WHAT IS CHAPTER 7 BANKRUPTCY?
Consumers and small business owners in Colorado can choose from several “chapters” of bankruptcy, including Chapter 7, Chapter 11, Chapter 12 and Chapter 13. Chapter 7 bankruptcy is the most popular chapter – by far. In order to file Chapter 7 bankruptcy in Colorado, you must fully disclose all of your property, debts and financial activities during the past few years. Approximately three months after filing Chapter 7 bankruptcy, you will receive a “discharge” (or cancellation) of most types of debts and emerge from bankruptcy will all or most of the property you owned beforehand.
Chapter 7 bankruptcy is usually a three-month process that requires the filing of your “petition,” which is a long legal document that your lawyer typically fills out. You will also be required to attend a hearing with the bankruptcy trustee, who has been appointed to handle your case for the court.
Last year, nearly 27,000 Chapter 7 bankruptcies were filed in Colorado. Here’s an overview of the Chapter 7 bankruptcy process:
PRE-FILING CREDIT COUNSELING REQUIREMENT
Before you can file your petition, you must have completed a two-hour credit counseling session from a nonprofit agency, which typically costs between $30-$50, depending on your income. For a list of approved agencies in Colorado, click here. After you complete your counseling session, the agency will provide you with a certificate of completion that must be filed with your petition. Although there are a few exceptions to this general rule, most Coloradans filing for bankruptcy must obtain their certificate before officially filing Chapter 7 bankruptcy. Counseling is available online, by telephone, and even through the mail. For more information on selecting a credit counseling agency, read this post.
THE AUTOMATIC STAY
After you’ve received your credit counseling certificate, the next step is to obtain your bankruptcy filing number. This can be done by either filing a “skeleton” emergency petition, or by filing all of the required paperwork at the same time. Either way, the court issues your filing number, you have a powerful shield – called the “automatic stay” – to protect yourself against any efforts by your creditors to collect their debts. Any proceedings against you to garnish your wages, repossess your car, or foreclose on your home will also cease.
It’s important to realize that there are a few exceptions to the automatic stay. Actions to collect debts you owe for child support, spousal maintenance (i.e., alimony), most student loans, and certain actions by the IRS will be unaffected by the shield created by the automatic stay. Still, as a general rule, filing for bankruptcy will give you almost total relief from your creditors while your Chapter 7 bankruptcy case is processed by the bankruptcy court in Colorado.
CREDITOR ACTION TO LIFT THE AUTOMATIC STAY
In some situations, your creditors may file a motion with the bankruptcy court to “lift,” or remove, the automatic stay. For example, if the automatic stay prevented a foreclosure action, the mortgage owner can request permission from the judge to proceed with the sale. Other common reasons lenders give for lifting the stay are car repossessions and evictions of month-to-month tenants.
YOUR CHAPTER 7 BANKRUPTCY PAPERWORK
Unless you plan to file an emergency bankruptcy petition, you’ll need to file the following with the court:
- Your petition;
- A mailing list of your creditors;
- A form showing your complete Social Security Number or Individual Taxpayer Identification Number;
- Your credit counseling certificate;
- A description of all your property, including where it is located and its approximate value;
- Detailed information about all of your debts and creditors;
- A description of certain economic and financial transactions that occurred within the previous several years, such as property you sold or gave away within the previous two years;
- A description of how you plan to handle certain debts like car loans and other loans that are secured by your property as collateral;
- Your monthly income and expenses;
- A statement of whether you want to keep any leases and contracts you have in effect or cancel them; and
- A summary of your assets and liabilities.
In addition, you’ll need to file a form along with your pay stubs, showing your average monthly gross income for the six months prior to the month in which you plan to file.
THE 341 CREDITORS’ MEETING
Roughly 30 days after you file Chapter 7 bankruptcy in Colorado, you will be required to attend a hearing known either as the “creditors meeting” or the “341 hearing.” Depending on where you live in Colorado, your hearing may not be at the US Bankruptcy Court in Denver. Typically, in Denver, the 341 Meeting is held at the U.S. Customs House at the corner of 19th St. and Stout St. However, if you don’t live in the Denver area, your hearing may be held in another city like Fort Collins, Greeley, Loveland, Colorado Springs, Grand Junction, or Pueblo.
At the 341 Creditors Meeting, a bankruptcy trustee, who has been appointed to handle your case by the court, conducts the hearing. Another U.S. government official, known as the U.S. Trustee, may also attend your meeting and may ask you questions to determine your eligibility for Chapter 7 bankruptcy because of things like your income level.
The main purpose of the 341 Hearing is to have your affirm under oath that your petition and paperwork is complete, accurate and honest to the best of your ability. In Colorado, the bankruptcy trustee may also choose to ask you about the property you listed in your paperwork to make sure you listed a proper value or whether you have equity that could be used to make a lump sum payment to your other creditors. The bankruptcy trustee may also ask you about any:
- Anticipated tax refunds;
- Recent large payments you made to creditors or relatives;
- Methods you used to estimate the value of your property;
- Whether you should be required to file bankruptcy under Chapter 13 instead of Chapter 7;
- Your failure to file any of the required documents, which is common;
- Any inconsistencies in the information you provided that might indicate you are being dishonest; and
- (If you didn’t hire a lawyer), how you got the information necessary to make certain decisions about your case, such as which property is exempt.
If you’ve done a good job on your paperwork and clearly qualify for Chapter 7 bankruptcy in Colorado, your “moment of truth” will probably be brief. Creditors and banks rarely show up to 341 Creditors Meetings, and the Chapter 7 bankruptcy trustee is typically the only person asking questions. The trustee may simply ask whether all the information in your paperwork is correct and end the 341 Hearing if you say, “Yes.”
WHAT DEBTS ARE DISCHARGED IN CHAPTER 7 BANKRUPTCY?
After you file Chapter 7 bankruptcy in Colorado, almost all of your debts will be “discharged,” or cancelled. This includes most credit cards, medical bills and most court judgments and loans. Most Coloradans are able to discharge all of their debts in their Chapter 7 bankruptcy case.
But it’s important to realize that some types of debts will not be discharged in bankruptcy. The most common of these are:
- Debts taken to pay non-dischargeable taxes;
- Court-imposed fines and restitution;
- Back child support and spousal maintenance (i.e., alimony);
- Debts owed to an ex-spouse as a result of a divorce or separation;
- Loans owed to a retirement plan such as a 401(k) (because you are the creditor as well as the debtor so, in this situation, bankruptcy will not discharge the debt);
- Student loans unless you can show that repaying the loans would be an “undue hardship,” which is very hard to do;
- Federal and state taxes that were first due less than three years before your bankruptcy filing date; and
- Debts for personal injuries or death resulting from drunk or drugged driving.
Some other types of debts may survive your bankruptcy, but only if the creditor seeks and obtains an order form the bankruptcy court excluding the debt from your Chapter 7 bankruptcy case. Such debts include those obtained through fraud and recent credit card charges for “luxury items.”
CHAPTER 7 BANKRUPTCY FEES AND COSTS IN COLORADO
The U.S. Bankruptcy Court for the District of Colorado charges $299 to file your Chapter 7 bankruptcy petition. If you can’t afford the fee, you may be eligible for a fee waiver or payment plan. To obtain a fee waiver, you must file an Application for Waiver (or payment in installments) when you file your bankruptcy paperwork. The court’s clerk will set a hearing date for you to appear before the judge to determine whether you qualify for the waiver. The form, rules, and eligibility requirements for getting a fee waiver are available on the U.S. Courts website, which you can visit by clicking here.
ISSUES FOR THE JUDGE
Chapter 7 bankruptcy is designed to run smoothly, and very few Chapter 7 petitions require a decision by an actual judge in Colorado. Instead, the bankruptcy trustee runs the show. However, you and your attorney (if you have one) will have to appear before a judge if any of the following situations occur:
- Your income appears to make you ineligible for Chapter 7 bankruptcy, and you want to argue that an exception should be made in your case;
- A creditor contests your right to file Chapter 7 bankruptcy or discharge a particular debt;
- You want the judge to rule that you are entitled to discharge a particular type-of debt, such as taxes or student loans;
- You want to eliminate a lien on your property that will survive Chapter 7 bankruptcy if the judge doesn’t remove it; or
- You are handling your own case, are making payments on a car or other personal property, and want to keep the property and continue the contract after bankruptcy. (This is often called “reaffirming” the contract.)
CLOSING YOUR CASE
In Colorado, your Chapter 7 bankruptcy case ends with a discharge of all the debts you are entitled to discharge. When a debt is discharged, the creditor is forever barred from trying to collect it from you or reporting it to a credit bureau. Government entities may not discriminate against you simply because you’ve received a bankruptcy discharge, but private companies can – and do – in some circumstances.
In addition to the requirement that you obtain credit counseling before you file for bankruptcy, you must also participate in a two-hour course on budget management before you get your discharge. Most filers use the same agency for the budget counseling as they used for their pre-filing credit counseling certificate.
If you’re thinking of filing Chapter 7 bankruptcy in Colorado, our firm can help. Contact our offices in Denver today to discuss your case or schedule a free consultation.