Consult Denver Bankruptcy Attorneys Wink & Wink to Determine Your Best Option
Filing for bankruptcy can wipe out your debts, providing some much-needed debt relief.
Of course, it’s not always that easy. It’s not just filling out and turning in some paperwork and then poof, your debts are all gone.
While it’s true that Chapter 7 bankruptcy can wipe out the vast majority of your debts, such as credit card, medical, leases, and personal loans, there are reasons why you might not qualify or it could cost you some of your property.
When considering filing for bankruptcy, it’s crucial you consult with a respected bankruptcy law firm, such as Colorado’s Wink & Wink. A skilled bankruptcy lawyer will review your case and determine the proper course of action.
Types of Bankruptcy
If you’re suffering from crippling debt, bankruptcy may be the right option to get much-needed debt help.
Chapter 7 is the chapter most people think of when they think of bankruptcy. It is over quickly, it discharges many types of debt including credit cards and medical bills, and the majority of people who file Chapter 7 keep everything they own through the process.
However, Chapter 7 bankruptcy may not be your best choice due to income limits and which assets you can keep (more on that in a bit).
If Chapter 7 is not an option for you because of these issues, there is another option, Chapter 13 bankruptcy.
Whereas Chapter 7 bankruptcy can be over quickly, Chapter 13 requires you to enter into a three- to five-year repayment plan. You typically pay only a small fraction of your debt in this payment plan, and the rest of your debt rest is discharged at the end of the payment plan. You still get debt relief, but now you’re asked to pay back something.
Chapter 13 bankruptcy can actually be the better option if you have some non-exempt assets that could be taken from you in Chapter 7 bankruptcy.
Let’s get into more explanation why that is.
Median Income Limits for Chapter 7 Bankruptcy
Every state has set median income limits for your household size. The numbers are updated from time to time, so consult with a bankruptcy attorney, such as Wink & Wink, to get the latest numbers and learn how your income compares.
If you are above the median income limit for Chapter 7 bankruptcy, then you’ll want to consider Chapter 13 bankruptcy instead.
If you are below the median income limit for your state and household size, you technically qualify for Chapter 7 bankruptcy. However, just because you qualify for Chapter 7 bankruptcy in income doesn’t mean it is a good fit. This is because of the asset prong of the equation.
Whenever a person or married couple files for bankruptcy, they must disclose and include in the bankruptcy filing every asset they own. Period. There is no partial bankruptcy. There is no such thing as a bankruptcy where you do not include your car, house, or bank accounts. It is an all-or-nothing process to get out of debt.
But this does not mean that you lose your car, your house, or what is in your bank account when you file for bankruptcy.
Everyone who files bankruptcy gets to claim certain exemptions, or safe zones, for their property. Each state is different, but there are exemptions that allow you to protect your property in every state in the union.
In Colorado, some examples of exempt assets include:
- Your home
- Household goods
- Motor vehicle
- Tools or instruments related to your job or main source of income
- Pensions and benefits related to welfare, unemployment, social security, and other things
- Retirement accounts, such as a 401(k), IRA, etc.
So if you file for bankruptcy, you get to keep all those? Not quite. Certain exemptions have a cap on how much is exempt. A good bankruptcy lawyer will help you keep as much of your assets as possible, but it may not be everything.
A good bankruptcy lawyer will also advise you on non-exempt assets, things the bankruptcy court typically won’t let you keep when you file for bankruptcy.
Examples of non-exempt assets include:
- Additional homes (vacation home, cabin, etc.)
- Excess funds in a bank account above $2,500
- Stocks or bonds (except for what’s in a retirement account)
- Certain valuable items, such as a stamp or coin collection
- Tax refunds
If you have assets that are non-exempt, then even if you qualify for Chapter 7 based on your income, you may lose property if you file a Chapter 7 bankruptcy.
In Colorado, you are allowed to keep a certain amount of equity in your primary residence. If you and your dependents in the home are all under 60 years of age and not disabled, the amount of equity that is safe in bankruptcy is now $250,000 since Colorado passed a sweeping expansion of its exemption laws in 2022 (SB 022-085) including an amendment to Colorado Revised Statute § 38-41-201. Equity is what is left over after a hypothetical sale where all mortgages are paid off.
So, for example, let’s say you have a house that is worth $475,000, and there is $150,000 left in the mortgage (i.e., you still owe $150,000). That means you have $325,000 of equity in the house. That is $75,000 more than the $250,000 you are allowed to keep in bankruptcy.
Therefore, if you were looking to file bankruptcy, but you own a house with $325,000 equity, you have a problem. If you were to file Chapter 7, the bankruptcy trustee – the person assigned to oversee your bankruptcy case and distribute your money to pay off the creditors to whom you owe money – can sell your home out from under you, as long as they pay you the $250,000 exemption amount.
So, if you have non-exempt home equity, like in the example above, you will not want to file Chapter 7 bankruptcy since you will lose your house. This is where you need to look at alternatives, such as filing a Chapter 13 bankruptcy, where you can pay to keep the property and pay for the non-exempt equity in a three- to five-year payment plan.
Another option would be to settle your debt for less than what you owe outside of bankruptcy.
Yet another option is to liquidate the non-exempt property (it isn’t always a house) prior to filing bankruptcy and spend the proceeds in a way that is not going to get you into trouble with the bankruptcy trustee or bankruptcy court. (Here, as in every bankruptcy, legal representation is a MUST.)
Every Bankruptcy Situation Is Different
Bankruptcy is a complicated situation. It is not a one-size-fits-all equation.
For many, an “easy” Chapter 7 bankruptcy is in the cards, but if you have complications on either income or assets, you may still achieve powerful debt relief in bankruptcy or outside of it – it just may not look like the image you have in your mind when you think of bankruptcy.
The best advice is to get good advice. If you are struggling with debt, call an experienced, local bankruptcy attorney who offers free consultations so that you can get educated on the best option for you. Most people qualify for bankruptcy relief – it is just a matter of what type fits your life.