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What is Bankruptcy?

It’s a system of laws set up by Congress to allow people to rid themselves of debt.  For regular folks (called “debtors”), there are two types of bankruptcy—Chapter 7 and Chapter 13.  The easiest way to distinguish between the two chapters …. Chapter 7 requires no payments to a “trustee,” while chapter 13 requires payments, usually for five years.

In our office, we focus on which chapter is best for the client.  And many times, Chapter 13 –although it requires payments—is the best way to go.

Chapter 13 has many advantages over chapter 7.  It allows folks to get current on bank home payments, to repay taxes with no interest.  In cases where collateral is being financed, sometimes allows a debtor to pay the value instead of the debtor, often at a reduced rate of interest.

Most cases filed in Colorado are under Chapter 7.  I think the reason is—many attorneys don’t like filing chapter 13 cases because they are difficult.  It’s almost always a fight with creditors and trustees.  But our office does what is best for the client.  And we have almost a 100 percent confirmation rate in chapter 13.  In other words—we don’t give up.

You may have heard about Chapter 11.  That chapter is mostly used by companies, where it makes sense to keep the business running—not a common occurrence in my opinion.  Most chapter 11s end up being dismissed or going to chapter 7.

Other common questions:

Ten years, but if you are worried about credit, I assure you—after you file, you will get solicitations from all kinds of creditors trying to get your business.

No, you won’t and for a few reasons. Like most states, in Colorado we have “exemptions,” which is a way to of saying “categories of things no one can take.” Examples are $75,000 equity in your home, $30,000 of tools, $3000 of household goods. If there are issues about going over an exemption amount, it’s usually equity in a home. IF there is too much equity, chapter 13 is available to “reconcile” the amount that goes over the limit. Yes—it’s complicated.

Only if you owe the employer month.  Then he will get notice of the filing.  But bankruptcy filing is public record, and it shows up on credit reports.  By the way, employers are prohibited from firing an employee for having filed a bankruptcy.

Almost impossible.  It requires a lawsuit, and the student loan creditors are some of the most rabid in the business.  And lawsuits are expensive.  If you do not have a physical permanent disability, student loans are not going away in bankruptcy.  However, in chapter 13, we can get 5 years of protection from student loan creditors and garnishments.

Yes, but it’s not easy.   There are three big “hurdles” to discharge taxes.  We go over these requirements when we meet and discuss your situation.

If you owe the bank money, then yes.  But our goal is to get rid of debts.  Finding another bank is not very difficult.

Very few creditors purse getting the merchandise back.  When I started practicing in 1982, Sears was very aggressive in getting its stuff back. Nowadays, it’s not common. Probably because it costs so much to “replevin” collateral in the courts.

This is a common reason to file chapter 13.  At the minimum, we can get your current.  At best, we can pay the value instead of what you owe.  That is called a “cram down.”

So, you want to file bankruptcy.  And you have your heart set on Chapter 7, because that is what your uncle told you to do.  And he knows everything about everything.

To file a chapter 7 bankruptcy, you must pass the “Means Test.” It is a test to determine if you make too much money to declare Chapter 7 Bankruptcy.  (Its Congress’ method of pushing people into Chapter 13.  If you don’t like that, blame Congress and the credit card companies that wrote the law.  Don’t blame me, please).

The Means Test works like this:

Means test step 1: Your income is compared to the income for a similarly-sized family in Colorado.  Add up your income for the six months prior to filing the bankruptcy, multiply that by two and that gives you your annual income.  The bankruptcy code calls it “CMI,” which stands for current monthly income.  It’s not current, and it’s not monthly.  Again, this is Congress’s idea.  Don’t blame me.

Anyway, if your income is less than the CMI, then you pass. No Step 2.  You can file Chapter 7.  (If most of your debts are business related, the Mean’s Test does not apply.  Its Congress;’ way of giving you a pat on the back for trying a business—although it failed.  Oh well.)

Means test step 2: If your income is more than the CMI, then you must go to Step 2.

Subtract expenses from your income to see if you have anything left over?  More than about $167 left over per month, you are still on the radar for Chapter 13.  No Chapter 7.  If you file Chapter 7, because you have money left over, the trustee will file something called a “presumption of abuse.”  The trustee will want you out of Chapter 7, or have you convert to Chapter 13—where you should have been all along.

“Hold on a second” you are thinking.  “I have a boatload of expenses.”  Not so fast, my friend.  The Mean’s Test has national and local standards as to how much expenses you are allowed.  The bottom line is–if your CMI is above the average income for the same size household, it’s not easy to qualify for chapter 7 without a presumption of abuse.

“What if I add more people to my household,” you may be thinking?  Do you really want to do that?  The Earth is already over-populated, and while there are many kids trying to get out of their native countries (North Korea comes to mind), its expensive to raise another kid just so you can file Chapter 7.

It gets even more complicated when you have people living in the house who are chipping in part of their paycheck towards household expenses.  The bankruptcy code requires disclosure of those contributions.

Anyway, if you do not qualify for chapter 7, and it looks like chapter 13 is in the cards, it’s not the worst thing that could happen.  There are unique aspects of chapter 13 that have many advantages over chapter 7.  As an example, almost always, I can propose a chapter 13 payment plan that includes paying off and getting rid of all debts, repaying taxes, and paying off a car, for about the same amount that the old car loan was.  Crazy, right?

My partner and I offer free consultation.  Consider calling our office and setting a time to go over your situation.  As you can see, everybody’s circumstances are different.

We look forward to meeting with you.

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