the interest rate in the original contract with the lender, however this issue is more restricted under the new law. This must be done through the Chapter 13 Plan and is particularly beneficial when you owe substantially more on a secured debt than the value of the collateral that secures that debt (commonly called "upside down"). Debtors with substantial amounts of non-exempt property can repay the value of the non-exempt property through the Chapter 13 Plan over its duration. This amount paid for non-exempt property in a Chapter 13 is somewhat less than must be paid for the same non-exempt property in a Chapter 7, and in a Chapter 7 it must be paid in a much shorter period of time, usually no more than 6 months. And finally, debtors whose entire household income exceeds their total reasonable and necessary living expenses for that household cannot file a Chapter 7. If these debtor(s) want relief from the Bankruptcy Court, they must file a Chapter 13 or Chapter 11 bankruptcy.

After either a Chapter 7 or a Chapter 13 bankruptcy proceeding is filed, creditors, for the most part, may not seek to collect their debts outside of the proceeding. Also, certain transfers of property that were made before the bankruptcy was filed may be reversed, such as repaying a substantial amount to a particular creditor right before filing or repaying all or part of debts to a family member within a year before filing the bankruptcy. Additionally, transfers of property (especially to a family member) within 4 years of filing bankruptcy can be reversed if the debtor did not receive fair value for the property transferred (for example, you cannot sell a $10,000 car to your brother for $1,000 2.5 years before filing the bankruptcy).

To get the best possible care and service on such a delicate matter upon which your future depends, take a second to contact us. We can solve most financial problems, get creditors off your back and put you on the right track to a solid financial future.