Regardless of whether you need a chapter 7 or chapter 13 Denver bankruptcy lawyer or, instead, have a fairly stable financial situation, it is imperative to know what you’re dealing with when borrowing money. The Law Office of David M. Serafin can advise as to how to best address excessive debt of any type. A debt can be either secured or unsecured. A secured debt gives a creditor the right to foreclose upon (for real property) or repossess (for personal property) collateral, whether or not the collateral was originally pledged as security for debt. (With a non-purchase money secured debt, a debtor typically pledges property other than that directly purchased to incur the debt simultaneous to the debt being incurred. For instance, this may be an already paid off vehicle.)
In comparison, no collateral is pledged in return for unsecured debt. Unsecured debt can be incurred voluntarily – e.g. credit cards or a personal line of credit, or involuntarily – e.g. medical bills or a deficiency balance owed from a previous foreclosure or repossession. Because an unsecured creditor has only the option of suing you personally on the debt incurred (typically in the County Court of your county of residence in Colorado), obtaining a judgment and then pursuing collection (by garnishment of wages, freezing a bank account, filing a lien on your home or business, or otherwise selling your assets, the interest rate you’re paying is almost always higher than with secured debts.Fraudulent Transfers
If bankruptcy is on the horizon, as a Denver bankruptcy lawyer, I will help you determine how you can legally keep the assets you own. In any case, you do not want to simply give away any valuable assets, particularly to a relative or business partner, immediately prior to filing. Such a fraudulent transfer (called such even if you had no subjective intent to defraud anybody) can be rescinded by a trustee or, if the trustee cannot or refuses to pursue the transferee of the property, you still may be responsible for reimbursing the bankruptcy estate the value of the transferred. The worst case scenario is that a fraudulent transfer will result in your case being dismissed.Chapter 7 Versus Chapter 13 in Colorado
Chapter 7 is the simplest, quickest and easiest form of debt relief in Colorado. Often called a liquidation, you typically can discharge (or eliminate) all unsecured debt, except for student loans. A chapter 7 is not advisable if you own valuable assets or if you own a business with equity (e.g. assets exceed liabilities) because the trustee will either compel turnover of the asset or require that the value of the asset be paid back to the bankruptcy estate in installments.
However, even in a chapter 7, not all property will be lost. Compared with many states, Colorado has rather generous exemption laws. Property statutorily deemed exempt cannot be taken by the trustee or any creditors. Examples of property exemptions in Colorado include the following: the first $60,000 of equity in a homestead ($90,000 if the owner is 60 years of age or older), $5,000 of equity in a motor vehicle ($10,000 if the owner is 60 years of age or older), $3,000 of household goods, $1,500 of clothing, 75% of wages and over $1 million for an ERISA qualified retirement account (usually a 401(k) or IRA). These exemption laws in Colorado apply regardless of the chapter filed.
For those owing valuable assets, a chapter 13 may be a better option. For instance, a homeowner with $120,000 of household equity in a home would only be able to retain the home by filing for chapter 13 and “reconciling the non-exempt equity” or paying back in installments of 3-5 years the equity above the Colorado exemption limits. Similarly, in order to prevent a liquidation of a small business with significant assets and little liabilities (particularly as this would presumably diminish income earning capacity), the owner may prefer to pay back the equity from the profits of the business.Legitimate Pre-Bankruptcy Protection of Assets in Colorado
A doctrine related to the prohibition against fraudulent transfers is that against avoidable preferences. The Bankruptcy Code disallows pre-filing payments of debts to favored unsecured creditors, such as relatives, business partners or even a trust or other estate planning device to the detriment of the remaining unsecured creditors.
But, the following use of funds in anticipation of bankruptcy is typically permissible:
- Paying down tax debt to the IRS or Colorado State Dept. of Revenue,
- Paying down a mortgage or car loan up to Colorado exemption limit,
- Making annual contributions to an ERISA qualified retirement account, such as a 401(k) or IRA – but, don’t run afoul of the tax laws by over-contributing,
- Purchasing health, life (term, not permanent life insurance with a cash surrender value) or disability insurance, or
- Liquidating non-exempt property such as a recreational vehicle or boat in order to make past due payments (e.g. cure arrears).
In my experience as a practicing Denver bankruptcy lawyer, the decision to file is typically expedited if you are facing an imminent foreclosure action sale date, if your car is about to or already has been repossessed, or you are having wages or a bank account garnished (or about to be garnished) by an unsecured creditor with a judgment or even by the IRS or Colorado State Dept. of Revenue.
Conversely, absent a situation justifying taking immediate action to stave off creditors, having time to make wise pre-filing related decisions by taking one or more of the aforementioned pre-filing planning steps, can very well pay off.
For further advice regarding asset protection in Denver or other areas of Colorado, please contact the Law Office of David M. Serafin.