Colorado Bankruptcy: Chapter 7

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which created a means test to determine who can take advantage of the protections of Chapter 7 bankruptcy. The basic concept behind the means test is that Chapter 7 relief is only available for people who can’t afford to repay their creditors based on their income.

You will typically qualify for Chapter 7 bankruptcy if your household income for the six months prior to filing (your Current Monthly Income) is less than the median income for a comparably sized household in Colorado. If your income is above that amount, you may still be eligible for Chapter 7 bankruptcy depending on your expenses and disposable income. Bankruptcy law sets out a complex formula using IRS guidelines and your personal financial information to determine your disposable income.

Finally, there is an exception to the means test if the majority of your debt is non-consumer debt (ex., business debt, taxes). If the majority of your debt is non-consumer debt, you may be eligible for Chapter 7 regardless of your income.

The Wink Law Firm can help you to evaluate whether you qualify for Chapter 7 bankruptcy relief and will offer advice and strategies for you if you are “above median”.

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While bankruptcy is federal law, the property that you keep in bankruptcy (exempt property) is typically based on the state law where you live. Many states have their own exemption laws, while some states defer to the federal exemption laws. The exemption laws that apply to your situation will be based on where you live when you file bankruptcy and where you have lived during the two years before you file bankruptcy. If you have lived in the same state for two years or more prior to filing bankruptcy, that state’s laws will determine the property you keep in bankruptcy. If you have lived in multiple states during the past two years, the state you lived previously or the federal laws will determine the property you keep in bankruptcy.

Colorado passed sweeping changes to its exemption laws in 2022 from Senate Bill 022-085, which amended portions of Colorado Revised Statutes §§ 13-54-102, 13-54-102.5, 8-80-103, 38-41-201, 38-41-205 and 38-41-201.7. Coloradans now enjoy some of the most significant property protection in the country, including these current exemption amounts and categories:

• Homestead Exemption: Colorado’s homestead exemption protects a significant portion of your home equity from being used in a bankruptcy settlement. In Colorado, the protection for your home equity depends on how long you have owned the home and whether you or a dependent in the home are over 59 years old or disabled. While Colorado’s homestead exemption is more generous, federal bankruptcy law limits the homestead exemption (as well as any other exemption) to $190,000 of home equity until you have been in the home for more than 1,215 days (approximate 3 years, 4 months). Once you’ve owned the home for longer 1,215 days, Colorado’s homestead exemption kicks in. Colorado’s homestead exemption allows you to protect up to $250,000 of home equity unless you or a dependent in the home are over 59 years old or disabled, in which case you can protect up to $350,000 of home equity.
• Vehicle Exemption: Allows you to protect up to $15,000 of equity in up to two vehicles. This amount increases to $25,000 if you or a dependent family member is at least 60 years old or disabled. If you file joint bankruptcy with your spouse, you each get your own vehicle exemption (ex., can enable you to protect up to $30,000 of jointly owned vehicle equity). The vehicle exemption typically does not apply to ATV’s, boats or recreational vehicles.
• Household Goods Exemption: Allows you to protect up to $6,000 worth of household goods. If you file joint bankruptcy with your spouse, you each get your own household goods exemption (i.e., protect up to $12,000 of jointly owned household goods). When valuing your household goods and other personal property for purposes of bankruptcy, you should use resale value (ex., garage sale or craigslist) and not replacement value.
• Clothing Exemption: Allows you to protect up to $2,000 worth of clothing for yourself and your dependents. If you file joint bankruptcy with your spouse, you each get your own clothing exemption (i.e., protect up to $4,000 of clothing).
• Jewelry Exemption: Allows you to protect up to $2,500 worth of jewelry/watches of yourself and your dependents. If you file joint bankruptcy with your spouse, you each get your own jewelry exemption.
• Bank account balances up to $2,500: Regardless of the source of the funds. If you file joint bankruptcy with your spouse, you each get your own bank account exemption (i.e., $5,000 total in a joint account).
• Firearms, hunting & fishing equipment: Allows you to protect up to $1,000 worth of this equipment for personal safety or hunting. If you file joint bankruptcy with your spouse, you each get your own hunting and personal safety exemption.
• Personal Library and Family Pictures Exemption: Allows you to protect up to $2,000 in personal library and family pictures. If you file joint bankruptcy with your spouse, you each get your own personal library and family pictures exemption.
• Tools of the Trade Exemption: Allows you to protect up to $60,000 in things you need for your job or business (ex., tools, books, furniture, inventory, etc.) if it is your primary source of income. If the tools of the trade are used for a secondary source of income, the amount you can protect is limited to $20,000. If you file joint bankruptcy with your spouse, you each get your own tools of the trade exemption.
• Retirement and Health Savings Account Exemption: Allows you to protect any amount in an IRA, 401(k), pension plan, or health savings account.
• Whole Life Insurance Exemption: Allows you to protect up to $250,000 cash surrender value of a life insurance policy, if only regular premium payments have been made for at least the past four years. If you file joint bankruptcy with your spouse, you each get your own whole life insurance exemption.

The Wink Law Firm will help you determine which set of exemptions apply to your situation. If you have non-exempt property, The Wink Law Firm can provide you with pre-bankruptcy planning in order to maximize the applicable exemptions. There are many ways to protect your assets under the law so that you keep them through bankruptcy.

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The following debts can be wiped out by a Chapter 7 bankruptcy:

• Credit cards
• Medical bills
• Personal loans
• 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
• Most Judgments, unless for a type of debt which is excluded from discharge (ex., fraud or false pretenses)
• Income tax liability from any return that was 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 (including liability from a broken lease)
• Guaranties, including guaranteed business debt and co-signing for another’s debt
• Negligence claims

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 7 bankruptcy:

• Spousal support or child support obligations as well as any other obligation from a divorce decree
• Student Loans
• Income tax liability from tax evasion or from any return that: i) became due less than 3 years before filing bankruptcy, ii) you did not file or filed less than 2 years before filing bankruptcy, iii) was assessed within 240 days of filing bankruptcy, or iv) was fraudulent.
• Liability from other types of taxes, such as sales taxes and payroll taxes
• Fines and penalties owed to a governmental unit
• 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
• Debts incurred from causing willful and malicious injury to someone else
• Debts incurred from causing death or personal injury while 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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A “secured debt” is one that gives a creditor the right to take a specific item of property (collateral) if you don’t pay the debt, such as a home loan or auto loan. In order to keep collateral through Chapter 7 bankruptcy, your equity in the property (i.e., value minus the lien amount) must be exempt. Additionally, you will likely have to continue paying the secured debt because, while your personal liability for the debt will be discharged, the lien on the collateral remains after bankruptcy.

Many people keep their secured assets (ex., car, home) after bankruptcy by simply continuing to pay the secured debt. While many secured creditors are happy with you continuing to pay the debt, some secured creditors may require you to “reaffirm” the debt in bankruptcy as a condition to keeping the collateral. If you “reaffirm” the debt, you agree to waive the discharge as to that specific debt and re-commit your personal liability to it. If you default on a secured debt after reaffirming it in bankruptcy, the creditor can attempt to collect against you personally for the balance owed on the loan (ex, sue you and garnish your wages).

If the property is worth less than the secured debt on it, you may be able to “redeem” the property in Chapter 7 bankruptcy. This means that you agree to pay the creditor the present value of the property in bankruptcy and you then keep the asset free from any further claims. Alternatively, you can “surrender” secured property to the creditor in bankruptcy, which means the creditor takes the property from you and you are free of all responsibility for that debt after your bankruptcy discharge.

The Wink Law Firm will help you determine the best option for your specific secured debt(s) and help you reach any agreements necessary with the creditors.

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