The Intersection of Chapter 7 and 13 Bankruptcy and Dissolution of Marriage In Colorado Springs, CO

Are you involved in a Colorado legal proceeding involving bankruptcy and dissolution? An experienced Colorado Springs, Colorado divorce and child custody lawyer can guide you through the legal process and assist you in exploring your options. You have one bite at the apple in the court system so make it count.

A Chapter 7 bankruptcy is intended to provide debtors with a “fresh start”. The debtor can keep all “exempt” property, however must give up any other property. In exchange some or all of the debt is discharged. There are exemptions for certain assets owned by the debtor which protects the assets from collection in bankruptcy. For example, the homestead exemption allows a person to keep a certain amount of equity in a primary home. See C.R.S. § 13-54-102, § 13-54-104, and § 38-41-201(a). It should be noted that, a Chapter 7 creates a negative credit rating and can remain on a credit report for ten years, negatively impacting the ability to obtain more credit. In addition, a debtor cannot file a subsequent Chapter 7 for at least eight years. 11 U.S.C. § 727(a)(8).

Chapter 7 bankruptcies also offers the highest level of dischargeability. 2 A Chapter 7 bankruptcy is relatively fast and occurs within 120 to 180 days after filing. However, not everyone qualifies for a Chapter 7 bankruptcy. An applicant has to qualify under the “means test”. Generally, in order to qualify the debtor’s monthly income must be lower than the state median family income.3 Which chapter is best for an individual must be determined on a case by case basis. Common reasons to pursue a Chapter 13 instead of a Chapter 7 are too much income, a desire to protect non-exempt assets, and/or having debt that is nondischargeable under a Chapter 7. Typical steps in a Chapter 7 bankruptcy are:

1. Take the means test to determine qualification;
2. Complete an online credit counseling course;
3. File for bankruptcy and provide comprehensive information about income and assets and debt as well as an income tax return;
4. Attend a meeting of creditors with a bankruptcy trustee; and
5. Complete an online personal financial management counseling course.

Keep in mind that not all debt is dischargeable. Some debt is automatically non-dischargeable. 11 U.S.C. § 523(a). For example, domestic support obligations, such as child support or spousal support are non-dischargeable. See 11 U.S.C. § 523(5); 11 U.S.C. § 101(14A). Other types of debt can be dischargeable if the creditor objects to the discharge, such as debt arising out of:

1. false pretenses, fraud, or false financial statements, such as misrepresentations on loan applications (11 U.S.C. § 523(a)(2));
2. fraud, embezzlement, or larceny (11 U.S.C. § 523(a)(4)); and
3. malicious and willful injury to person or property (11 U.S.C. § 523(a)(6)).

The Chapter 7 means test is a test designed to determine whether an individual debtor qualifies for a Chapter 7 bankruptcy, which is intended for those who do not have sufficient assets or income to reasonably pay debt. As outlined in 11 USCS § 707, it is a mechanism designed to determine whether an individual debtor's Chapter 7 bankruptcy filing is appropriate and not “abusive” of the system. The test compares income and expenses to set thresholds. The debtor's monthly income, calculated by averaging income from the six months prior to filing, is compared to the median family income in the state. If the income is below the state median, qualification is automatic. In re Wilson, 454 B.R. 155 (2011).

However, if the debtor's income exceeds the state median, the means test requires a further requires examination of disposable income. 11 USCS § 707, § 31.2.3. The examination involves deducting certain allowable expenses from income to further assess disposable income. These expenses include:

1. Standard of living expenses prescribed by the Internal Revenue Service (IRS), and
2. Actual monthly expenses for categories specified as "Other Necessary Expenses" by the IRS, such as healthcare and childcare costs . In re Wilson, 454 B.R. 155 (2011).

After income is reduced by these deductions, the resulting disposable income value determines whether the debtor has sufficient funds to repay creditors. Generally applicants are aware of the results of the test prior to filing. However, if it is determined that the debtor does not qualify for the Chapter 7 after filing, the court may dismiss it or convert it to another chapter, such as Chapter 13 with the debtor's consent. 11 USCS § 707, § 31.2.3. The purpose of the means test is to ensure that Chapter 7 relief is reserved for those debtors who genuinely require it. This approach protects the rights of creditors. 11 USCS § 707.

Alternatively, in a Chapter 13 bankruptcy, debtors enter into a repayment plan and keep all of their property. They repay creditors for a period between 36 – 60 months. At the end of the repayment period, any remaining debt is discharged. Secured and priority creditors are paid first, and unsecured creditors are paid next. Typically, Unsecured creditors may receive between 1% and 100% of their claims. One advantage of a Chapter 13 is that it allows the discharge of certain debt that would be non-dischargeable under a Chapter 7. For example, marital property division obligations may be dischargeable in a Chapter 13, but not in a Chapter 7. However, domestic support obligations owed at the time of filing are not dischargeable under either plan. 11 U.S.C. § 707(b)(2)(A)(iii).

If an applicant does not pass the Chapter 7 means test, he or she typically pursues a Chapter 13. If the debtor’s current monthly income is greater than the state median, the plan must last for 60 months. 11 U.S.C. § 1325(b)(4). As with Chapter 7, certain debts are nondischargeable, including non-listed debts, outstanding support obligations, and student loans as well as certain disputed claims that can be made by creditors. 11 U.S.C. §§ 523(3), (5), and (8), 11 U.S.C.§§ 523(c) and 1328(a).

There is a required repayment plan for Chapter 13. The repayment plan must provide for full payment of priority claims. 11 U.S.C. §§ 1322 and 1325. Priority claims are taxes and past-due domestic support obligations, unless the holder of the claim agrees otherwise. See 11 U.S.C. § 1322(a)(4). All debt owed should be disclosed in the bankruptcy schedules. Creditors can file objections to the confirmation of a Chapter 13 plan. Absent an objection, the plan is binding on all creditors. However, Chapter 13 plans do not have a high success rate, and fewer than 50 percent are completed. If the case is dismissed because the plan is not completed, creditors can then collect any remaining debt that has not been paid through the plan.

A highly knowledgeable and experienced Colorado Springs divorce and child custody lawyer can guide you through Colorado Springs divorce and child custody matters by negotiating, mediating and litigating on your behalf. You can focus on moving to a better future instead of spending your time attempting to navigate complex legal rules and procedures.

Sabra Janko from Janko Family Law has more than 20 years of legal experience and has written “the book” on Colorado divorce and family law – “Colorado Family Law With Forms”, published by LexisNexis, which you can find here. Contact us at 719-344-5523 or complete our online scheduling request for a free 30-minute informational consultation. We also offer paid advice sessions for a more in-depth analysis of your case.