What Happens to Your Debt After Filing Bankruptcy in Colorado

Filing for bankruptcy is a significant decision that can have lasting effects on your financial situation. In Colorado, as in other states, the bankruptcy process can provide individuals with relief from overwhelming debt. Understanding what happens to your debt after you file for bankruptcy is crucial for anyone considering this option.

When you file for bankruptcy in Colorado, an automatic stay goes into effect. This stay halts most collection actions against you, including lawsuits, wage garnishments, and calls from creditors. This immediate relief allows you some breathing room as you navigate the bankruptcy process.

There are two common types of bankruptcy individuals may file for: Chapter 7 and Chapter 13. Each type has different implications for your debt.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is often referred to as "liquidation" bankruptcy. In this process, most of your unsecured debts, like credit card debt and medical bills, can be discharged, meaning you are no longer legally obligated to pay them. However, some debts are nondischargeable, such as student loans, certain taxes, and child support obligations.

Once you file for Chapter 7 bankruptcy, a trustee is appointed to oversee your case. They may sell some of your non-exempt assets to pay off your creditors. However, many filers do not lose any property due to Colorado's exemptions, which allow you to protect a certain amount of equity in your home, vehicle, and personal possessions.

Chapter 13 Bankruptcy

In contrast, Chapter 13 bankruptcy involves creating a repayment plan to pay off your debts over a period of 3 to 5 years. This option is ideal for individuals who have a steady income and wish to avoid liquidation of their assets. During this time, debts like mortgage arrears and car payments can be included in the repayment plan, allowing you to keep your property while you pay off your obligations.

After completing the repayment plan and making all required payments, any remaining unsecured debts are generally discharged. This means you will emerge from bankruptcy with a clean slate, albeit with a record of the bankruptcy filing on your credit report.

Impact on Credit Score

Filing for bankruptcy in Colorado has a significant impact on your credit score. A bankruptcy filing will remain on your credit report for 7 to 10 years, which may affect your ability to secure new credit or loans in the future. However, many individuals find that their credit score begins to improve within a few years of filing as they start to rebuild their financial standing.

Post-Bankruptcy Considerations

After filing for bankruptcy, it’s essential to take proactive steps to manage your finances. Create a budget, rebuild your credit, and consider financial counseling to set yourself up for success. Your ability to get credit after bankruptcy is possible, especially if you demonstrate responsible financial behavior.

Ultimately, understanding what happens to your debt after filing for bankruptcy in Colorado can empower you to make informed decisions about your financial future. Seek advice from a qualified bankruptcy attorney to navigate the complexities of the process and to understand your specific situation better.