This article is a brief overview of how bankruptcy may impact your family law case, and not a complete primer on bankruptcy. Note that this firm practices Colorado divorce & family law, not bankruptcy, so please consult with a bankruptcy attorney about the facts of your case for specific guidance. If one spouse is considering filing for bankruptcy, the other spouse needs to consult with a bankruptcy attorney for advice about the impact on that spouse.
Types of Bankruptcy
For individuals, there are two primary types of bankruptcy:
- Chapter 7 Liquidation, in which a Trustee is appointed to collect all of the debtor's non-exempt property, which is then liquidated, and the proceeds paid to the creditors. Any remaining debts are then discharged entirely, so the debtor has a fresh start. This "complete bankruptcy" is the most common type, and the process typically takes 3-4 months.
- Chapter 13 Restructuring, in which the debtor restructures his/her debt by submitting a repayment plan to the Court (often 10 cents on the dollar) for payment over 3-5 years. Since this type of bankruptcy does not involve liquidating the debtor's assets, it is harder to qualify for (e.g. the debtor's unsecured debts cannot exceed $250,000, and the secured debts cannot exceed $750,000). Assuming the debtor complies with the repayment plan, any debts paid off in full or in part are then discharged.
If a debtor files for Chapter 7 bankruptcy, Colorado law provides that certain property is exempt from liquidation. If the debtor owns a home, then $60,000 of the equity is exempt (the "Homestead Exemption"), pursuant to C.R.S. 38-41-201.
Additionally, under C.R.S. 13-54-102, several items of property are exempt from liquidation. The most common ones are:
(a) Clothing, up to a value of $1500
(b) Watches & jewelry, up to a value of $2000.
(c) Photographs & books, up to a value of $1500.
(d) Burial Sites for the debtor plus each dependent.
(e) Household Goods, up to a value of $3000.
(f) Food & Fuel, up to a value of $600.
(h) Military Retirement
(j) Vehicles or Bicycles, up to a value of $5000 ($10,000 if elderly or disabled)
(l) Life Insurance Cash Surrender Value, up to $50,000.
(n) Personal Injury Claim Proceeds.
(s) IRA, 401(k) or pension plan
(u) Child Support or Maintenance Payments received.
For a complete list of exempt property, together with statutory references, see this handy chart on www.coloradobankruptcy.com. Note that the chart's citations are accurate, but the values contained in the chart are a bit out of date.
Upon filing a bankruptcy petition, an automatic stay goes into effect which prevents most collection actions against the debtor. however, there are exceptions which are important for family law: actions to establish paternity, start a dissolution, and to establish or modify a maintenance or child support obligation. 11 U.S. Code §362(b)(2)(A).
But note one important aspect of family support - the Colorado family law court can establish a support order, but not necessarily enforce it while bankruptcy is proceeding. Pursuant to §362(b)(2)(B), the stay only permits property which is NOT part of the bankruptcy estate to be attached for family support obligations. In the context of a Chapter 7 bankruptcy, this means the list of exempt property described above, plus and post-petition earnings.
With a Chapter 13 bankruptcy, no enforcement action to collect family support obligations is permitted while the bankruptcy is pending.
Discharge of Debts
While the automatic stay restricts or prevents the enforcement of family support obligations while the bankruptcy is pending, the debtor's relief is only short-lived. Among the list of obligations which cannot be discharged in bankruptcy are a: