Colorado Bankruptcy: Chapter 13

In general, Chapter 7 bankruptcy is more restrictive than Chapter 13 bankruptcy because you typically have to pass the “means test” to be eligible for Chapter 7 bankruptcy. Even if you are eligible for Chapter 7 bankruptcy, you may still file Chapter 13. However, there are a few restrictions to eligibility for Chapter 13 bankruptcy. First, you must be an individual or filing jointly as two individuals. Legal entities such as corporations and LLCs are not eligible for Chapter 13 bankruptcy. Second, you must earn some regular income, which can include social security or a pension. Third, your total debt when you file bankruptcy cannot exceed $2,750,000. Congress put this increased total debt limit in place temporarily and it is set to expire June 21, 2024. If this increased total debt limit is not extended, the debt limit will revert back to a total debt limit for unsecured debt ($465,275) and secured debt ($1,395,850). These debt limits are adjusted from time to time and are particularly relevant for small business owners who tend to have more debt.

The Wink Law Firm can help you determine if you are eligible for Chapter 13 bankruptcy.

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In Chapter 13 bankruptcy, you will have to make payments to the bankruptcy Trustee for three to five years. The Trustee will distribute your payments pursuant to the terms of your Chapter 13 plan. The amount you must pay into the Chapter 13 plan is based on your income, assets and debts. At a minimum, your Chapter 13 plan must cover certain types of debts including certain taxes and arrears on secured debts and domestic support obligations. Income tax liability for returns that have come due in the past three years must be paid through your Chapter 13 plan, but you likely don’t have to pay liability from returns due more than 3 years ago. If you are personally liable for sales taxes or payroll taxes, these must also be paid through your Chapter 13 plan.

Additionally, if you are behind on secured debt such as a car loan or a mortgage and you wish to keep the collateral (ex., vehicle, home), you must pay the arrears (i.e., the amount you are behind on the loan as of the day you file bankruptcy) on this secured loan through your Chapter 13 plan. If you are curing arrears on a secured loan in your Chapter 13 plan, you must also maintain payments on the secured debt as they come due. These payments can typically be made directly to the creditor and do not have to paid through your Chapter 13 plan.

If you are behind on child support, alimony or maintenance when you file bankruptcy, you will likely have to pay these arrears through your Chapter 13 plan. Additionally, bankruptcy law requires you to maintain all domestic support payments that come due during your bankruptcy. Payments for domestic support obligations that come due after you file bankruptcy will typically be made directly to recipient of the obligation and not be paid through your Chapter 13 plan.

Other debts, including your unsecured debt (ex., credit cards, medical bills, personal loans), do not necessarily get paid in Chapter 13 bankruptcy. However, your assets and income may serve as a basis for you to have to pay some of this debt in Chapter 13 bankruptcy. The law states that your creditors cannot do worse in Chapter 13 bankruptcy than they would if you filed Chapter 7. This means Chapter 13 incorporates the asset analysis of Chapter 7, in which the law specifies certain property that you can keep (“exempt”) in bankruptcy (for more information see What property can I keep in Chapter 7 bankruptcy? under Bankruptcy: Chapter 7). If you have property that is “non-exempt”, you must pay your creditors the value of this property in Chapter 13 bankruptcy.

And you may have to pay even more to your creditors if your income is too high. In particular, if your household income for the six months prior to filing (your Current Monthly Income) is above the median income for your household size in Colorado, the amount you have to pay in Chapter 13 bankruptcy will likely be based on the complex formula of the long-form means test (also used to determine eligibility for Chapter 7 bankruptcy). The formula starts with your average monthly household income and then allows you to take deductions from that income for numerous expenses, including:

1. Living expenses such as food, clothing, utilities, education;
2. Childcare expenses for children under 18;
3. Ongoing medical expenses;
4. Many payroll deductions, such as taxes, health insurance, term life insurance, and retirement contributions;
5. Secured debt payments for your home and vehicle;
6. Other reasonable and necessary expenses for the support of you and your dependents (ex., business expenses); and
7. Those expenses mentioned above that must be paid in Chapter 13 bankruptcy.

Certain expense deductions are based on IRS standards for your household size while others are based on the amount you actually spend. In general, if your income minus these allowed expenses yields a positive number, then you have “disposable income” and you will pay this amount to your unsecured creditors in your chapter 13 bankruptcy plan for 5 years.

Finally, you typically must make regular payments on any debts secured by collateral you intend to keep, such as your mortgage and car loan. While these payments can be made directly to the creditor outside of your Chapter 13 plan, they are typically specified in the plan and required as a condition to getting a bankruptcy discharge at the end of your plan. Alternatively, you can pay a secured debt at relatively low interest through the Chapter 13 plan.

In general, developing the most advantageous Chapter 13 repayment plan for you requires expert legal advice. Chapter 13 bankruptcy is highly complex and adversarial. The Wink Law Firm has the experience, knowledge and skill to help you get the lowest payment possible in a Chapter 13 bankruptcy.

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Bankruptcy law typically requires you to make payments into a Chapter 13 plan for three to five years. If your household income for the six months prior to filing (your Current Monthly Income) is above the median income for your household size in Colorado, then you must be in a five-year Chapter 13 plan unless you are repaying all of your debt in bankruptcy. If your household income for the six months prior to filing is below the median income for your household size in Colorado, then you may choose a plan length between three and five years. Your Chapter 13 plan can only be shorter than three years if you are repaying all of your debt in bankruptcy. And your Chapter 13 plan may never be longer than five years.

The Wink Law Firm can help you determine whether you are eligible for a three-year Chapter 13 plan, or if you must be in Chapter 13 for five years.

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While Chapter 7 is the most used and preferred form of bankruptcy, Chapter 13 bankruptcy can provide many benefits that are not available in Chapter 7.

Chapter 13 bankruptcy can provide the following benefits:

• Lien Strip (Permanently Remove A 2nd Mortgage From Your Real Estate): If the value of your home is worth less than you owe on your first mortgage and you have a second mortgage, home equity line or third mortgage on your home (“junior liens”), those junior liens may be permanently removed in a Chapter 13 bankruptcy. This is a process known as lien stripping, which is accomplished through a separate motion in your Chapter 13 bankruptcy.
• Reduce The Interest Rate On A Secured Debt: In Chapter 13 bankruptcy, you can repay a secured debt through your three to five-year Chapter 13 plan. You have to pay interest on the secured debt at a rate that combines the risk factor with the prime rate (typically prime plus 2%). When interest rates increase, the benefit of paying a secured loan through the Chapter 13 Plan goes down. However, if you have a high interest loan secured by collateral you’d like to keep (ex., vehicle), paying the loan through your Chapter 13 plan can save you money.
• Cram Down (Reducing The Balance On Your Secured Loan): While you can pay off a secured loan through your Chapter 13 plan and possibly reduce the interest on the loan by doing so, you can also reduce the balance to be paid on the secured loan in certain circumstances. In particular, you can reduce the balance owed on a secured loan to the value of the collateral and pay it off with relatively low interest through your Chapter 13 plan. This is known as cramming down the balance of the loan and can only be done if the collateral is worth less than the balance owed on the secured loan. Cram downs can be very useful for loans secured with household goods (ex., Conn’s, Rent-a-Center) because the collateral in these loans is often worth much less than the balance owed. Cram downs can also be very valuable to reduce the balance owed on a car loan. However, there are limitations to cramming down the balance on a car loan. In particular, you can only cram down the balance on a vehicle loan if you’ve had the car for at least 2 ½ years (910 days) before you file bankruptcy unless the loan was not a purchase money loan (ex., you took out a loan against the car after you owned if free and clear) or you acquired the vehicle for business use or for someone else’s use. In such cases, you can cram down the balance owed on the vehicle to what it is worth when you file bankruptcy and pay that balance with interest through your chapter 13 bankruptcy payment plan. You cannot cram down the balance owed on a mortgage.
• Cure Mortgage Arrears/Back Taxes/Child Support: If you are behind on mortgage payments, back taxes or domestic support obligations, you can cure (catch up) these arrears through your three to five-year Chapter 13 plan. This can be particularly valuable for people who are facing foreclosure. When your home is in foreclosure, the mortgage lender typically will not accept partial payments. This puts you in the position of having to make up all missed payments at once in order to stop foreclosure. Chapter 13 can help people facing this impossible situation. It will stop foreclosure, enable you to cure the arrears through your three to five-year Chapter plan, and force the lender start accepting regular payments again. As a condition of this, however, you must make regular payments as they come due on the loan after you file bankruptcy.
• Non-Exempt Assets: Sometimes a person qualifies for a Chapter 7 bankruptcy but has a significant amount of non-exempt assets, such as a house with more than $250,000 worth of equity, that they would not be able to keep in Chapter 7. In these cases, Chapter 13 bankruptcy may be a better option because Trustees in Chapter 13 bankruptcy do not sell property. Rather, you pay to keep your non-exempt assets in Chapter 13 bankruptcy. Spreading the amount to be paid for your non-exempt assets over a three year to five year Chapter 13 plan can make keeping your property affordable.
• Divorce Settlement Obligations: While child support obligations and alimony cannot be wiped out by any bankruptcy, other divorce settlement obligations not related to support, such as property division orders, can be discharged in a Chapter 13 bankruptcy. The distinction between support orders and property settlement is critical in determining whether an obligation from a divorce decree or separation agreement is dischargeable in Chapter 13.

The Wink Law Firm can help you determine whether you should file Chapter 13 bankruptcy to take advantage of these benefits.

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The following debts can be wiped out by a Chapter 13 bankruptcy:

• Credit cards
• Medical bills
• Personal loans
• Obligations from separation agreement and divorce decrees which are not related to domestic support, such as property division orders
• Repossession deficiencies (i.e. the amount you owe on your car after a repossession)
• Auto accident claims against you, except for claims resulting from driving while intoxicated
• Many Judgments, unless for a type of debt which is excluded from discharge (ex., fraud or false pretenses)
• Income tax liability from any return that became due more than 3 years before filing bankruptcy so long as: i) you filed the return more than 2 years before filing bankruptcy; ii) the return was not reassessed within 240 days of filing bankruptcy; and iii) the income tax liability is not the result of you filing a fraudulent return or committing tax evasion
• Business debts
• Leases
• Guaranties, including guaranteed business debt and co-signing for another’s debt
• Negligence claims
• Debts incurred by willful and malicious injury to property (not personal injury)

The Wink Law Firm will help you determine which of your debts are dischargeable in bankruptcy, and whether you have any non-dischargeable debts.

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The following debts cannot be wiped out by Chapter 13 bankruptcy:

• Spousal support or child support obligations
• Student Loans
• Income tax liability from tax evasion, from a return that was not filed more than two years prior to filing bankruptcy, or the result of a fraudulent return
• Tax penalties from any tax years for which a return came due in the past three years
• Liability from other types of taxes, such as sales taxes and payroll taxes (although these types of taxes often will be paid through your Chapter 13 plan)
• Debts incurred by fraud or false pretenses
• Debts incurred by a false statement in writing (such as false credit application)
• Debts incurred by embezzlement or larceny
• Damages from a civil judgment as a result of willful and malicious actions that caused personal injury or death to another individual
• Debts resulting from death or personal injury by debtor operating a motor vehicle while intoxicated
• Criminal fines and restitution

The Wink Law Firm will help you determine which of your debts are dischargeable in bankruptcy, and whether you have any non-dischargeable debts.

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