Chapter 7
Liquidation Under the Bankruptcy Code
The chapter of the Bankruptcy Code providing for "liquidation," ( i.e., the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors.)
1. Background
2. What About the House and Car?
3. Colorado Chapter 7 Eligibility (The Means test)
Background
Chapter 7, otherwise known as "liquidation" or "straight bankruptcy" is generally the simplest and quickest and is available to individuals, married couples, corporations and partnerships. A trustee appointed by the court gathers and sells your nonexempt property. The proceeds from the sale pay your creditors while you are able to keep any exempt property.
A chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in chapter 13. Instead, the bankruptcy trustee gathers and sells the debtor's nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code. Part of the debtor's property may be subject to liens and mortgages that pledge the property to other creditors. In addition, the Bankruptcy Code will allow the debtor to keep certain exempt property; but a trustee will liquidate the debtor's remaining assets. Accordingly, potential debtors should realize that the filing of a petition under chapter 7 may result in the loss of property.
What About the House and Car?
In a Chapter 7 Bankruptcy filing, if you want to keep your home or car, you must be current on your mortgage and car payments. If your equity in the property is fully exempt (see above), then you may keep your home or car provided you continue to make the monthly required payments.
SOME EXAMPLES:
The exemption for home equity is $60,000 (the “homestead exemption”). If you own a home worth $200,000 and you currently owe $150,000, you have $50,000 of equity in your property. In this case, you could file a Chapter 7 Bankruptcy and keep your home provided you are current on your payments and continue to make the payments on time.
It should also be noted that the law allows for a “cost of sale” accounting. So, your home is worth $200,000 and you currently owe $130,000. This is $70,000 in equity in your home and is greater than the $60,000 homestead exemption; however, if your Realtor and other closing costs are more than $10,000 you are within the homestead exemption and your home is protected.
The exemption for equity in an automobile is $5,000 for an individual filer and $10,000 for joint filers. If you are a single filer and your car is worth $20,000 but you owe $16,000…this reflects $4000 in equity…and the car is therefore exempt from the Trustee forcing a sale. A leased vehicle does not, by definition, have equity and is not subject to the Chapter 7 filing.
Colorado Chapter 7 Eligibility (The Means test)
The “means test” was designed to limit the use of Chapter 7 bankruptcy to those who truly can't pay their debts. It does this by deducting specific monthly expenses from your "current monthly income" (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly "disposable income."
The "means test" is a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. Only bankruptcy filers with primarily consumer debts, not business debts, need to take the means test. High income filers who fail the means test may use Chapter 13 bankruptcy to repay a portion of their debts, but may not use Chapter 7 bankruptcy to wipe out their debts altogether.
However, having to take the Chapter 7 means test doesn't mean that you must be penniless in order to use Chapter 7 bankruptcy. You can earn significant monthly income and still qualify for Chapter 7 bankruptcy if you have a lot of expenses, such as a high mortgage payment. This article shows you simple ways to determine whether you can pass the means test -- and, therefore, use Chapter 7 -- if you were to file for bankruptcy.
How It Works (The Colorado Bankruptcy Chapter 7 Means test)
The means test was designed to limit the use of Chapter 7 bankruptcy to those who truly can't pay their debts. It does this by deducting specific monthly expenses from your "current monthly income" (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly "disposable income." The higher your disposable income, the more likely you won't be allowed to use Chapter 7 bankruptcy.
To take the means test, you must first determine whether your income is more or less than the median income in your state. If you earn more than the median, you must figure out whether you would have enough left over, after subtracting certain expenses, to repay some of your debt.
Is Your Income More Than the Median?
The first step is simple: If your current monthly income is less than the median income for a household of your size in Colorado…you pass. You're done. You do not need to complete the rest of the means test. You can file for Chapter 7. If your income is more than the median income for a household of your size in Colorado…you need to look at disposable income below.
Does your household income alone qualify you for Chapter 7? Simply submit your information by clicking here and we will let you know!
Do You Have Enough Disposable Income to Repay Some Debts?
For those whose household income exceeds the state median, the means test computations get significantly more complex. You must determine whether you have enough income left over (called "disposable income"), after paying your "allowed" monthly expenses and to pay off at least a portion of your unsecured debts (such as credit card bills). If your disposable income adds up to more than a certain amount, you fail the means test and cannot file for Chapter 7 bankruptcy.
Median income levels vary in Colorado by household size, and each county has different allowed amounts for categories of expenses: basic necessities, housing, and transportation.
Do you still qualify for Chapter 7 despite being about the median income? Simply submit your information by clicking here and we will let you know!
Colorado Bankruptcy Exemptions
In a Colorado Chapter 7 Bankruptcy filing, you can keep all property which the law says is "exempt" from the claims of creditors. Colorado exemptions include:-
$60,000 in equity in your home (the “homestead exemption”);
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$5,000/$10,000 in equity in your car (single filer/joint filer);
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household goods up to a total of $3,000;
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$20,000 in items you need for your occupation (tools, books, etc.);
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$2,000 in jewelry;
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$1,500 in collectibles, CDs, and/or art;
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any amount in an IRA, 401(k), or pension plan;
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your right to receive certain benefits such as social security, unemployment compensation, veteran's benefits, public assistant, and pensions - regardless of the amount- remain exempt from creditors
The Colorado Bankruptcy Center is here to protect you and your future. Contact Us when you are ready for your FRESH START.
