Colorado Bankruptcy Law: Key Differences Between Chapter 7 and Chapter 13

When individuals in Colorado are faced with overwhelming debt, they often consider filing for bankruptcy as a viable solution. Understanding the different types of bankruptcy available under Colorado law is crucial to making an informed decision. The two most common types are Chapter 7 and Chapter 13 bankruptcy, each with its distinct features and implications.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," allows debtors to eliminate most unsecured debts, such as credit card debt, medical bills, and personal loans. In this process, a bankruptcy trustee may sell non-exempt assets to repay creditors. However, Colorado has specific exemptions that protect certain assets from being sold. For example, a primary residence, a vehicle, and personal belongings can often be exempt up to certain values.

To qualify for Chapter 7 bankruptcy, individuals must pass the means test, which evaluates their income against the median income for Colorado residents. If their income is below the median, they are eligible for Chapter 7. If not, they may need to consider Chapter 13 bankruptcy instead.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is known as "reorganization bankruptcy." It allows individuals with a regular income to create a repayment plan to pay back a portion of their debts over three to five years. This method is advantageous for debtors who want to keep valuable assets, like a home or vehicle, while getting back on their financial feet.

In Chapter 13, the debtor proposes a repayment plan to their creditors, detailing how they will repay their debts over a specified period. As long as the plan is approved by the court, individuals are protected from creditor actions, such as foreclosure and repossession, during the repayment period.

To qualify for Chapter 13, debtors must have a steady source of income and must not exceed certain debt limits established by the bankruptcy code. These limits are updated periodically, so staying informed about the current thresholds is essential for those considering this route.

Key Differences Between Chapter 7 and Chapter 13

The primary difference between Chapter 7 and Chapter 13 bankruptcy in Colorado lies in the way debts are dealt with and the eligibility criteria. Chapter 7 provides a quicker discharge of debts, typically within a few months, while Chapter 13 requires a longer commitment, as debtors must adhere to a repayment plan over several years.

Another difference is the treatment of assets. In Chapter 7, non-exempt assets may be liquidated to pay creditors, whereas Chapter 13 allows individuals to retain their assets while repaying creditors through the structured plan.

The means test also plays a crucial role. Chapter 7 requires passing this test based on income, while Chapter 13 is available to individuals with a regular income, regardless of their income level, as long as they fall under the specific debt limits.

Conclusion

Choosing between Chapter 7 and Chapter 13 bankruptcy in Colorado depends on various factors, including income, types of debt, and whether individuals wish to retain their assets. It's advisable for anyone considering bankruptcy to consult with a qualified bankruptcy attorney who can provide personalized advice and help navigate the complex legal landscape.