Bankruptcy
Bankruptcy
Need a Bankruptcy Attorney to stop a Foreclosure, deal with IRS issues, handle Bill Collectors, avoid repossession, handle a Student Loan, address Tax Debt, to deal with excessive Credit Card debt, Medical Bills or Consumer debt? Bullock Law, LLC. is the right place to begin.
Tim will clearly explain the Bankruptcy process and assist with friendly easy to understand instructions that will quick navigation through the Bankruptcy process.
For someone financially over their head financially, Bankruptcy can provide a path to debt relief, and provide a fresh start. Tim handles all matters related to Chapter 7 Bankruptcy.
Bankruptcy is stressful and can be complicated. A petition must be completed for submission to the federal bankruptcy court. In this petition, the debtor identifies their assets and liabilities and provides other schedules of information. Once the case is filed, the debtor must attend two courses about an hour in length which can be accessed over the internet. The first is a ‘credit counseling‘ course. The second is a ‘financial management‘ course (see below). Once a bankruptcy petition is filed, creditors are on notice and under court order to cease further collection activities.
A trustee is assigned to every case to represent the interests of unsecured creditors. In addition to the above two courses, a debtor must also attend a meeting with a trustee at which creditors may be present. This is known as a ‘Rule 341 Creditors Meeting’. At this meeting, the trustee has the duty of identifying the debtors’ non-exempt assets for sale – the proceeds from which are distributed among the creditors (see below for law identifying exempt and non-exempt property). During the Rule 341 Creditors meeting the trustee and creditors are allowed to ask the debtor questions regarding their assets. An exempt asset is one which is protected from seizure by the trustee. In the era of COVID-19 some trustees conduct these meetings via internet conferencing.
If a debtor has a lien, it may be ‘avoided‘ under certain circumstances. If a debtor is making payments toward an asset which, if fully paid, would be more than the asset is worth, it may be possible to eliminate that portion of the debt which is above the actual asset value (called a ‘cram down’). A debtor may keep a non-exempt or partially exempt asset through negotiation and payment to the trustee. Debtors may also keep other assets which might otherwise be non-exempt by re-affirming the debt.
The two most common forms of bankruptcy for individuals are found under Chapters 7 and 13. The following describes the process involved with these two chapters in more detail.
Explanations of Selected Bankruptcy Topics
Chapter 7
Purpose of Chapter 7
The primary purpose of Chapter 7 bankruptcy is to discharge (eliminate) certain debts giving honest individuals a “fresh start.” At the conclusion of a Chapter 7 bankruptcy, the debtors will have no liability for discharged debts. Chapter 7 bankruptcy is also spoken of in the context of full liquidation. A trustee is assigned to each case to inventory, collect and sell all of the debtor’s assets which are not exempt or excluded by law from being included in the bankruptcy (a table and explanation of Colorado and New Mexico exemptions is found below). Net proceeds of the liquidation are then distributed to creditors by the trustee after they take a commission for case administration. The typical Chapter 7 case sees most consumer debts eliminated. A debtor’s strategic use of exemptions and re-affirmation of certain debt can leave a debtor recovering from bankruptcy surprisingly comfortable. Potential debtors, however, should be aware that filing a Chapter 7 is likely to result in the loss of some non-exempt property.
Liens, Judgments & Mortgages
Some of the debtor’s property may be subject to liens, judgments and mortgages. The debtor has the choice of reaffirming this debt or surrendering the underlying asset. A debtor can also negotiate with a trustee to keep property which is not otherwise exempt by paying the trustee. When a Chapter 7 bankruptcy is complete, unsecured debt is officially ‘discharged’ by the court. The right to discharge debt is not absolute, and some types of debts may not be discharged (see ‘Categories of Debt’ below). Moreover, a bankruptcy discharge does not extinguish a lien, however, a lien may be ‘avoided’ under certain conditions (see below).
Chapter 7 Eligibility
To qualify for relief under Chapter 7, a debtor must be a natural person, not a corporation. See 11 U.S.C. §§ 101(41), 109(b). Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts (see types of debt below) of less than $250,000 and noncontingent, liquidated, secured debts of less than $750,000 may file a Chapter 7 bankruptcy. A filer is also subject to a ‘means test’ based upon their current monthly income which is the average of their monthly income over the last six months before filing (see further explanation of the means test below). If an individual’s average income is less than or equal to the state median income for their family, the law presumes that they are eligible to file under Chapter 7 assuming they satisfy meet additional Chapter 7 eligibility criteria listed immediately below.
An individual is not eligible to file under Chapter 7 (or any other chapter) if:
- during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court, or;
- the debtor failed to comply with an order of the court, or;
- the debtor voluntarily dismissed a previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens, or;
- the court believes the debtor is cheating or defrauding creditors.
- the debtor obtained a discharge of their debt in a Chapter 7 bankruptcy case within the last eight years,
These guidelines are found in law at 11 U.S.C. §§ 109(g), 362(d) and (e).
Required ‘Pre’ and ‘Post’ Filing Courses
No individual may be a debtor under Chapter 7 or 13 unless they have, within 180 days before filing their case, received a certificate of credit counseling from an approved credit counseling agency. See 11 U.S.C. §§ 109, 111. This certificate must be filed with the court no later than 60 days after the first scheduled date of the meeting of creditors (also called the Rule 341 Meeting – see below). While the bankruptcy is pending, the debtor must take a second course referred to as the ‘financial management’ course. A certificate of completion for this course must also be filed with the court. Each course may be taken on-line at a typical cost of between $25.00 to $50.00.
The Chapter 7 Discharge & Credit Reporting
A Chapter 7 discharge acts as a permanent injunction against any creditor attempting to collect debt from the discharged person. This does not mean the debtor does not continue to owe the debt, it just means that no creditor can force them to repay their debt. On the debtor’s credit report any debts discharged in bankruptcy must be reported as a ‘zero’ balance. The credit report could say something like, “Included in a bankruptcy”, or, “Included in Chapter 7”.
Chapter 7 Filing Fees, Legal Fees and Costs
The court filing fee for a Chapter 7 is $338.00. Tim charges $1500 for a standard Chapter 7 bankruptcy filing. The fee increases if the filing involves an ‘adversary proceeding’ (a ‘mini-trial’ within the bankruptcy), ‘lien avoidance’ or ‘cram down’ of a debt (see explanations below). This does not include two required courses, – ‘Credit Counseling’ and ‘Financial Management’ – which may be taken on-line from any one of a number of venders at a typical cost of between $25.00 and $50.00.
Chapter 13
Purposes of a Chapter 13
A Chapter 13 bankruptcy enables individuals with regular income to develop a re-payment plan to repay all or part of their debts from the debtor’s future income over time. A re-payment plan may be over three to five years. If the debtor’s current monthly income is less than the applicable ‘state median’ income, the plan will be for three years. The court may approve a longer period “for cause.” If the debtor’s current monthly income is greater than the state median income, the plan must generally be for five years. In no case may a plan provide for payments over a period longer than five years. See 11 U.S.C. § 1322(d). Chapter 13 bankruptcy is generally used by debtors who want to keep secured assets, such as a home or car, when they have more equity in their secured assets than they can protect using their bankruptcy exemptions in a bankruptcy filed under Chapter 7 (see below for explanation of exemptions). Chapter 13 bankruptcy is a ‘reorganization’.
A Chapter 13 debtor is required to take Credit Counseling and Financial Management courses and to submit certificates for both. If a debt management plan is developed during required credit counseling, it also must be filed with the court.
Chapter 13 allows debtors to make up past due payments over time and to reinstate an original lending agreement (like a mortgage or car loan) if the debtor has fallen behind in payments. Where a debtor has non-exempt property and wants to keep it, Chapter 13 may be a good option.
The Chapter 13 Process
A Chapter 13 case begins by filing a petition with the bankruptcy court. Unless the court orders otherwise, the debtor must also file with the court:
- schedules of assets and liabilities;
- a schedule of current income and expenditures;
- a schedule of executory contracts and unexpired leases;
- a statement of financial affairs. See Fed. R. Bankr. P. 1007(b);
- a certificate of credit counseling and debt repayment plan developed credit counseling;
- evidence of payment from employers, if any, received 60 days before filing;
- a statement of monthly net income and any notice of anticipated change after filing;
- a record of any interest the debtor has in qualified education or tuition accounts;
- a copy of the debtors most recent tax return as well as tax returns filed during the case;
- a Chapter 13 plan.
The Chapter 13 Plan
A Chapter 13 plan is the debtor’s formal proposal to the court indicating how much they propose to pay their creditors monthly over either 3 or 5 years. The plan also identifies: the collateral the debtor intends to keep, sell, or surrender; the leases the debtor plans to affirm or cancel; the debtor’s intentions regarding judgments, tax and other kinds of liens. It can also propose that the debtor intends to sell or refinance their real estate or other assets and can provide other information important to the debtor’s case. A Debtor is not required to include all their debts in the plan and may elect to pay some debts outside the plan (like a mortgage) to avoid paying the trustees commission charged against the value of an asset within the plan. The plan must be submitted for court approval and must provide for payments of fixed amounts to the trustee on a regular basis – typically monthly. The trustee then distributes the funds to creditors according to the terms of the plan, which may offer creditors less than full payment on their claims.
Amount and Level of Payments Under a Chapter 13 Plan
The amount to be repaid under a Chapter 13 plan is determined by several factors including the debtor’s disposable income. This is determined in part using a ‘Means Test’ (see below). Payments are typically monthly and made over 36 months (three-year plan) or 60 months (five-year plan). They leave a debtor with enough to live but little disposable income. The plan must be approved by the court.
Court Approval of a Chapter 13 Plan
In its analysis, the court will review whether the total amount paid to creditors under the plan is at least as much as creditors would have received had the debtor filed under Chapter 7 bankruptcy. The court will also consider whether a debtor has a “regular source of income” with enough disposable income to afford monthly payments required under the plan.
Chapter 13 Eligibility
Only wage earners are eligible to file for Chapter 13 relief as long as their unsecured debts are less than $394,725 and their secured debts are less than $1,184,200. See 11 U.S.C. § 109(e). These amounts are adjusted periodically to reflect changes in the consumer price index. Corporations and partnerships are not eligible to be Chapter 13 debtors.
A debtor may not file Chapter 13 if:
- during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court;
- a debtor fails to comply with orders of the court;
- a prior bankruptcy petition was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens;
- they have not, within 180 days before filing, received credit counseling from an approved credit counseling agency. See 11 U.S.C. §§ 109, 111.
Advantages of Chapter 13
During the life of a Chapter 13 plan, the law forbids creditors from starting or continuing collection efforts. Lawsuits are stayed (frozen) by court order. An automatic stay is put in place by the court which stops a foreclosure as soon as the debtor files their bankruptcy petition. Using Chapter 13, an individual may bring the past-due payments current over a reasonable period of time. A debtor may still lose their home if their mortgage company completes a foreclosure sale before the debtor files their petition. See 11 U.S.C. § 1322(c). The debtor can also lose their home if they fail to make the regular mortgage payments proposed under a Chapter 13 plan. Chapter 13 allows individuals to reschedule secured debts and to extend them over the life of the chapter 13 plan (other than a mortgage used for their primary residence except that ‘mortgage arrearage’ can be part of a Chapter 13 Plan). This rescheduled debt may lower a debtor’s overall monthly obligations. Chapter 13 also has a special provision that protects third parties who are liable as co-debtors along with the debtor on “consumer debts”. An example is parents co-signing on a debt for their children. A Chapter 13 is like a consolidation loan by which the debtor makes plan payments to a Chapter 13 trustee who then distributes payment to creditors. By contrast, Chapter 7 bankruptcies require no payment plan.
Plan Confirmation
No later than 45 days after the meeting of creditors (the Rule 341 meeting), the bankruptcy judge must hold a confirmation hearing to decide whether the plan is feasible and meets the standards for confirmation set forth in the Bankruptcy Code. See 11 U.S.C. §§ 1324 & 1325. If the court confirms the plan, the chapter 13 trustee will distribute plan funds it received from the debtor “as soon as is practicable”. See 11 U.S.C. § 1326(a)(2). The debtor is responsible for making the plan succeed by making monthly payments on time. While confirmation of the plan entitles the debtor to retain property as long as payments are made, the debtor may not incur new debt without consulting the trustee because additional debt may compromise the debtor’s financial ability to complete the plan. See 11 U.S.C. §§ 1305(c), 1322(a)(1), 1327.
If the court declines to confirm the plan, the debtor may file a modified plan. See 11 U.S.C. § 1323. The court may dismiss or involuntarily convert the debtor’s case to a Chapter 7 if the debtor fails to pay any post-filing domestic support obligations (i.e., child support, alimony), or fails to make required tax filings during the bankruptcy. See 11 U.S.C. §§ 1307(c) and (e), 1308, 521.The debtor also has the option to convert their case to a full liquidation case under Chapter 7. See 11 U.S.C. § 1307(a). If the court declines to confirm the plan or allow modification, it may authorize the trustee to keep some of the debtor’s funds to cover its costs, otherwise the trustee must return all remaining funds to the debtor except those funds it has already paid to creditors.
Modification of a Chapter 13 Plan
Occasionally, a change in circumstances may compromise the debtor’s ability to make plan payments. For example, a creditor may object or threaten to object to a plan, or the debtor may inadvertently have failed to list all creditors. In such instances, a plan may be modified either before or after it has been confirmed by the court. See 11 U.S.C. §§ 1323, 1329. Modification after confirmation is not limited to the initiative of the debtor, but may also be modified at the request of the trustee or an unsecured creditor. See 11 U.S.C. § 1329(a).
Timing of the Chapter 13 Plan
Unless the court grants an extension, debtors must file a repayment plan with their petition or within 14 days after the original petition was filed. See Fed. R. Bankr. P. 3015.
Unsecured Debt In a Chapter 13
The plan need not pay unsecured claims in full as long it provides that the debtor will pay all projected “disposable income” over an “applicable commitment period,” and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor’s assets were liquidated under Chapter 7. See 11 U.S.C. § 1325.
Disposable Income
In Chapter 13, disposable income is income (other than child support payments received by the debtor) less amounts reasonably necessary for the maintenance or support of the debtor or dependents and less charitable contributions up to 15% of the debtor’s gross income. If the debtor operates a business, the definition of disposable income excludes those amounts which are necessary for ordinary operating expenses. See 11 U.S.C. § 1325(b)(2)(A) and (B).
Three vs. Five Year Plan
The length of a re-payment plan is the applicable commitment period and depends on the debtor’s current monthly income. The applicable commitment period must be three years if current monthly income is less than the state median for a family of the same size – and five years if the current monthly income is greater than a family of the same size. See 11 U.S.C. § 1325(d). The plan may be less than the applicable commitment period (three or five years) only if unsecured debt is paid in full over a shorter period.
When Chapter 13 Payments Must Begin
Payments must begin within 30 days after filing the bankruptcy case. Even if the plan has not yet been approved/confirmed by the court, the debtor must start making plan payments to the trustee within 30 days. See 11 U.S.C. § 1326(a)(1). If any secured loan payments or lease payments come due before the debtor’s plan is confirmed (typically home and automobile payments), the debtor must make adequate protection payments directly to the secured lender or lessor – deducting the amount paid from the amount that would otherwise be paid to the trustee.
Creditor Objections to The Plan
If the court declines to confirm the plan, the debtor may file a modified plan. See 11 U.S.C. § 1323. The court may dismiss or involuntarily convert the debtor’s case to a Chapter 7 if the debtor fails to pay any post-filing domestic support obligations (i.e., child support, alimony), or fails to make required tax filings during the bankruptcy. See 11 U.S.C. §§ 1307(c) and (e), 1308, 521.The debtor also has the option to convert their case to a full liquidation case under Chapter 7. See 11 U.S.C. § 1307(a). If the court declines to confirm the plan or allow modification, it may authorize the trustee to keep some of the debtor’s funds to cover its costs, otherwise the trustee must return all remaining funds to the debtor except those funds it has already paid to creditors.
Retaining Possession of Assets in Chapter 13
If a debtor wishes to keep the collateral securing a particular claim, a Chapter 13 plan must provide that the holder of the secured claim receives at least the value of the collateral. If the obligation underlying the secured claim was used as collateral to buy an asset and the debt was incurred within certain time frames before the bankruptcy filing, the plan must provide for full payment of the debt, not just the value of the collateral (which may be less due to depreciation). Payments to certain secured creditors, such as a home mortgage provider, may be made over the original loan repayment schedule (which may extend beyond the life of the plan) so long as any delinquent amounts owed are brought current while the plan is active. Mortgage arrearages may be made a part of the plan.
A Chapter 13 bankruptcy trustee is responsible for seeing that the non-exempt portion of the value of an asset is paid back into the Chapter 13 plan. If the value of an asset exceeds the allowed exemption, the debtor may still retain possession if they pay the difference between the value of the asset and the exemption to the trustee. For example, the ‘Colorado Homestead Exemption‘ for a primary residence allows a debtor to keep $75,000 of equity in their home ($105,000 if the owner is 60 years of age or older, or disabled). A younger debtor with $100,000 of equity (calculated after subtracting mortgage liens and costs of sale from fair market value) would be required to “reconcile” (pay back) the $25,000 non-exempt portion over the 3 or 5 year. In this scenario, the debtor may keep the desired property.
Discharge in Chapter 13
A discharge releases the debtor from all debts identified in the Chapter 13 plan with limited exceptions. The discharge in a Chapter 13 case is somewhat broader than discharge in a Chapter 7 case. Examples of debts dischargeable in Chapter 13 but not in Chapter 7 include: debts for willful and malicious injury to property (in contrast to malicious injury to a person); debts incurred to pay non-dischargeable tax obligations, and; debts arising from property settlements in divorce or separation proceedings. Creditors paid by the trustee in full or in part under the Chapter 13 plan may no longer initiate or continue any legal or other action against the debtor. A Chapter 13 debtor is entitled to a discharge upon completion of all payments under the chapter 13 plan so long as the debtor:
- certifies (if applicable) that all domestic support obligations that came due prior to making such certification have been paid;
- has not received a discharge in a prior case filed within a certain time frame (two years for prior chapter 13 cases and four years for prior chapter 7, 11 and 12 cases), and;
- has completed an approved course in financial management.
The court will not enter the discharge until it determines, after notice and a hearing, that there is no reason to believe there is any pending proceeding that might give rise to a limitation on the debtor’s homestead exemption (See exemptions defined below). See 11 U.S.C. § 1328(h).
Credit Reporting Of Chapter 13 Debt
In a Chapter 13, discharged debts must be reported by credit agencies as having a zero balance on a credit report. See 11 U.S.C. § 1328.
Filing Expense, Legal Fees & Costs
The filing fee for a Chapter 13 is $313.00. Tim charges $5000 for a standard Chapter 13 bankruptcy filing which may be paid over time as a part of a three or five year re-payment plan. Tim’s fee may increase if a Chapter 13 involves additional work like an ‘adversary proceeding’, a ‘modification’, ‘lien avoidance’ or ‘cram down’ of a debt. A debtor may incur more expense if additional professionals (e.g. appraisers etc.) are required. A debtor is also required to attend the same courses as required in a Chapter 7 bankruptcy (Credit Counseling and Financial Management).
The Rule 341 Creditors Meeting
Between 21 and 60 days after the debtor files their bankruptcy petition, the bankruptcy trustee must hold a meeting of creditors referred to as a ‘Rule 341′ Meeting. The Rule 341 meeting must be held no more than 60 days after the debtor files. See Fed. R. Bankr. P. 2003(a). During this meeting, the trustee places the debtor under oath, and both the trustee and creditors may ask questions. The debtor must attend the meeting and respond to questions regarding their financial affairs and the proposed terms of their plan. See 11 U.S.C. § 343. If a husband and wife file a joint bankruptcy petition, they both must attend the creditors’ meeting and answer questions. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the creditors meeting. See 11 U.S.C. § 341(c). Creditors have the right to object to any aspect of the bankruptcy. The parties (trustee, debtor and creditors) typically resolve any problems either during or shortly after the creditors’ meeting. A debtor can avoid issues by making sure their petition (and their plan if they have filed under Chapter 13) are complete and accurate. Consulting with the trustee prior to the meeting is usually a good idea.
Types of Debt
There are three types of debt claimed by creditors against debtors: priority, secured, and unsecured.
- priority claims are those granted special status by the bankruptcy law, such as most taxes and the costs of bankruptcy proceeding;
- secured claims are those for which the creditor has the right take back the asset;
- unsecured claims are those unsecured by an asset.
A Chapter 13 plan must pay priority claims in full unless a particular priority creditor agrees to different treatment of their claim or, in the case of a domestic support obligation, unless the debtor contributes all “disposable income” (discussed below) into a five-year plan. See 11 U.S.C. § 1322(a).
The Trustee
When an individual files a Chapter 13 petition, an impartial trustee is appointed to represent the best interests of unsecured creditors and administer the case. See 11 U.S.C. § 1302. In a Chapter 13 case, the trustee serves as a disbursing agent collecting payments from the debtor and making distributions to creditors. See 11 U.S.C. § 1302(b). In a Chapter seven case, the trustee collects and sells all of the debtor’s non-exempt property. Proceeds from this property sale are paid to creditors depending on the creditor’s ‘status’. The local trustee is appointed by the U.S. Trustee and is charged with the duty of locating and liquidating any non-exempt assets owned by the debtor for the benefit of unsecured creditors.
The Trustee at the Rule 341 Meeting
The Chapter 7 trustee runs this meeting with the objective of processing cases quickly and efficiently. This may be the only opportunity the trustee has to determine which of the debtor’s assets are exempt from liquidation. During the meeting, debtors must decide to: surrender non-exempt assets; pay back the value of such assets, or; pay the trustee the excess value the non-exempt portion of such assets over a period of time. A Chapter 7 trustee typically earns $60 for “no-asset” bankruptcy matters plus a commission (in asset cases) from any non-exempt assets they liquidate.
A Chapter 13 trustee represents the best interests of unsecured creditors and reviews the proposed 3 – 5-year payment plan to determine a debtor’s ability to make monthly payments. The Chapter 13 trustee is responsible for collecting monthly payments and forwarding them to unsecured creditors who have filed timely, allowed (approved) Proofs of Claim. A proof of claim is a formal filing made by a creditor into the debtor’s case declaring that a certain amount is owed by the debtor. A debtor’s non-payment of payments under the plan will lead to the trustee moving to dismiss the case.
The trustee and the debtor’s lawyer always have competing interests as to what percentage of unsecured debts should be paid through the Chapter 13 plan. A Chapter 13 trustee has incentive to object to most proposed plans and monthly payments as being insufficient because the trustee receives 10% of all plan payments. It is common for trustees to object to ‘subjective’ bankruptcy Means Test deductions (see below) and to require proof of certain expenses like: out-of-pocket medical expenses; payments made to, or for, the benefit of somebody elderly or disabled, and/or; child care. Disallowance of these types of deductions result in a higher monthly payments. Disallowance of a Means Test deduction could also mean the difference between the debtor electing to use a 3 year or 5-year plan.
Colorado Bankruptcy Means Test
The bankruptcy means test determines who can file a Chapter 7 bankruptcy. It takes into account the debtor’s income, expenses and family size to determine whether they have enough disposable income to repay their debts over the plan period. The test was designed to restrict the number of debtors who can erase their debts using a Chapter 7 bankruptcy. Most people who apply the means test pass it. Those who don’t qualify for Chapter 7 or who want to retain certain assets — like a house or expensive car — can choose instead to restructure their debts and pay them off through a Chapter 13. Income limits for qualification under the Chapter 7 Means Test are based upon the Census Bureau’s Median Family Income Data.
To pass the Chapter 7 means test and qualify to file a Chapter 7 bankruptcy in Colorado, a debtor’s income must be below Colorado’s household ‘median income’. If a debtor is above the median household income for Colorado, they still may be eligible to file for Chapter 7 bankruptcy, as long as their disposable monthly income, or what’s left after paying certain expenses, is below a certain amount. The test only applies to higher income filers which means that if a debtor’s income is below the median household size, the debtor is exempt from the test and may file a Chapter 7. If more than 50% of the debt is considered ‘non-consumer‘ debt, the debtor is automatically exempt from the means test calculation.
Colorado Median Income Standards for Bankruptcy Means Test
(For cases filed on, or after May 15th, 2021)
| Household Size | Monthly Income | Annual Income |
| 1 | $5,647 | $67,768 |
| 2 | $7,348 | $88,178 |
| 3 | $8,019 | $96,223 |
| 4 | $9,623 | $115,473 |
| 5 | $10,373 | $124,473 |
| 6 | $11,123 | $133,473 |
| 7 | $11,873 | $142,473 |
| 8 | $12,623 | $151,473 |
| 9 | $13,373 | $160,473 |
| 10 | $14,123 | $169,473 |
Means Test Exemptions
If a debtors’ debt is not primarily consumer debt then they may be exempt from the means test. Debtors are also exempt from the means test if they are a disabled veteran and incurred their debt primarily during active duty or while performing a homeland defense activity.
Non-consumer debt
Non-consumer debt is also referred to as business debt because it’s incurred with a ‘business’ or ‘profit’ motive. If a debtors’ income is higher than the Colorado median, they will need to complete the means test calculation to determine if they instead should file a Chapter 13 bankruptcy. Filing a Chapter 13 bankruptcy means paying back a portion of their unsecured debts.
Median Income
If a debtor’s currently monthly household income is less than the Colorado and New Mexico median income for a household of the debtor’s size, there is a presumption they pass the means test and are eligible to file a Chapter 7 bankruptcy. A debtors average household income is determined by averaging monthly income over the last six calendar months.
Treatment of Co-Debtors in Chapter 13
Chapter 13 contains a special “automatic stay’ provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a “consumer debt” from any co-debtor who is liable along with the debtor. 11 U.S.C. § 1301(a). Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose. 11 U.S.C. § 101(8).
New Mexico Bankruptcy Means Test
To qualify to file bankruptcy, the debtor must pass the New Mexico ‘Means Test‘. The Means Test determines applies to higher income filers and determines who is eligible for discharge under a Chapter 7 bankruptcy based on a threshold test established by federal law. This means that if a debtor’s income is below the median household size, the debtor is exempt from the test and may file a Chapter 7.
Income limits for qualification under the Chapter 7 Means Test are based upon the Census Bureau’s Median Family Income Data. To pass the Chapter 7 means test and qualify to file a Chapter 7 bankruptcy in New Mexico, a debtor’s income must be below New Mexico’s household ‘median income’. If a debtor is above the median household income, they still may be eligible to file for Chapter 7 bankruptcy, as long as their disposable monthly income, or what’s left after paying certain expenses, is below a certain amount. If a debtor makes too much to file under Chapter 7, they may still be eligible to file under Chapter 13.
New Mexico Median Income Standards for Bankruptcy Means Test
| Household Size | Monthly Income | Annual Income |
| 1 | $3,242.83 | $38,914.00 |
| 2 | $4,128.16 | $49,538.00 |
| 3 | $4,212.33 | $50,548.00 |
| 4 | $4,598.66 | $55,184.00 |
| 5 | $5,273.66 | $63,284.00 |
| 6 | $5,948.66 | $71,384.00 |
| 7 | $6,623.66 | $79,484.00 |
| 8 | $7,298.66 | $87,584.00 |
| 9 | $7,973.66 | $95,684.00 |
| 10 | $8,648.66 | $103,784.00 |
Means Test Exemptions
If a debtors’ debts are not primarily consumer debts, then the debtor is exempt from the means test. A debtor is also exempt from the means test if they are a disabled veteran and incurred their debt primarily during active duty or while performing a homeland defense activity.
Median Income
A debtor’s average household income is determined by averaging their monthly income over the last six calendar months.
Colorado Bankruptcy Exemptions
The chart below, details the property a debtor can exempt (protect) from seizure by creditors or the trustee when filing bankruptcy. Property is exempted if it falls within one of the categories below up to the dollar amount listed. This means the debtor is able to keep this exempted property after filing bankruptcy. Note: certain debts cannot be discharged in bankruptcy. (see Non-dischargeable Debts).
Colorado Exemption Table
(assets a debtor is allowed to keep in bankruptcy – partial list)
| ASSET | EXEMPTION | LAW |
| HOMESTEAD | Real property (equity), mobile home or manufactured home occupied by the debtor up to $75,000 or $105,000 [if occupied by an elderly (60+) or disabled debtor or spouse]. Spouse or child of deceased owner may claim homestead exemption | 38-41-201, 38-41-201.6, 38-41-203, 38-41-207 38-41-204 |
| House trailer or coach used as residence to $3,500 | 13-54-102(1)(o)(I) | |
| Mobile home used as residence to $6,000 | 13-54-102(1)(o)(II) | |
| INSURANCE | Life insurance – cash surrender value for writs issued against the insured – $250,000 | 13-54-102(1)(l)(A) |
| Life insurance proceeds if clause prohibits proceeds from being used to pay beneficiary’s creditors | 10-7-106 | |
| Group life insurance policy or proceeds | 10-7-205 | |
| Homeowners’ insurance proceeds used for improvement or repair up to homestead exemption amount | 38-41-209 | |
| Life insurance | 13-54-102(1)(l)(B) | |
| MISCELLANEOUS | Child support if recipient does not co-mingle with other money or deposits into separate account for the benefit of the child | 13-54-102.5 |
| Property of business partnership | 7-60-125(2)(b) | |
| PENSIONS | ERISA-qualified benefits, including IRAs | 13-54-102(1)(s) |
| Public Employees | 24-51-212 | |
| Veterans and their dependents (in time of war) | 13-54-102(1)(h), 13-54-104 | |
| PERSONAL PROPERTY | 1 burial plot per person and each dependant | 13-54-102(1)(d) |
| Clothing to $2000 | 13-54-102(1)(a) | |
| Food and Fuel to $600 | 13-54-102(1)(f) | |
| Health aids | 13-54-102(1)(p) | |
| Household goods to $3,000 total | 13-54-102(1)(e) | |
| Jewelry and articles of adornment to $2500 total | 13-54-102(1)(b) | |
| Up to two motor vehicles or bicycles kept and used by any debtor in the aggregate value of $7,500, or; up to two motor vehicles or bicycles kept and used by any elderly or disabled debtor or by any debtor with an elderly or disabled spouse or dependent, in the aggregate value of $12,500. | 13-54-102(j)(I), (II) | |
| Personal injury recoveries, unless your debt is related to the injury | 13-54-102(1)(n) | |
| Pictures and books to $2000 | 13-54-102(1)(c) | |
| Proceeds for damaged exempt property | 13-54-102(1)(m) | |
| Security deposits | 13-54-102(1)(r) | |
| The full amount of any federal or state earned income tax credit refund or child tax credit | 13-54-102(1)(o) | |
| Professionally prescribed health aids for the debtor or a dependent of the debtor | 13-54-102(1)(p) | |
| PUBLIC BENEFITS | Aid to blind, aged, disabled, AFDC, public assistance | 26-2-131 |
| Crime victims’ compensation | 13-54-102(1)(q), 24-4.1-114 | |
| Unemployment compensation so long as proceeds are not co-mingled with other funds | 8-80-103 | |
| Workers’ compensation | 8-42-124 | |
| Tools of Trade | Stock in trade, supplies, fixtures, maps, machines, tools, electronics, equipment, books, and business materials to $30,000 if it is used in the debtor’s primary occupation, to $10,000 if it is used in an occupation other than the debtor’s primary one; library of a professional to $3,000; livestock or other animals, tractors, farm implements, trucks used in agriculture, harvesting equipment, seed, and agricultural machinery and tools to $50,000. National Guard members’ military equipment | 13-54-102 |
| Motor Vehicles & Bicycles | Bicycles and motor vehicles that are used to travel to work up to $7,500 (up to $12,500 if used by the elderly or debtor or dependent with a disability) | 13-54-102 |
Wages | Either minimum 75% of earned but unpaid wages, insurance, and pension payments or 30 times the federal minimum wage. The greater of the two amounts will be used. | 13-54-104 |
* The foregoing table is current through August 2020
Collateralized Property
If a loan is secured by a car or home, and the debtor is current on the payments and the equity in the asset is protected by exemptions, the debtor may elect to keep making payments on the loan and retain this property through the bankruptcy (see Re-affirmation below). Exemptions may protect all or just a portion of a debtor’s property. If only a portion of the equity in an asset is protected by exemption, the trustee may elect to liquidate the asset and distribute proceeds from the sale to the creditor. If the debtor wishes to keep a partially protected/exempt asset, the debtor has the right to pay the trustee for any non-exempt value/equity not otherwise exempted.
Non-exempt Assets
A non-exempt asset is an asset subject to seizure by the trustee to sell for the benefit of creditors. The most common types of non-exempt assets include a home or car with too much equity, monies held in a checking or non-retirement brokerage account, tax refunds, 25% of earned but unpaid wages on the filing date, or a “non-essential” item of personal property such as a boat or timeshare. It is important to plan how to protect assets from the trustee and creditors before filing for bankruptcy. This means the strategic and full use of exemptions, spending down monies before filing, and/or paying the trustee equity in an asset which is above the exempted amount.
Asset Protection
A debtor may keep assets only if: 1) they re-affirm the debt with the creditor, or; 2) the asset is protected by a bankruptcy exemption.
Re-affirmation of Debt
To re-affirm a debt, a debtor signs a voluntary “Reaffirmation Agreement” filed with the court and brings the debt current. In other words, if the debtor is three or four months behind, they must first make up delinquent payments to take advantage of reaffirmation. If a debtor decides to keep their house, car or other secured debt, and the debtor reaffirms the debt, the Chapter 7 debtor cannot bankrupt (or wipe-out) that debt again for eight years. The debtor continues to owe the re-affirmed debt. A debtor can selectively reaffirm debts for the assets they wish to retain.
New Mexico Bankruptcy Exemptions
Debtors may elect to use federal exemptions or state exemptions. Tim advises debtors to use the scheme which benefits them most. For New Mexico bankruptcy filers, state exemptions are usually more generous than federal exemptions. These exemptions are available if the debtor has lived in New Mexico for more than two years.
New Mexico Exemptions Table
(assets a debtor is allowed to keep in bankruptcy)
| NEW MEXICO STATE LAW EXEMPTIONS | ||||||
| ASSET | EXEMPTION | LAW | ||||
| HOMESTEAD | Up to $60,000 of equity in your primary dwelling | 42-10-9 | ||||
| INSURANCE | Benevolent association benefits up to $5000 | 42-10-4 | ||||
| Fraternal Society Benefits. Unlimited. | 59A-44-18 | |||||
| Life, accident, health or annuity benefits, withdrawal or cash value, if beneficiary is a NM resident. Unlimited. | 42-10-3 | |||||
| MISCELLANEOUS | Cooperative association shares (minimum amount to qualify as a member) | 53-4-28 | ||||
| AFDC General Assistance | 27-2-21 | |||||
| Occupational Disease Disability Benefits | 52-3-37 | |||||
| Unemployment Compensation | 51-1-37 | |||||
| Workers Compensation | 52-1-52 | |||||
| PENSIONS | Any interest in or proceeds from a pension or retirement fund of every person supporting another person is exempt from receivers or trustees in bankruptcy or other insolvency proceedings, fines, attachment, execution or foreclosure by a judgment creditor. | 42-10-2 | ||||
| Pension or retirement benefits | 42-10-2 | |||||
| Public School Employees | 22-11-42A | |||||
| PERSONAL PROPERTY | Personal property in the amount of five hundred dollars ($500). | 42-10-2 | ||||
| Tools of the trade in the amount of fifteen hundred dollars ($1,500). | 42-10-2 | |||||
| One motor vehicle in the amount of four thousand dollars ($4,000). | 42-10-2 | |||||
| Jewelry in the amount of twenty-five hundred dollars ($2,500). | 42-10-2 | |||||
| Clothing, furniture, books, medical-health equipment being used for the health of the person and not for his profession. | 42-10-2 | |||||
| Building materials | 48-2-15 | |||||
| WAGES (Child Support) | Exempt from garnishment with respect to the enforcement of an order or decree for child support is fifty percent of the defendant’s disposable earnings for any pay period. | 35-12-7 | ||||
| WAGES | Exempt from garnishment is the greater of the following portions of the debtor’s disposable earnings:
| 35-12-7 | ||||
| WILD CARD | Property up to $2,000 in lieu of using homestead | 42-10-10 |
Halt Collection
- the 'automatic stay' -
Filing a petition under Chapter 7 or 13 “automatically stays” (stops) most collection actions against the debtor or their property. See 11 U.S.C. § 362. Filing the petition may be effective only for a short time in certain situations. The stay may be temporary or permanent. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even make telephone calls demanding payments. The stay is meant to allow a debtor to experience a reprieve from the stress of being sued, garnished, foreclosed upon, levied upon, having a bank account frozen or otherwise harassed by creditors. The stay prohibits creditors from:
- continuing to litigate a claim which arose before the bankruptcy petition was filed, or filing a new collection lawsuit after the filing;
- mailing any letters, calling or initiating any in-person contact to collect a debt;
- foreclosing a home or repossessing a vehicle or other personal property absent a signed court order granting Relief from Stay (which typically takes time for the Court to hear and which requires secured creditors to prove that their security interest is in jeopardy (ie: if the property has negative equity or is uninsured, or if the debtor has defaulted on monthly payments)[1].
The stay does not prohibit creditors from pursuing the following types of legal actions:
- attempts to establish paternity or enforce an existing child support or spousal maintenance orders;
- criminal fines;
- IRS or state department of revenue tax audits, and;
- Eviction actions by landlords with possession judgments for residential real estate.
When a case is filed, the bankruptcy clerk sends notice of the bankruptcy together with the order for automatic stay to all creditors whose names and addresses have been identified in the petition by the debtor.
Chapter 13 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a “consumer debt” from any individual who is liable along with the debtor. 11 U.S.C. § 1301(a). Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose. 11 U.S.C. § 101(8).tat
[1] Many debtors carry mortgages on their home which exceeds the homes fair market value and they may also be delinquent making their regular monthly mortgage payments. It is not uncommon for overreaching lenders to prematurely attempt to foreclose or repossess property under these circumstances. Their efforts may be in violation of the Bankruptcy Code and/or prohibited by the Fair Debt Collection Practices Act (FDCPA).
Surrendering the home may be the best option particularly for those who are significantly delinquent and on payments. Surrendering a house (or a vehicle) in bankruptcy allows a debtor to discharge the deficiency (amount owing) just like any other debt. It is sometimes be a debtor’s best option.
Conversely, for a debtor/mortgagor who is not irretrievably upside down and is able to demonstrate enough earned income to pay back or “cure” their mortgage arrears with increased payments over time it may be both possible and sensible to keep the family home. A Chapter 13 filing can stop imminent foreclosure. Assuming the Chapter 13 plan is confirmable, the debtor may be able to cure mortgage arrears over a 3 to 5 year time period by making regular monthly mortgage payments to their lender. Most lenders will likely file a ‘Motion for ‘Relief from Automatic Stay’ to protect their security interests – particularly if no equity exists in the home or the debtor is behind in their monthly payments.
Homeowners with two mortgages and a home which has dropped significantly in value such that the home is upside down with respect to the first mortgage alone may be able to rid themselves of their second mortgage. Section 506 of the Bankruptcy Code allows a homeowner to “strip off” a second mortgage lien in chapter 13 when the first mortgage exceeds the home’s fair market value. Section 506 renders the second mortgage lien ‘unsecured’. Under these circumstances, Chapter 13 plans allow debtors to cure mortgage arrears for a ‘first mortgage’ while concurrently stripping off a second mortgage.
Arrears owed for a vehicle or personal property can also be cured in a chapter 13 plan. Under section 506, debtors with a vehicle purchased at least 2.5 years ago or with personal property purchased at least 1 year ago, this Section allows a debtor in chapter 13 to “cram down” a loan balance down to the vehicle’s current fair market value. This section also allows a debtor to pay a reduced interest rate and stretch out the term for making vehicle payments.
Chapter 13 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a “consumer debt” from any individual who is liable along with the debtor. 11 U.S.C. § 1301(a). Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose. 11 U.S.C. § 101(8).
Categories of Debt
The term “debt” means liability for a claim made by a creditor. In bankruptcy, there are different categories of debt.
- “Secured debt” is an obligation owed by the debtor which is backed by collateral. A creditor can recover the collateral if the debtor is in default under the purchase contract. A debt is secured with a lien or other security instrument. An asset tied to a secured debt is never fully owned by the possessor until the loan is paid off.
- “Priority debt” is mostly debt owed to the government. This includes taxes owed, criminal fines, or repayment of government benefits. It also includes domestic support obligations. Priority debt is not dischargeable in bankruptcy. Debtors can repay priority debt over time in a Chapter 13 plan.
- “Unsecured debt” means debt for which lenders do not have the right to any collateral. If the debtor becomes delinquent on payments, creditors generally cannot claim or repossess the underlying asset.
- “Non-dischargeable debt” is debt which cannot be discharged in bankruptcy. Upon filing a bankruptcy case this debt will still be owed after the bankruptcy. Generally, a debtor will have to show extraordinary circumstances to get the following debts discharged:
- debts not included in the bankruptcy petition, unless a creditor actually knew of the bankruptcy filing;
- condo or cooperative housing fee debts;
- attorneys’ fees for child custody or support;
- criminal restitution and other court fines or penalties;
- personal injury debts arising out of a drunk driving accident;
- debts arising out of tax-advantaged retirement plans;
- many types of taxes[1];
- child support or alimony;
- fines or penalties owed to government agencies;
- student loans (although there are some exceptions to this).
See 11 U.S.C. §§ 1328, 523(c); Fed. R. Bankr. P. 4007(c).
To the extent that debts are not fully paid through the chapter 13 plan, the debtor will still be responsible for these debts after their bankruptcy case has concluded. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for restitution or damages awarded in a civil case for willful or malicious actions that cause personal injury or death to a person will be discharged unless a creditor timely files and prevails in an action to have such debts declared non-dischargeable.
- The debts are income taxes;
- The debtor did not file a fraudulent tax return or willfully evade taxes;
- The debtor filed a tax return for the debt at least two years before they filed for bankruptcy;
- The tax debt was due at least three years before the debtor filed for bankruptcy; and the IRS assessed the debtor’s income tax at least 240 days before they filed for bankruptcy.
The Bankruptcy Petition
Official forms which make up the petition include multiple schedules identifying the following information:
- A list of all creditors identifying the amounts and nature of their claims;
- The source, amount, and frequency of the debtor’s income;
- A list of all of the debtor’s property; and
- A detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
Married individuals must include their spouse regardless of whether they are filing joint or separate petitions. In situations where only one spouse files, the income and expenses of the non-filing spouse must be disclosed so that the court, the trustee and creditors can evaluate the household’s true financial status.
FAQ's
Q: Can a husband and wife file a joint petition?
A: Yes. A husband and wife may file a joint or individual petitions. See 11 U.S.C. § 302(a).
Q: What chapter should be filed, 7 or 13?
A: For many debtors, Chapter 7 is preferable to Chapter 13 because most types of unsecured debt will be eliminated without any requirement to repay creditors. Law suits are stayed (stopped) however, some debtors may not eligible to file under Chapter 7.
Filing under Chapter 13 provides options not available in a Chapter 7. Typical reasons for filing under Chapter 13 include:
- A debtor’s income exceeds the Chapter 7 Means Test maximum and the Debtor isn’t otherwise eligible to receive a Chapter 7 discharge.
- A homeowner is behind on a mortgage payment and can’t afford to pay the all the arrearages at once but may they have the ability to pay past due amounts through using a three to five-year plan under Chapter 13.
- A debtor faces an insurmountable collection action like a wage garnishment while paying off a tax bill, overdue child support, or other ‘non-dischargeable debt.
- A debtor wants to keep non-exempt property which would otherwise be liquidated in a Chapter 7 bankruptcy (however the debtor would need to pay for the nonexempt portion of their assets within their three or five-year repayment plan).
Q: What if a debtor can’t pass the state Means Test because their average household income is too great?
A: If a debtor is over the median income limit but their income has declined over the last six months, then strategically waiting one or more months before filing may allow them to otherwise qualify to file.
Q: Can a debtor run up credit cards and then discharge this debt in bankruptcy?
A: No. Using a credit card shortly before filing bankruptcy isn’t right and may create a criminal situation including an accusation of making ‘fraudulent transfers with intent to defraud’.
Q: What is an adversary proceeding?
A: An adversary proceeding is a mini-trial within the bankruptcy case. Typical subjects of adversary proceedings include situations where creditors object to exemptions claimed by debtors; discharge or creditors seeking court permission to continue their collection efforts. A bankruptcy case may include one or more adversary proceedings. ‘Adversary’ simply means that, unlike the bankruptcy process in general, the proceeding involves an issue between the creditor and debtor.
Q: Can a debtor give away assets before filing bankruptcy?
A: Selling or giving away something even innocently may give the trustee a right to seize it from the person to whom it was given.
Q: Can a debtor elect which creditors to repay or can some creditors be paid before filing bankruptcy?
A: No. This is considered a preference under the law. A preference is a payment made to a creditor before a debtor files bankruptcy. A trustee may force any creditor which has been subject of a preference to surrender the debtor’s payment. A “preference” is defined by Section 547 of the Bankruptcy Code as a payment made:
- on an “antecedent” debt (meaning a previously incurred as opposed to current) debt;
- while the debtor was insolvent (meaning their assets are less than its liabilities);
- to a non-insider (like a family member) creditor, within 90 days of the filing of the bankruptcy;
- which allows a creditor to receive more on their claim than they would otherwise receive, had the payment not been made if the claim been paid through the bankruptcy proceeding.
Unsecured creditors must be treated equally without giving preference to any one over another.
Section 550 of the Bankruptcy Code allows a trustee to avoid and recover any preference payments by filing a lawsuit against the creditor to whom an asset was given. The law permits the trustee to avoid and recover from creditors payments made within the 90-day period before the bankruptcy filing. Typically, a ‘preference action’ is often preceded by a “demand letter” from the trustee. The demand letter sets forth the trustee’s claim and demands immediate payment. Often times the trustee may be willing to settle the preference action for a largely reduced amount if settlement is reached before a lawsuit is filed.
Q: Can a debtor keep a certain asset even if it exceeds the exemption allowed by law?
A: Yes. If a debtor wishes to keep collateral securing a debt that exceeds the exemption allowed by law, they may exclude that debt from their bankruptcy by signing a reaffirmation agreement. Under these circumstances, a debtor remains legally liable on that debt. By signing a reaffirmation agreement, the debtor will likely agree to all the terms of the original debt contract. Alternatively, a debtor may negotiate with the trustee to pay the amount which exceeds the exemption.
Q: How does filing a Chapter 7 affect liability of co-signers?
A: A creditor can still go after a second, non-filing co-signer for the amount owed. This scenario is fairly common in divorce situations or where parents sign for children who subsequently default.
Q: How soon after filing bankruptcy may a debtor file another bankruptcy?
A: If a debtor previously filed under Chapter 7, they may file a new Chapter 13 four years after their Chapter 7 filing. If a debtor previously filed under Chapter 13, they may file a new bankruptcy under Chapter 7 eight years after filing their original Chapter 13. (in most cases). There are certain exceptions.
Q: What are a debtor’s obligations if they reaffirm a debt?
A: A reaffirmed debt remains the debtor’s personal obligation. It is not discharged in their bankruptcy case. This means that if a debtor defaults on reaffirmed debt after their bankruptcy case is over, a creditor may be able to take the debtors property or wages. A debtor’s revised obligations will be determined by the reaffirmation agreement which may have changed terms of the original agreement. A creditor may change the terms of an original agreement using applicable law in a reaffirmation.
Q: Is a debtor required to enter into a reaffirmation agreement?
A: No, a debtor is not required to reaffirm a debt. A debtor should only agree to reaffirm a debt if it is in their best interest. Before reaffirming a debt, a debtor should determine they can afford the new payments.
Q: What if a creditor has a security interest on a debtor’s asset?
A: A bankruptcy discharge does not eliminate any lien or security interest on property. Even if a debtor does not reaffirm a debt and the debtor’s personal liability on the debt is discharged, a creditor may still have the right to take property which is the subject of a security interest if the debt remains unpaid. If a lien is on an item of personal property that is exempt or that the trustee has abandoned, a debtor may be able to redeem the item rather than reaffirm the debt. To redeem, the debtor must make a single payment to the creditor equal to the amount of the allowed secured claim, as agreed by the parties or determined by the court.
Q: What is the effect of a lien on a debtors’ property?
A: A lien evidences the interest that a creditor or other entity has in specific property to secure their payment. Liens are common where ownership of property is evidenced by legal title. Recording and perfecting a lien on the title document can prevent the conveyance of a clear title to another preventing sale of the item. This means a debtor will not be able to sell the asset until the debt is paid and the lien is removed.
Q: Can liens be eliminated?
A: Many liens can be eliminated in a Chapter 7 bankruptcy. But whether a lien can be eliminated or reduced depends on the type of lien and may also depend on the exemptions that a debtor is claiming. Furthermore, if the unencumbered equity in an asset is significantly greater than the allowed exemption amount, the trustee may seize and sell the asset, pay the debtor the exemption amount, pay the lienholders the lien amount, and use the rest of the left-over equity to distribute to the unsecured creditors.
Bankruptcy may be used to ‘avoid’ certain unsecured liens like judicial liens. These can be reduced or eliminated by lien avoidance. A debtor may also be able to eliminate or reduce judicial liens on exempt property which is over-secured or impairs an exemption (like a homestead exemption) where the total lien exceeds the value of the property. Judicial liens have the lowest priority of all liens, regardless of when a lien was perfected (ie: reduced to judgment).
Q: What is the priority of liens filed against a property?
A: Normally, under non-bankruptcy law, perfected liens have chronological priority, with earlier liens having priority over later liens. When a bankruptcy is filed, bankruptcy law pre-empts state law.
Q: Should a person filing bankruptcy be ashamed?
A: No. At some point in most people’s lives, balancing debt becomes difficult. Debtor’s prisons no longer exist. The modern solution to insolvency is bankruptcy. Bankruptcy is in the Constitution. The Constitutional Convention of 1787 adopted the U.S. Constitution which refers explicitly to bankruptcy. The list of legislative powers given to Congress in Article I of the Constitution includes the power “to establish… uniform laws on the subject of bankruptcies throughout the United States.” See U.S. Constitution; Article 1, Section 8, Clause 4).
Prior to adoption of the U.S. Constitution in 1789, the states operated under the ‘Articles of Confederation’. Each state acted much as a sovereign country, each with its own money, independent militia, and laws regulating trade with other states and other countries. There was no national court system and no executive branch to enforce the acts of Congress. The national government had no power to pass laws on interstate commerce, including bankruptcy. In colonial times each colony or state had its own laws of bankruptcy and insolvency. There were no debtor’s prisons and intense confusion and conflict existed among the debtor laws of each state. As it gradually developed, the early federal government established power over interstate commerce and avoided these problems when it provided uniform bankruptcy law among all the states. Bankruptcy law is federal law and is found in Title 11 of the U.S. Code.
The Federalist Papers (85 essays written by Alexander Hamilton, James Madison, and John Jay supporting ratification of the Constitution) also mention ‘Bankruptcy’ in essay no. 42:
“The power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie or be removed into different States, that the expediency of it seems not likely to be drawn into question.”
Q: What if a creditor attempts to collect a debt discharged In Chapter 7?
A: This may be a violation of the Fair Debt Collection Practices Act FDCPA) subjecting the creditor to liability. See 15 U.S.C. 1692. Proof of a FDCPA is required. A discharged debtor who is subject to renewed collection efforts following discharge of a debt in bankruptcy should keep records of each time the creditor contacts them. If the person has caller ID, the discharged debtor should take a picture of the caller ID shown on their phone and keep the photo as proof. If a creditor sends a collection letter, the discharged debtor needs to keep the letter. Once a bankruptcy is filed, listed creditors may NOT contact the debtor anymore. Continued contact initiated by the creditor with the debtor is also a violation of the stay (the court order prohibiting further collection activities). A legal action can be brought against creditors and the debtor can actually win an award against them. It is important for debtor to keep good records of the creditor’s attempts and inform their bankruptcy attorney when violations occur. Contact Tim immediately.
Q: How long does a bankruptcy case take?
A: Depending on the complexity of the case, a Chapter 7 case may be completed in as little as 4-5 months. A typical Chapter 13 bankruptcy case involves a repayment plan that lasts between three and five years, and may be completed very soon after the final payment is made and the required financial education courses are completed.
Q: Is foreclosure of a home mandatory in Chapter 13 bankruptcy?
A: No, but sometimes surrendering the home may be the best option particularly for those who are significantly delinquent and on payments. Surrendering a house (or a vehicle) in bankruptcy allows a debtor to discharge the deficiency (amount owing) just like any other debt. Conversely, for a debtor/mortgagor who is not irretrievably upside down and is able to demonstrate enough earned income to pay back or “cure” their mortgage arrears over the life of the plan with increased payments, it may be both possible and sensible to keep the family home. A Chapter 13 filing CAN stop imminent foreclosure. Assuming the Chapter 13 plan is confirmable and the debtor is able to make both the regular monthly mortgage payment and re-pay the arrearage, they can keep their home. Most lenders will likely file a ‘Motion for ‘Relief from Automatic Stay’ to protect their security interests – particularly if no equity exists in the home or if the debtor is behind in their monthly payments made to the trustee.