FREQUENTLY ASKED QUESTIONS ABOUT BANKRUPTCY

Whether you are trying to buy a home, finance a car, or trying to get any other type of credit, potential creditors will count the fact that you filed bankruptcy against you. That does not, however, mean they will refuse to lend you money. It does mean that you will likely be charged higher interest rates for at least several years. In practical terms, however, if you’ve come to the point of bankruptcy, your credit is already in shambles. Since you are not allowed to file another Chapter 7 bankruptcy for 8 years, in some cases, it might actually improve your chance of obtaining credit.

A bankruptcy remains a part of your credit report for 10 years.

No. This is relevant prior to filing bankruptcy. When you sign up for a credit card, there is almost always a clause in the contract that gives the bank a lien on money deposited in your savings and checking accounts. If you are behind on your payments, the rent money you’ve been carefully saving might suddenly disappear, taken by the bank to pay your credit card bill. It’s a problem that can be solved by bankruptcy. If the bank has not yet used the clause, filing bankruptcy will prohibit it from doing so.

It is not wise. It is not uncommon for banks to “freeze” accounts upon learning that a customer has declared bankruptcy. Because the bank is not trying to take the money, but only to “preserve” it for the bankruptcy estate, this is not against the law. It can happen even when the amount involved is properly declared and fits into your bankruptcy exemptions. The bank’s action can be reversed by action of the Bankruptcy Trustee, but in the interim, you may have no money to pay for the necessities of life. It is recommended, therefore, that you make sure that all your bank accounts have a zero balance at the time of filing.

No. Such obligations survive bankruptcy. Furthermore, proceedings to enforce such debts are not slowed down or affected by the injunction that goes into effect upon filing.

Your average monthly income over the six months prior to filing is multiplied by 12. You compare the result to Colorado’s yearly median income. If you exceed the median, you must take a “means” test. In May, 2022, the “means” test was taken by everyone whose income was greater than $70,952 for a single person, $92,321 for two people, $100,744 for a family of 3, or $120,898 for a family of 4. Add $9,900 for each additional family member above that. The median income changes based on census data.

High earners must calculate their “disposable income” by subtracting “allowable expenses” as set by the IRS, as well as standardized deductions, from gross current monthly income. If you have sufficient disposable income to fund a repayment plan, you’re not allowed to file Chapter 7. In such cases, your case with either be dismissed or converted into a Chapter 13 repayment plan. That’s why we don’t try to file a Chapter 7 case if you don’t qualify.

As a matter of law, even if your income is below the threshold or you pass the “means test”, the trustee can still, theoretically, contest your right to file Chapter 7. The court can still dismiss or convert your case to Chapter 13 if, for some reason, it is of the opinion that you can afford a repayment plan. There are no absolutes in law practice. But, such things rarely happen in real life. If you are below the income threshold, your case will likely breeze through the system without a hitch.

Occasionally, someone fails the means test but still has the right to file Chapter 7 bankruptcy. If we feel this is possible, we’ll tell you, and it’s your call as to whether to go forward. We are usually willing to give it a shot, so long as we determine that there’s a good possibility you fit into an exception to the general rule. However, such cases are not “simple consumer bankruptcies. They require more time and we charge a higher fee.

Exempt property is the amount of various types of property that you are allowed to keep, regardless of the claims of creditors and the fact that you’ve declared bankruptcy. If you have assets, above and beyond the exemption limits, in a Chapter 7 bankruptcy, that extra stuff will be sold at a quick sale to raise money to pay off your creditors to the extent possible. CHECK OUT THE LIST OF COLORADO EXEMPT PROPERTY. That is why some people choose to file Chapter 13 even if they qualify for Chapter 7.

In some cases, if you are slightly above the exemption amounts, it might be worth offering cash to the trustee. He might be willing to sell you back excess property, above the exemption amounts. That’s because, in order to raise cash for your creditors, from disposing of non-exempt property, the trustee must expend time, trouble and money. If asked, he might be willing to sell some of your non-exempt property back to you at a significant discount. If you have a lot of priority debts, such as taxes, which survive bankruptcy anyway, this may end up as a excellent choice for you. That’s because you’ll eventually have to pay the tax debt anyway, and by law, cash raised by the trustee will be used to pay priority debts first. Thus, at the end of your bankruptcy, a large portion of the money you pay for the non-exempt property will reduce your post-bankruptcy tax obligation. It can also be a viable alternative to filing Chapter 13 repayment plan. There are no guarantees, however, that this will be possible in your case.

Chapter 13 is a payment plan bankruptcy. Filing Chapter 13 usually allows you to keep all or most of your property, subject to paying a sum of money based on your net available income. The full amount you must repay is normally a fraction of your total debt, and the plan can run from 3 to 5 years. Only “priority” debts, like child support and recent back taxes, must be repaid in full. You get to keep property you might have lost in Chapter 7 and, at the end, you receive a bankruptcy discharge relieving you of the obligation to pay the balance.

A minimum, in a Chapter 13, the unsecured creditors must get at least what they would have received if your property were sold in a Chapter 7 liquidation. Chapter 13 cases are more complicated, take more attorney time to complete, and therefore cost more. You’ll also may need make payments over a long period of time. Also, if you get a new job and start making more money, you may be required to increase your payment amount and/or the total amount that you pay back.

Property is valued at “fair market value”. That means at a relatively quick retail sale, but not a “garage sale”. Very few people pay more than pennies on the dollar for used clothing in second hand shops, eBay and the like. Furniture is worth a bit more, but except for rare antiques, its resale value is also usually far below what you paid when it was new, and most likely considerably below what you think it is worth. In listing personal property, don’t to write down every pot, pan and spoon. Instead, list it as “kitchenware”, for example.

Houses and cars are very easy to get accurate values for. You can have a real estate agent give you an estimate, or look up home values on Zillow.com, Realtor.com, Trulia.com etc. You can find the retail value of your car or truck in the NADA, Kelly Blue Book, or Edmund’s Used Car Guides. Keep in mind that home prices have been rising quickly. If you list your house at a value lower than it is worth, the trustee may think otherwise, and sell it, if the equity exceeds the bankruptcy exemption for real estate.

If you have less than $250,000 worth of equity (resale value minus mortgages) or $350,000 if you, your spouse or your dependent is disabled or 60+ years old, you can keep the house. That’s because those are the homestead exemptions in Colorado. You do have to keep the mortgage payments current. If there is equity above the level of your exemption, however, the trustee will sell the house, give you $250,000 or $350,000 and use the rest of the money to pay down your debt. If your equity is higher than the exemptions allow, and you want to keep the house, you must file a Chapter 13 repayment plan.

Also, if you file a Chapter 13 repayment plan, there is sometimes a chance to get the second (and higher) lien(s) voided, or partially voided. You must prove that the total debt is more than the equity. This is not possible to do in a Chapter 7 case, where payments on all mortgages, regardless of priority, must be kept current. Avoiding liens, however, is not easy. A formal “motion to void liens” needs to be filed, costing additional legal fees. You must also have an official appraisal done, by a licensed appraiser. Even that is not a guarantee of success. The second lien holder can submit a competing appraisal to defend its lien.

Some liens can also be voided in Chapter 7 liquidations. For example, liens that you did not consent to, which reduce the value of your property exemption. If a creditor has obtained judgment on a debt and filed a collection lien against your home, the lien can be voided, IF AND ONLY IF it prevents you from obtaining the full equity interest you are allowed to keep under exemption law. This does not happen automatically. You will need an official appraisal of the value of the property as well as information from the bank showing how much is still owed on the mortgage. Your lawyer must then file a “motion to avoid lien” in court. This will normally cost you additional attorney’s fees, well beyond the typical flat fee listed as the “price” of Chapter 7 bankruptcy. Lien avoidance motions are not a part of a “simple” bankruptcy. The process can end with a very valuable result, but it requires a substantial amount of additional time to be spent on your case.

All personal property kept in your house is your property and must be listed on your bankruptcy schedules, even if you think it “belongs” to your minor child. However, if the child works and earns money, and can prove he purchased something with his own earnings (using receipts) that particular property belongs to him. If property is officially titled in the child’s name, like a bank account under the “Uniform Gifts to Minor’s Act” (which by law cannot be revoked) or, theoretically, a 17 year old’s personal car, that property also does not need to be listed. That doesn’t mean you are allowed to deliberately transfer money or property into your child’s name in contemplation of bankruptcy. Such transfers are deemed fraudulent, are subject to seizure, and can even have criminal implications.

Yes. You must take a credit counseling course within 180 days prior to filing for bankruptcy. Your certificate of completion must be filed with the initial Petition. After you file, you must take yet another course, known as a “budget counseling” or “debtor education course”. Your certificate of completion for the second course must be also be filed with the court. If it isn’t filed, you won’t get your discharge of debt and your case will eventually be dismissed. The only excuse for non-participation in the debtor education program is you are in the military on active duty, incapacitated, or have a disability that prevents you from participation. Click here for a course provider who charges only $12 each.

Generally speaking, people who file bankruptcy are suffering through a barrage of credit collection agency telephone calls and other harassment. Sometimes, it feels like they don’t care whether or not they collect the debt anymore. Many people say the collectors seem like they simply enjoy engaging in harassment. The Automatic Stay is an injunction that puts a stop to that. It goes into effect upon the filing of your Petition in Bankruptcy and prohibits creditors from taking any further actions, including even the filing of lawsuits, in furtherance of their attempt to collect debts.

A bankruptcy trustee is an independent contractor, usually a lawyer, appointed by a government agency known as the “U.S. Trustee’s Office”. Such a person is appointed in every bankruptcy case. His job is to examine your papers, investigate anything suspicious, and determine if you have any property that can be collected for sale. If he finds anything, the proceeds are mostly paid to your creditors, with a small percentage paid to the trustee in exchange for his efforts. In most cases, however, where the debtor only has exempt property, there’s nothing for him to do, but conduct an interview. This interview is called the “Section 341 Meeting”, and it is usually the only proceeding you need to attend. Prior to the Covid-19 pandemic, such meetings were always held in a conference room at the courthouse or some other government building. Since 2020. however, the meetings have been conducted virtually, using Zoom video or a simple telephone conference call. The US Trustee’s Office has announced that it intends to make this change to Zoom permanent, even after the pandemic. At the meeting, it is likely that the Trustee will ask you a few simple questions. He might, for example, ask you how got into your debt predicament and how you arrived at particular valuations for the assets you are declaring exempt from the claims of creditors. Most 341 hearings are quick, simple matters that consume no more than about 10 minutes each.

No. If you transfer money or sell property in the 90 days preceding your bankruptcy, and the value of the money or property is over $600 in aggregate, it it is presumed to be a “fraudulent transfer.” That said, a debtor does have the right to sell assets if the money is needed to pay for essential items, like food, clothing, and shelter. Advance payment of regular monthly bills, however, is NOT allowed. If you sell property and expect to claim that you did it out of necessity, you must keep all the receipts and be able to prove it.

No. You must not throw out, give away, sell, or otherwise compromise any property that has any significant value, without the express consent of the bankruptcy trustee. Even if all your property is declared “exempt”, you still must not sell it. You are required to hold onto all of it. That’s because, during the time your case is pending, the trustee is the temporary “legal” owner even though you will keep physical possession. You must wait until after your case is over before you do anything. That includes exempt property. In contrast, if you acquire property with money you’ve earned AFTER the date of filing, you can do whatever you want with that, except for insurance settlements, marital settlements, or inheritances that you become entitled to receive within 180 days after your filing date. Such property, if acquired within 180 days after you file, is also the legal property of the bankruptcy trustee.

Mortgages and car loans, where a house or car can be taken from you if you don’t pay, are known as “secured loans”. If you are behind on your payments, the lender can ask the court to grant relief from the automatic stay so that it can foreclose or repossess the property. Absent filing bankruptcy, in Colorado, if the amount you owe is greater than the amount the creditor sells the property for at auction, you are stuck with paying the balance. After you’ve filed bankruptcy, however, while the creditor can still foreclose or repossess, you won’t owe anything after you return the property.

a) Surrender the Collateral – If you give the car or house back to the bank you will owe nothing after that because the bankruptcy filing wipes out the underlying debt, giving you a fresh start.

b) Redeem – If you owe considerably more than the personal property, such as a car, is worth, you can pay the creditor a lump sum equal to the market value of the property. If you and the creditor disagree on the value, you a “valuation hearing” must take place, where the judge will decide what it is worth. Business property cannot be redeemed. The extra hearing requires payment of additional attorney’s fees. Unfortunately, most people don’t have the cash to do this.

c) Retain and Pay – This involves simply keeping the property by insuring that your payments are current. Most creditors, but not all, will accept this. However, some creditors claim that the filing of bankruptcy, itself, is a “breach” of contract. A minority, like Ford Motor Company Credit, will repossess as a matter of policy, even at a financial loss. Others will demand a reaffirmation agreement, and even go so far as to threaten to repossess. But, in practice, even though they warn and threaten, most won’t do anything, so long as you make your payments on time. That’s because, even though you probably think creditors want to repossess cars, they actually don’t. Every time a repossession occurs, it costs money to hire a tow truck, commissions or salaries on the sale, and the creditor gets the deeply depreciated value, as opposed to getting back the full amount of the loan. There is some risk in playing a game of “chicken” with the car loan creditor, but you can usually (but not always) keep the payments current and keep your car.

d) Reaffirm – A reaffirmation agreement is a renewed promise to pay. If you sign onto one, you will be legally allowed to keep the property as the agreement binds both you and the creditor. However, you will be putting yourself back into the same position you were in before filing bankruptcy. If your payments ever become untimely, the creditor can repossess and then hit you with a deficiency judgment for the difference between the “song” for which the car is sold, and the remaining amount of the loan. For example, if you have a car that is worth $10,000 at resale, and you owe $22,000, reaffirmation will result in you paying that $12,000 (plus all the interest that accrues over the term of the loan) to keep a $10,000 car. In addition, if you get behind on the payments, at a time the car is worth $5,000, and the loan balance is, maybe, $18,000, the creditor will get a judgment against you for $13,000, plus its attorney’s fees and costs. Then, it will garnish your wages or take your other property to collect.

e) Surrender the Collateral – The best alternative is often to simply give the car or other collateral to the lender and have done with it. You can usually go out and buy a cheaper used vehicle with lower payments. While you think about what to do, investigate the possibility. Look for another, preferably used car, and even though you’ll pay a high interest rate, buying it may be a better decision than trying to keep the one you have now.

No. Congress decided to treat personal property and real estate differently. No one can force you to sign a reaffirmation agreement simply to be sure you can keep your home. All you have to do is “retain”, that is, you must stay current on the payments. That prevents any risk of foreclosure. In contrast, if you sign a reaffirmation agreement, if you are unable to pay in the future, as with a car, you’ll be stuck with a deficiency judgment for the difference between the auction price and the amount you owe on the house. We strongly discourage any client from ever signing reaffirmation agreements on houses, especially if they are current on the payments. Only if the lender offers a significantly lower interest rate, a significantly lower monthly payment, or some other huge accommodation, should you ever sign a reaffirmation agreement on a house.

No. If you have not paid your rent, you will be evicted. A bankruptcy filing can, in some cases, can slow down the eviction process, but only in special cases and to a limited extent. For example, if your landlord hasn’t gotten a judgment yet, and the eviction is based solely on failure to pay rent, he must first file a “Petition for Relief from the Automatic Stay”. It may take a week or two before the bankruptcy court grants the motion. If the landlord already has a judgment by the time you file bankruptcy, the automatic stay doesn’t apply. He can kick you out at his leisure. Also, if the eviction is based on the claim that you are endangering the property or using illegal drugs, it doesn’t matter whether he has a judgment yet. He can file for eviction without filing a motion in the bankruptcy court.

Generally speaking, the answer is “no”, subject to limited exceptions. For example, if you receive (or have a right to receive) an inheritance, insurance or lottery proceeds, or proceeds from a divorce settlement, within 180 days after filing bankruptcy, you must report it to the trustee, as these things may be property of your bankruptcy estate. If you don’t, your discharge can be revoked.

Yes. You can start to rebuild your credit rating right away, a little at a time. Interestingly, filing bankruptcy can occasionally increases the chance that a lender will let you borrow money. That’s because, post-bankruptcy, you are free of other debts and whatever money you have will be available for repayment of the new debts, and you are not allowed to refile another Chapter 7 case for 8 years. However, in all likelihood, you will have to pay higher interest rates for many years than you would if you had not filed bankruptcy. The best thing to do, however, is to follow Benjamin Franklin’s famous advice and “Neither borrower nor lender be.” Pay cash in-person and use a debit card for buying online. That way, you won’t wind up in a debt trap again.

You should list the name and address of every person/company you owe money to. That includes credit card companies, mortgage companies, banks and your Aunt Tilly. The proper address to use is the billing address that is on your bill. If you want to repay Aunt Tilly while not paying others, you are free to do so, as long as the money you use to do it comes from earnings AFTER filing bankruptcy. Money and property obtained prior to filing, unless covered by an exemption, belongs the bankruptcy estate and it is administered by the Trustee. You have no right to use any of it to make a preferential payment to one creditor as opposed to another.

No! Absolutely not. When you sign a bankruptcy petition, you are swearing under penalty of perjury, that everything that has been said, there, reflects the truth, the whole truth and nothing but the truth. It is one thing to make a minor clerical error. Intentional falsification, however, is perjury. If necessary. If it is determined that you intentionally lied, you could not only lose the right to a bankruptcy discharge but, in rare cases, you could be fined up to $250,000 and/or be sentenced to spend up to 20 years in jail! So, please disclose everything and tell the truth.