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Colorado Bankruptcy Exemptions and Law
If you live in Colorado and are having trouble paying down your debt, bankruptcy could shield you from bill collectors while you pay off or eliminate your debt. Bankruptcy offers individuals and couples who are deep in debt and do not see any route to paying it off in the future a way forward. It can force your creditors to accept payment plans and reduced payments to give you a fresh start free from most debt.
While the Bankruptcy Courts are governed by federal law, the U.S. Bankruptcy Code lets states create their own rules on property that can be protected from creditors. This protected property is usually referred to as “exempt property" and lets you shelter some assets to help you start over after bankruptcy.
Some states let you choose between state and federal exemption rules, depending on which one benefits you the most. But Colorado requires you to use the state rules. To understand how these exemptions will help protect your property in bankruptcy, it helps to know that there are two kinds of personal bankruptcy:
- Chapter 7 Bankruptcy is often known as a “liquidation" bankruptcy because you must turn over all of your property that is not exempt to a trustee who will sell it to repay your creditors. In return for giving up your nonexempt assets, you will usually exit Chapter 7 free from nearly all debt. However, you can only file under the chapter if your disposable income falls below a certain level.
- Chapter 13 Bankruptcy allows people who have a steady income to restructure their debt so that most of it is paid off over three to five years. Payments are made under a plan approved by the court that will often relieve you of some of your debt. In most cases, homeowners filing for Chapter 13, will keep their house.
Perhaps the most important benefit offered by both types of bankruptcy is the automatic stay issued by the court when you file. The stay stops all collection actions by your creditors, including court cases and foreclosures. The stay lets you stop worrying about being harassed by your creditors while you work to find a solution to your debt problems. The stay also keeps more aggressive creditors from seeking payment ahead of others by stopping all collection actions.
Secured vs. Unsecured Debt
If you are thinking about filing bankruptcy you must understand that your debts will be designated as either secured or unsecured. This designation plays a major role in bankruptcy because it dictates how much debt you can eliminate. Additionally, secured and unsecured assets are treated differently when you file for Chapter 7 or Chapter 13.
An unsecured creditor has no right to seize your property if you fail to pay. Since those creditors hold no collateral for the debt you owe them, it is most likely to be eliminated in bankruptcy. Credit card debts, court judgments, medical bills, and most income taxes are unsecured debt.
However, not all unsecured debt can be eliminated in bankruptcy. You will likely need to pay off all of your priority debts like child and spousal support.
Your secured creditors have the right to seize your property if you fail to pay them. Since creditors retain their rights to repossess your property in bankruptcy, this type of debt is harder to shed. You will usually need to either return the property or work out a payment plan if you have secured debt. Home mortgages, car loans, and property liens are the most common types of secured debt.
How Secured and Unsecured Debt Work in Bankruptcy
In a Chapter 7 bankruptcy case you can usually discharge most of your unsecured debt. Unsecured creditors are only paid after secured creditors. In addition, unsecured creditors do not have access to your exempt property. You will generally have three options for secured debt in a Chapter 7 proceeding:
- Return the property to the creditor. When you choose this option you will lose the property, but will usually free you from making more payments on the debt.
- Keep the property and keep making payments. This is most likely when a state exemption covers your equity in the item.
- Purchase the property outright. This rarely happens in Chapter 7 because people filing under this chapter generally lack the needed cash to do so.
A Chapter 13 filing lets you create a plan to repay your creditors over three to five years. The court may force your creditors to accept a repayment plan that reduces or restructures the debt. Your unsecured creditors will be paid with the disposable income left after you have repaid your secured creditors. At the end of the plan, your unsecured debts will be discharged by the court.
Mortgage payments are not included in the plan and you will continue to make those payments as you did before filing for bankruptcy. But your trustee may negotiate a payment agreement with your lender if you have fallen behind on payments.
There are two means tests used to determine whether you can file under Chapter 7 in Colorado. The first test is pretty straightforward: If your household income is less than the median income for households of the same size in Colorado, you qualify. According to census data, the median household income for a three-person Colorado family was $95,050 in November 2020.
If you determine that your income is above the state median, you may still be eligible for Chapter 7. The second means test is based on calculations of your monthly disposable income. You find that by subtracting your monthly expenses from your monthly income. If you are found to have little to no disposable income each month, you can file under Chapter 7.
To file under Chapter 13 you must have a steady income and unsecured debts of no more than $419.275. Your total secured debts cannot total more than $1.26 million.
Colorado has established its own exemptions system and you must use them if you file for bankruptcy there. Exemptions are an important part of bankruptcy because if your property falls under one of the exemptions you can protect it from creditors. Put simply, exemptions help you start over with more financial assets.
If you are a married couple filing for bankruptcy jointly, Colorado will let you double the amount of most exemptions if both spouses own the property together.
If you live in Colorado, up to $75,000 of your home's equity will be exempt. That number rises to $105,000 if you, your spouse, or a dependent who lives in the home is at least 60 or disabled. A spouse or child qualifies for the homestead exemption if the owner dies.
At least 75% of your weekly disposable earnings or 30 times the federal minimum wage, whichever is greater, is exempt. Your disposable earnings are any compensation you earn, plus insurance, minus any amounts required by law to be withheld. Additionally, any money received as compensation, a pension, or allowance for your service in an armed conflict will be exempt.
Colorado law provides an exemption for up to two motor vehicles or bicycles up to a total value of $7,500. That amount increases to $12,500 if you, your spouse, or a dependent are at least 60 or disabled. The exemption does not apply to motorhomes, travel trailers, tent trailers, snowmobiles, golf carts, all-terrain vehicles, or watercraft.
Personal Property Exemptions
Colorado provides several exemptions for your personal property. Those include:
- $3,000 for household goods, like furniture, appliances, home electronics, and musical instruments
- $2,000 of necessary clothing
- $2,500 of jewelry, watches, and similar items
- $2,500 for a library, school books, family pictures.
- Prescribed health aids
Tools of the Trade Exemption
Up to $30,000 of tools, supplies, equipment, and other business property you use in your primary occupation is exempt. If they are not used in your primary occupation, the exemption amount drops to $10,000.
Child Support Exemption
Child support is exempt if the recipient deposits it into a separate account for the child's benefit.
Retirement and Pension Exemptions
The following retirement and pension benefits are exempt under state law:
- Tax-exempt retirement accounts, such as 401(k)s, defined benefit plans, and profit-sharing plans.
- IRAs and Roth IRAs are exempt up to $1.36 million.
- ERISA-qualified retirement plans and the pensions of veterans who served in an armed conflict
- Public employee pension, defined contribution, and deferred compensation plans
Government Benefit Exemptions
The following government benefits are exempt in Colorado:
- Unemployment compensation
- Workers' compensation
- Veteran's benefits for the spouse or child of a veteran serving in an armed conflict
- Disability benefits of up to $3,000
- Earned income tax credit
- Crime victims' compensation
- Public assistance such as aid to the blind, aged, and disabled
Business Partnership Property
If you are a member of a business partnership, the partnership's property is exempt.
No Wildcard Exemption
Many states and federal bankruptcy law provide a “wildcard exemption" that lets you protect any property of your choosing from creditors, up to a certain amount. However, Colorado has no wildcard exemption.
Before you can file for personal bankruptcy in Colorado you will be required to take a credit counseling course to help assess whether you can pay your debts outside of bankruptcy. You must show that you finished the course within 180 days of filing by including a completion certificate with your bankruptcy filing.
If you are not represented by an attorney you will begin the bankruptcy process by downloading the correct bankruptcy petition for the District of Colorado. There are separate petitions for Chapter 7 and 13. The instructions will let you know which additional forms and documents must be filed along with the petition.
If you want to file for Chapter 7 bankruptcy in Colorado it will cost you $338 in filing fees. The filing fees for a Chapter 13 case are $313. The fees are the same whether you represent yourself (known as filing “pro se"), or using a lawyer. If you can't afford the filing fee, you can ask to pay in installments over 120 days. Additionally, you can seek to have the fee waived if your income is less than 150% of the poverty line.
Most filers choose to hire an attorney to represent them in bankruptcy. Most Colorado bankruptcy lawyers will charge between $800 and $1,500 for a relatively simple Chapter 7 filing. Typical fees for a simple Chapter 13 filing can run from $2,000 to $4,000.
Need Help Filing for Bankruptcy in Colorado?
If you are having financial trouble, paying a bankruptcy attorney may seem like an expensive luxury when you can file on your own. But personal bankruptcy can be a very complicated process and you will need to closely follow the rules and deadlines or your case will be thrown out of court and you will once again be receiving calls from collection agencies. A local bankruptcy attorney will represent you in court, negotiate with creditors, and ensure that you keep as many of your assets as the law allows.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.