What kind of bankruptcy should I file?

Chapter 7      A chapter 7 case, referred to as a "liquidation" or "straight" bankruptcy, is the most common consumer bankruptcy proceeding. In a chapter 7, the debtor seeks a "fresh start" by discharging the obligation to pay unsecured debts. A security interest in collateral (e.g., a car or home) is not affected by the discharge. In exchange for this discharge, the debtor loses non-exempt assets. The Trustee collects all of the non-exempt assets a debtor owns as of the date of filing, sells those non-exempt assets, and then pays the proceeds to creditors in accordance with a priority schedule. Most of the time, however, there is no money for the trustee to distribute. Typically, most cases are "no asset" cases, i.e., one in which the trustee determines that no property exists in the estate that could be sold to generate funds for the unsecured creditors, or the value is too minimal to liquidate. Even if there are non-exempt assets for the trustee to collect, the debtor is given the opportunity to keep the assets by making payment of the non-exempt amount to the trustee over several months. Rarely do debtors lose items they want to keep.

Chapter 13      In a chapter 13 or "debt adjustment" plan, an individual with income is permitted to pay creditors from future earnings all or a portion of the creditors' claims over a 3 to 5 year period through a repayment plan. The payments are paid monthly to a trustee, who disburses the funds to creditors. The debtor's budget is reviewed to ensure that debtor's income is sufficient to pay necessary living expenses and the plan payment. The debtor's plan must provide for the full payment of all priority claims, including taxes and unassigned claims for alimony, maintenance, or child support. If you are behind in payments on your home or auto loan, you can pay the arrearages through the plan. The debtor may propose to pay other secured creditors through the plan, either the present loan balance or the replacement value of the collateral. The Code does not require the debtor to repay 100 percent of the unsecured claims, but the debtor must propose payment to unsecured creditors of at least what they would have received in a chapter 7 case. A chapter 13 case allows the debtor to keep non-exempt assets while paying for their value through monthly plan payments.

      A chapter 13 debtor receives a discharge that is broader than the chapter 7 discharge because it may include debts that are non-dischargeable in a chapter 7 case (e.g., debts incurred by fraud or breach of fiduciary duty). But like chapter 7, alimony and child support obligations are non-dischargeable in chapter 13, as well as debts on which the final payment is due after the end of the plan, student loans, drunk driving damages, and criminal restitution.

      A chapter 13 plan usually targets specific financial issues, such as foreclosures, repossessions, taxes, non-exempt assets, and past due alimony or child support. In addition, a small business may continue to operate while a chapter 13 plan is pending. Furthermore, the automatic stay in a chapter 13 case applies to co-debtors on consumer loans if the entire debt is being paid in full through the chapter 13 plan.

Chapter 11      A chapter 11 case is often referred to as a "business reorganization," but individuals who do not qualify for chapter 13 may file under chapter 11. Although it contemplates the continuation of an ongoing business entity, a debtor may liquidate the assets instead of reorganizing. The primary goal is for the debtor to have a plan of reorganization confirmed by the Court. The plan is a statement of how the business affairs and finances of the debtor can be reorganized to make the business profitable. A unique feature of a chapter 11 case is the power given to the debtor to stay in possession of the assets and to manage the business affairs. The "debtor in possession" acts as a trustee in the case and has many of the same powers.

Will filing bankruptcy stop foreclosures, repossessions, wage garnishments, lawsuits and other debt collection activities?

      The filing of a bankruptcy petition operates to immediately stay or halt any action to collect debts or property, with some exceptions, such as actions to establish or modify orders for alimony, maintenance, or support; to prosecute criminal actions; to perfect purchase money security interests; to evict tenants when lease has expired; and to collect from guarantors or co-signers.

Will I lose my property?

      Filing bankruptcy requires debtors to disclose all assets; however, certain property is protected. These property protections are known as exemptions. The law specifies allowable exemptions, but each state has its own set of exemptions. When properly claimed, the debtor removes exempt property from the bankruptcy estate and keeps it. Therefore, creditors may not levy upon the exempt asset, nor can the trustee sell the exempt asset without compensating the debtor for the exempt portion. If you wish to keep an asset that secures a debt (e.g., a house or car), then you must keep current on your payments and keep the property insured.

      In Colorado, every homestead occupied as a home by the owner or his family is exempt up to $45,000 in actual cash value in excess of any liens or encumbrances on the property at the time of filing. The homestead may consist of a house and lot (or lots), or a farm of any acreage. In addition, each individual debtor is allowed to exempt wearing apparel up to $1,500, jewelry up to $1,000, household goods up to $3,000, books and family pictures up to $1,500, and one or more motor vehicles up to $3,000, or up to $6,000 for an elderly or disabled person. Pension and retirement funds are also exempt, as well as some other assets. In determining the amount of property claimed exempt, the primary consideration is the value in the property, i.e., only the value exceeding the amount of any liens on the property is counted. Thus, most debtors are allowed to keep all of their property.

Will I have to appear in Court?

      The debtor must appear at a § 341 Meeting of Creditors and submit to examination under oath by the trustee and by any creditors appearing at the meeting. Most creditors, however, do not show up at the meeting to ask questions. In a chapter 7 case, the trustee holds the meeting of creditors approximately 30 days after filing. At such meeting, the trustee must orally examine the debtor to ensure that the debtor is aware of the consequences of seeking a discharge. The debtor must be made aware of the effect of bankruptcy on credit history; the ability to file under a different chapter; the effect of receiving a discharge; and the effect of reaffirming a debt.

How long does bankruptcy take?

      After the § 341 Meeting, creditors have 60 days in which to object to the discharge of the debtor. Once this period expires, the court will issue a Discharge of Debtor order, usually within 3 weeks. The case will then be closed. In a chapter 13 case, the duration of a chapter 13 plan must be a minimum of 36 months, and, with the court's approval, may be extended to a maximum of 60 months.

Will all of my debts be discharged?

      A discharge does not relieve a debtor of certain types of obligations. The debts that are excluded from discharge are fully secured debts, unless the collateral (car, house) is surrendered, and those in which there are co-obligors or guarantors. If you wish to keep collateral that secures a debt, then you must keep current on your payments and keep the property insured. Debts that are excepted from discharge include: some taxes; debts incurred by fraud; unlisted debts; debts for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny; debts to a spouse, former spouse, or child for alimony, maintenance, or support in connection with a separation agreement, or divorce decree; debts for willful or malicious injury; debts for fines, penalties, or forfeitures owed to a governmental unit; student loans; damages for death or personal injury caused by the debtor's operation of a vehicle while legally intoxicated; and some debts for homeowner association fees or assessments. In a chapter 13 case, some of these debts may be discharged.

What are the effects of filing bankruptcy?

      The filing of a bankruptcy can be reported on your credit report for up to 10 years. The law does not prohibit denial of new credit or further extensions of credit to debtor. The law prohibits government agencies and employers from discriminating against a debtor solely because debtor filed bankruptcy and/or did not pay a discharged debt. Accordingly, an employer cannot fire a debtor because of filing bankruptcy, nor can a state agency refuse to renew, suspend, revoke, or deny a license because the debtor did not pay a discharged debt.

What happens in a divorce?

      The cloud of bankruptcy often hovers over the breakdown of a marriage. If a couple has been having difficulty making ends meet during the marriage, a divorce places a greater strain on their finances. One or both parties may then file bankruptcy, either before, during, or after the dissolution of marriage. Careful coordination between the bankruptcy and divorce lawyer is important.

Disclaimer: The information provided on this website is not intended to be legal advice, but merely to convey general information related to bankruptcy law. No attorney-client relationship is created by publication. Laws may vary for each state. For legal advice on specific matters, you should consult with an attorney.

Modified:  05/31/03