Discharge of Debt in Each State


A growing number of Coloradans are starting to fret about their financial futures due to the current economic crisis. As a result of the changes to the bankruptcy code brought about by the 2005 legislation, an increasing number of consumers are consulting attorneys to determine whether filing for Chapter 7 or Chapter 13 bankruptcy protection would be beneficial and whether or not they qualify for Chapter 7 debt elimination bankruptcy in their home state. Almost everyone we’ve talked to in Colorado has heard of bankruptcy. Most have a general idea of what it entails and how it works (after all, even young children raised in the United States of America know that bankruptcy is meant to offer a fresh start to debtors who have gotten in over their heads with bills they can’t pay), but few know the finer details.

We can’t pretend that all the information about the possible outcomes and inherent loopholes of bankruptcy can be summarized in an article like this. Still, there is information that every Coloradan debtor should know before taking any further action. From our correspondence, it appears that virtually no Coloradan who is not already employed in the financial services industry has more than a surface understanding of how local statutes will protect their assets in the event of bankruptcy. For instance, borrowers in different parts of the country may have very other options for personal exemptions that they can use instead of the (typically much more stringent) federal exemptions. Before shelling out the ever-increasing fees associated with even consultation with experienced bankruptcy attorney firms, any consumer with a severe interest in bankruptcy should research how bankruptcy (specifically, bankruptcy in Colorado) could help their financial scenario. After all, these attorneys charge by the hour, so there’s no point in asking questions that could be answered for free if the borrowers just showed some initiative.

Again, nearly everyone your authors have talked to in Colorado is aware of the most fundamental facts of bankruptcy protection: consumers with sufficient debt balances (provided they are the right kind of unsecured loans) will be considered for a Chapter 7 debt elimination program (provided they have not earned too much money in the preceding years), which could liquidate their credit card bills and similar burdens under the complete protection of federal and Colorado s bankruptcy laws. The original intent of the bankruptcy process legislation was to provide a fresh start for borrowers who took on more debt than they could handle. To a certain extent, this is still true for debtors who are sufficiently destitute and who have suffered natural calamities necessitating governmental assistance;

however, only a tiny percentage of Coloradans would qualify under the current system. Despite the continued erosion of official safeguards, a growing number of debt relief and debt management firms have emerged to assist people in Colorado and elsewhere in the United States in paying off their higher-interest debt and developing sustainable financial routines. Borrowers in Colorado should prioritize researching all of their options before giving up and filing for bankruptcy, as there are substantial differences between debt consolidation, debt settlement, and Consumer Credit Counseling. Each solution may be different for different types of Colorado families.

Although it is more challenging for Colorado borrowers to file for bankruptcy protection, the right to do so remains under federal law; filing for bankruptcy protects your accounts from debtor harassment and collection efforts. If a debtor in Colorado files for Chapter 7 or Chapter 13 bankruptcy, all communication between that debtor and his or her creditors, including any third-party debt collectors, must immediately cease. Unless the creditors can show that they will incur losses due to depreciation of collateral or some other means of waiting for the trustee chosen by the Colorado courts to render a judgment on the borrower’s eligibility for bankruptcy (which rarely happens), the filer should be granted sudden peace of mind just after declaration. This, of course, does not ensure that the Colorado borrower will be eligible for bankruptcy. It does not prove that the Chapter 7 debt elimination proceedings will be beneficial once all the costs are factored in. No strategy should be entered into blindly or chosen without time for reflection, sufficient research, and self-education that would allow all due deliberation. This holds across the board when it comes to consumer finance. This article’s primary goal is to discuss the various motivations that may lead a Colorado borrower to consider bankruptcy, the bankruptcy process and statutes that borrowers should be familiar with before filing (including Colorado-specific changes and exemptions), and other debt-relief techniques that have gained popularity in recent years.

Each Coloradan should carefully weigh several factors when deciding whether or not bankruptcy is necessary before making a final decision or, again, even spending one dollar on a consultation with a bankruptcy lawyer. Borrowers should seriously consider filing for Chapter 7 or Chapter 13 bankruptcy protection if the interest rates on their loans are so high that they can’t afford to make more than the monthly minimum payments. Borrowers in Colorado whose total unsecured debts have accumulated to the point where they would be nearly impossible to repay shortly may genuinely need to investigate bankruptcy or any other debt solution.

Another warning sign that action is required is receiving frequent threatening phone calls and mail from lenders or collection agents working on their behalf. Remember that under Colorado law, collector harassment must stop when you hire a debt management company or file for bankruptcy. Suppose your mortgage company or car lender has started the process of foreclosure or repossession (or even the much less common but still effective civil court summons for potential forfeiture of property). In that case, you must hire an attorney or debt professional to help you out.

Borrowers in Colorado must sit down with their loved ones and debate the question of whether or not they can reasonably expect to repay their worst bills (debts with high-interest rates or adjustable interest rates bound to escalate, as well as loans that demand balloon payments or risk default) within a reasonable time frame. How have your family’s financial obligations changed over the past 12 months? Have they gotten steadily worse? If you can show that you’ve made progress on paying down your loans, this is a good sign that your efforts to manage your debt on your own may be successful and solve most of your financial issues. If your debts keep piling up, however, you may want to look into bankruptcy or get professional

help in your area of Colorado. Do you foresee a significant rise in your salary shortly? Have you considered the general financial free fall experienced by most of Colorado’s and the United States economies? We strongly advise skepticism and clear-headed perseverance if you hope a stolen inheritance or another windfall will help you pay off your debts. You would not believe the number of Colorado residents we’ve talked to who ignored their mounting debts in the hope of a miracle, only to end up filing for bankruptcy after their credit rating was irreparably damaged (even more so than if they had gone bankrupt in the first place) and family morale was permanently damaged.

When creditors are breathing down your neck, and you can’t even afford to make the minimum payments, it’s easy to see a problem. It’s a short step to insolvency once consumers realize they can’t rely on their incomes to improve their situation, despite their best efforts to rein in spending and stick to a budget. However, it can be surprisingly tricky for consumers uneducated in the complexities of finance to grasp just how potentially dire their debt circumstances may be, especially for those Colorado borrowers who have not yet reached rock bottom and who still think they may be able to climb out of debt burdens on their own. If you’re a Coloradan with unsecured debts of $10,000 or more but are still considering filing for bankruptcy, you should consider a debt solution program instead. Your authors recommend using an online debt calculator to understand better when payments must be completed and how much interest will accrue throughout your debts. Suppose you’re still having trouble doing the math (and credit card companies have little incentive to make this process easier). In that case, you may want to take advantage of the free consultations offered by debt management and debt settlement firms to find out what they recommend.

Again, these debt relief agencies will likely recommend filing for bankruptcy under federal and Colorado law in most cases. Your authors are sympathetic to the allure of Chapter 7 bankruptcies, which, if successful, would allow the liquidation of all applicable revolving debts, including but not limited to credit card accounts. While the possibility of having debts eliminated through the bankruptcy process receives most of the press attention, there are other advantages to filing for bankruptcy. Colorado law states that any wage garnishment or repossession proceedings that have already begun are immediately halted upon filing the initial documents for a Chapter 7 or Chapter 13 bankruptcy declaration. Even assets recently reclaimed by the collection agency will be returned by the lender following a bankruptcy petition (temporarily, depending on the ruling of the Colorado trustee). Like foreclosure

proceedings on homes will be temporarily halted, utilities cut off due to nonpayment will be restored immediately. This time and avenue toward the courts should be worth it for borrowers who believe their mortgage company or other lenders acted in poor faith or had committed outright fraud but could not alert authorities or afford proper lawyers. Colorado’s legal system will be given more time to review borrower claims, acknowledging the difficulty of fighting multinational corporations when your power has been cut off.

However, while Chapter 7 bankruptcy can work wonders for one Colorado shopper, it isn’t the solution for everyone drowning in debt. Acceptance into the program does not guarantee that you will have any obligations reduced or eliminated; for some people and families, this may be the case for most of their debts. Secured debts like home mortgages and car loans will be largely unaffected, though consumers will be asked to reaffirm their obligations with the original lenders if they wish to keep the items to which the debts are attached. Since the legislation was pushed through Congress in the late 1980s prohibiting the discharge of all education loans in Colorado and throughout the country, student loans will be treated as another type of secured debt for these purposes. Family debts such as alimony and child support are not dischargeable, nor are obligations imposed by the government or courts in the United States or the state of Colorado due to criminal behavior (such as fines and taxes). In addition, if the debts were co-signed, the other signatory could be held fully responsible. Given the limited debt liquidation available, even from successful Chapter 7 bankruptcies, one cannot assume the program will best aid each consumer problem.

Even if a debtor in Colorado qualifies for Chapter 7 bankruptcy, that doesn’t mean they’ll be able to get the relief they’re looking for. The court will decide if an unsecured loan discharge is warranted after a Chapter 7 petition is filed for debt liquidation. If the Colorado court trustee determines otherwise, the debtor will be allowed to participate in the Chapter 13 bankruptcy debt adjustment program, which requires a monthly payment to the trustees, which the courts shall then distribute among the assembled lenders in exchange for a temporary stay of

collection that may be a good help for truly needy consumers. Under Chapter 13 protection, the original borrower primarily pays credit card bills. A budget is determined (along with the budgetary guidelines predetermined by the Internal Revenue Service according to their, shall we say, somewhat fantastical expectations about Colorado living expenses) that the household must adhere to for the sixty months of repayment. If the court unfairly reduces your actual payments or your household income drops during repayment, Chapter 13 will not be much more effective than any personal attempt at debt relief. Still, the program’s legal restrictions could prove far more damaging.

Although other types of bankruptcies exist, almost all borrowers must only worry about Chapter 7 or Chapter 13 protections under Colorado law. These different types of bankruptcies cover everything from family farms to actual municipalities. Consumers in Colorado should only knowingly file for Chapter 13 bankruptcy if they have tax obligations they cannot otherwise resolve or if they have secured (mortgage, auto loan, investment) loans that are nearing default but which they believe they can repay given reaffirmed terms. Most Chapter 13 bankruptcies occur because the trustee in Colorado, acting by legislation passed by Congress in 2005, determines that the debtors have excessive income and, therefore, cannot qualify for Chapter 7 protections. Changes to the code now compare each bankruptcy petition’s gross income to the median income in the petitioner’s state. According to the most recent census data, a single borrower in Colorado must make less than $42,000 per year to qualify for a loan. To make ends meet in Colorado with two people, you’ll need an annual income of less than $60,000; with three people, $64,000; with four people, $75,000; and so on. Borrowers who file for bankruptcy without properly comparing their numbers to the median income of Colorado residents could be in for five desperate years. This is because the formal stipulation does not permit the Colorado trustee to look at the filers’ debts but only their incomes.

New regulations enacted in 2005 made enrolling in Chapter 7 bankruptcy protection harder, but that’s not all they did. Many Coloradans we’ve spoken to are under the false impression that bankruptcy protection that would liquidate credit card bills no longer exists, thanks to all the rumors circulating about the recent changes. We have previously discussed how Chapter 7 protection could be a lifesaver for the exemplary filer (assuming they meet the income regulations) but how additional barriers have since been erected. Debtors must now submit voluminous supporting documentation along with their petitions, including receipts for expenses to proof of income for the previous six months or more.

Borrowers will also be required to attend a credit counseling session twice: once before their bankruptcy is even considered and again before it is discharged. Consumers interested in taking a course that the federal government has approved will have to pay for it out of pocket and may have to travel outside of Colorado to do so. The time and money needed to fulfill these new responsibilities can be overwhelming for many debtors, especially the ones who could benefit the most from bankruptcy protection. Honestly, once the costs of the courses are added to the government fees and the truly substantial funds demanded by the attorneys – now more than ever, as the paperwork has grown exponentially more difficult following code alterations – Colorado bankruptcy law experts are required to ensure that borrowers not only find the best representation but also protect themselves from fraud charges resulting from documents mishandled due to laziness or neglect.

Any Colorado borrower contemplating bankruptcy must take into account additional factors. Filers of either form of debt protection can expect to pay interest rates near 20% on auto loans and any other credit accounts they can secure for years, potentially up to a decade after the filing. Worse yet, Chapter 7 bankruptcies guarantee that the courts are now in control of the filer’s possessions, even if the trustee should agree that the case should go forward (assuming the debtor could afford to declare bankruptcy in the first place). The assets of borrowers who were granted entry into what became known as Chapter 7 bankruptcy have always been subject to seizure by the courts and subsequent auction, with the proceeds going to the lenders whose burdens would be eliminated upon default. When determining whether or not a household item constituted an asset, courts previously only considered its resale value; however, borrowers now have to worry about their possessions being valued at their replacement cost, making virtually everything fair game.

Borrowers in Colorado who choose Chapter 7 have a much better situation than their neighbors who do not. In contrast to federal exemptions, Colorado state exemptions allow bankrupt individuals to keep $3,000 in furniture, $20,000 in tools of the trade, and $2,000 in art, music, collectibles, and hobby equipment. The bankruptcy laws in Colorado are highly lenient when compared to federal law. Additionally, under the Colorado homestead exemption, residents who file for bankruptcy are allowed to keep their homes if the equity is less than $60,000, as evidenced by a recent appraisal (which should not be much of a problem given the current real estate market slowdown) and their vehicles if the equity is less than $5,000 as evidenced by blue book pricing (which, for most any car, should not be an issue at all). In addition, all of these Colorado exemptions, other than the homestead, would be doubled for joint filers. No matter how significant the eventual funds are, retirement plans (including Social Security, Iras, and virtually all pensions) and most forms of public assistance, such as unemployment compensation and veterans’ benefits, will not be touched.

Consumers who are still curious about bankruptcy should remember that even though debtors in Colorado are better off than their counterparts throughout the United States, the value of their belongings could quickly increase under the wrong trustee at the wrong time, regardless of the exemptions Colorado grants. Again, some Colorado borrowers may benefit most from filing for Chapter 7 or Chapter 13 bankruptcy, but neither option should be automatically discounted. Given the state of the Colorado real estate market, especially in the metro areas of Denver and Colorado Springs, any borrower who plans to keep their current home should avoid the consolidation of their mortgage debt. Recent years have also questioned the efficacy of consumer credit counseling due to evidence that most such organizations receive as much, if not more, money from the same credit card companies they claim to be fighting. Debt settlement is an industry that repeatedly comes up as a success story when speaking with Coloradan borrowers who have managed to liquidate their accumulated burdens without risking the potential household destruction of bankruptcy protection.

By threatening creditors with Chapter 7 bankruptcy and employing a certified and experienced debt settlement negotiator, these counselors routinely induce representatives of the credit card companies to cut the accounts owed by as much as fifty percent with minimal effects upon the borrowers’ credit ratings. Debt settlement companies will still require you to pay off any outstanding unsecured debt within five years, so don’t expect anything for free. Since these loans have no collateral and are not covered by government guarantees, debt settlement companies can’t do much to help. Nonetheless, your authors would be remiss if we did not urge every potential filer for bankruptcy protection to at least have a chat

with a local debt settlement professional, given the low up-front costs and limited damage to credit reports and F.I.C.O. scores from a successful debt settlement negotiation (and the long list of satisfied Colorado debt settlement clients we have corresponded with over the past year). Even if you can’t find a debt settlement expert in your immediate area of Colorado, dozens of such experts can likely help you out online. There is no reason for Coloradan customers to be warier of websites than they would be of unfamiliar storefronts, given that so much financial analysis is conducted remotely. Even though bankruptcy protection is still probably your best option, there’s no reason to rule out other possibilities while the debt settlement industry thrives in Colorado.

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