What you need to know about bankruptcy law
Vail, CO, Colorado
The current economic crisis is spawning bankruptcies aplenty. Although largely skirting around Happy Valley, the scourge is touching here more and more as well.
Here are a few things you should know:
Most individual bankruptcies come in one of two flavors: Chapter 7 or Chapter 13, the more common of which is Chapter 7. In a Chapter 7 bankruptcy, a trustee liquidates all nonexempt assets and distributes the proceeds to creditors. The vast majority of Chapter 7 cases are, however, “no-asset” cases, in which the only assets of the debtor are protected by applicable exemptions and which, accordingly, cannot be liquidated by the trustee. As a result, the practical outcome of the bankruptcy is the complete elimination of the debtor’s unsecured, nonpriority debts such as medical bills and credit cards, without any distribution to the creditors.
A Chapter 13 bankruptcy is essentially a reorganization. The debtor proposes a plan whereby some or all of the debts are paid in full or in part over a period of time, which may extend to as much as five years. Under Chapter 13, the debtor may keep certain property that would have been subject to seizure in a complete liquidation under a Chapter 7 case.
When a bankruptcy is filed, an automatic stay is immediately imposed on all property in the bankruptcy estate. What this means is that any and all acts or proceedings against the debtor and his property are placed on hold.
Before a bankruptcy is filed, the debtor ” usually with the assistance of legal counsel ” often maps out the intended bankruptcy. This consists primarily of converting nonexempt assets to exempt assets. While it is not necessarily improper to protect assets prior to filing the bankruptcy, it is improper to defraud creditors or to file bankruptcy in bad faith.
While Colorado has opted out of some federal exemptions and gives the debtor exemptions as defined under state law, some federal exemptions, such as qualified retirement plans, are still available. There is a catch, however. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, in order to avail oneself of a state’s exemptions, the debtor must have lived in that state for a minimum of 730 days immediately preceding the filing. If he has not, then the exemptions of the state in which he resided for the 180 days immediately preceding the 730 day period will apply.
It is important to note that the value of the exemptions are defined under the law as the fair market value at the time of filing the petition.
Some types of debts are not dischargeable in any bankruptcy case. Some may be discharged in a Chapter 13 bankruptcy but not in a Chapter 7 bankruptcy. Some of the most common nondischargeable debts in both are what are known as Section 523 exceptions to discharge. These include most tax liabilities, debts arising from false or fraudulent financial statements, debts incurred for luxury goods acquired within 90 days of filing and child-support and spousal-maintenance obligations.
If an individual’s annual income exceeds the median income for that individual’s household size in Colorado, after certain living expenses are subtracted, he can file a Chapter 13 petition but not a Chapter 7 petition. Before filing bankruptcy, debtors are required to first obtain credit counseling from an approved agency. While a bankruptcy will relieve the debtor of many debts, there are also serious credit-worthiness implications. A debtor is well-advised to seek alternatives to bankruptcy, including negotiations with creditors and consumer credit counseling.
With some exceptions, if a debtor is granted a Chapter 7 bankruptcy, he cannot file another Chapter 7 bankruptcy within eight years. If granted a Chapter 13 bankruptcy, he must wait at least six years before seeking a subsequent Chapter 7 bankruptcy.
Bankruptcy is intended to give a debtor a fresh start, but like anything in law, there are rules and regulations which apply. Debtors would be well-advised to edge into bankruptcy slowly, deliberately and only after obtaining expert advice. There will be less drastic measures available, and planning might go a long way toward preserving assets with which to start anew.
Rohn K. Robbins is an attorney licensed before the bars of Colorado and California who practices in the Vail Valley. He is a member of the Colorado State Bar Association Legal Ethics Committee and is a former adjunct professor of law. He may be heard on Wednesday nights at 7 p.m. on KZYR radio (97.7 FM) as host of “Community Focus.” Robbins may be reached at 970-926-4461 or at his e-mail address: email@example.com.
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