Bankruptcy
Chapter 7
Chapter 7 is the simpler of the two consumer chapters. You file, a trustee reviews what you own and what you owe, most unsecured debt is discharged, and the case closes. For a household that qualifies, it is usually finished within a few months.
The word that frightens people is liquidation, because a Chapter 7 trustee does have the power to sell property that is not protected. In the overwhelming majority of the cases I file, there is nothing for the trustee to sell, because Colorado's exemptions protect your assets. Common non-exempt assets that would be turned over to the trustee include a portion of earned but unpaid wages and tax refunds you have either filed for and not received or not yet filed for.
- Typical length
- Four to six months from filing
- Meeting of creditors
- About a month after filing, by video
- Most common outcome
- No asset case. Nothing is sold
- Qualifying
- The means test, then Colorado exemptions
Eligibility
Who it fits
There are two issues we have to address in determining whether Chapter 7 is the right fit for you.
The first is income. The Bankruptcy Code compares your household income over the six months before filing with the Colorado median for a household your size. If you are below it, you generally qualify. If you are above it, a second calculation looks at what you actually have left after allowed expenses. Many people who are above the median income can still qualify at that step.
The second question is exempt or protected property. Colorado lets you protect a set amount of equity in a home, a vehicle, household goods, tools of a trade, and retirement accounts. If what you own fits within those limits, you keep it. If you want to keep an item that is not protected, we may consider Chapter 13 instead.
Timeline
How long it takes
After we file, the 341 meeting takes place about a month later, and the discharge order usually follows sixty to ninety days after that. In an ordinary case, that is about four to six months from filing to discharge.
The time before filing varies, because it depends on how quickly the documents come together. Some people are ready in three weeks, and some take four months. We will move at a pace that works for you, and we will help you with every document along the way.
The calculation
On the means test
I love working with clients who assume, or were told by another attorney, that they do not qualify for Chapter 7, to complete a means test in a Chapter 7 successfully. The means test is a calculation, and the result depends on its inputs: household size, the six-month lookback window and when you file within it, which expenses are allowed and at what standard, secured debt payments, and several kinds of income that are excluded.
None of that is a trick. It is the law applied carefully. But it can be the difference between being told you are over the line and filing a Chapter 7, which is why I never treat a quick look at a pay stub as the final answer.
Questions
The questions people ask me most
Do I lose my house?
This is usually the first thing people ask, and in most cases the answer is no. Colorado protects a substantial amount of home equity, and if your equity fits within that limit and you are current on the mortgage, a Chapter 7 does not put your home at risk. It becomes more complicated when there is significant equity above the exemption, or when you are behind on payments, and that second situation is often what leads to a Chapter 13.
Do I lose my car?
Usually not. There is an exemption for vehicle equity, and most financed cars have little enough equity that it is not an issue. If you keep the loan, you keep paying it and you keep the car.
What happens to my retirement?
Your retirement accounts are protected. Qualified employer plans and IRAs are exempt, and in twenty-five years, I have not had a client lose a retirement account in a Chapter 7. I have seen people cash out their retirement to pay debts that a bankruptcy would have discharged, and that is one of the most painful and expensive mistakes I see.
Will my employer find out?
No one notifies your employer in a Chapter 7. Bankruptcy filings are public records, so the case is not secret in the strictest sense, but no one is told. The exception is an active wage garnishment, where your employer already knows something is happening and will be told that it has stopped.
Can I file without my spouse?
Yes, and sometimes that is the better choice. Your spouse's income still counts in the means test, but your spouse's separate debts and credit are not automatically part of your case. Whether filing alone or together serves you better depends largely on whose name the debt is in, and we will work through that with you.
Read more
The long answers
The Colorado bankruptcy means test, explained
How the Chapter 7 means test works in Colorado: current monthly income, the state median by household size, allowed expenses, and why timing the filing matters.
11 minute read
What you keep: Colorado bankruptcy exemptions explained
What Colorado bankruptcy exemptions protect: home equity, vehicles, retirement, wages, and tax credits, plus the rules for people who moved here recently.
11 minute read
Should you cash out your 401(k) or IRA to pay off debt? Usually not. Here is why.
Retirement accounts are protected in bankruptcy, and a withdrawal costs taxes, a penalty, and decades of growth. What to know before you touch your 401(k) or IRA.
9 minute read
In clients’ words
“Tara took the time to actually listen to my situation, thoroughly review everything I submitted, and determine that Chapter 7 was the right path for me. I never felt rushed or judged.”
You do not have to figure this out alone.
From the first call, you will be treated with kindness and respect, and without judgment. You can call my office or book a Strategy Session yourself, and no one will pressure you.