When Denver couples divorce, few anticipate that one of the parties will file for bankruptcy, or that the bankruptcy could have such an impact on both of their lives. That is because there is a lot of confusion about bankruptcy in general: who applies for bankruptcy, what it involves, and its long-term impact.
This blog will look at bankruptcy as it relates to Denver couples who separate and divorce in two parts. The first part will discuss bankruptcy in general, and what happens when one member of a still-married couple files for bankruptcy. The second part will discuss potential problems a couple encounters when they separate and one party files for bankruptcy, or when one party files during or after divorce proceedings.
What Is Bankruptcy?
When individuals or couples file for bankruptcy, it is usually because they are looking to clear away debt. Their house might be “underwater” — meaning it is worth less than they owe on their mortgage — and they may have several large debts, such as for credit cards. In these situations, creditors will act aggressively to either pursue the debt or, if applicable, to foreclose or repossess the property. A family’s lives might be filled with threatening phone calls and letters. People in this situation typically file for bankruptcy because they have no other choice: they cannot make a deal with the credit card companies or afford to make their current mortgage payments.
When individuals file, they typically file for either Chapter 7 or Chapter 13. Chapter 7 is the most common, and is used when individuals have a lot of “unsecured” debt (debt that is not secured by property, such as a house) that they cannot pay off. The most common type is credit card debt. A Chapter 7 bankruptcy usually lasts from three to six months, and the individual or couple cannot file again for eight years. Once a debtor files for Chapter 7, the debtor’s property is put in the hands of a trustee, who determines which of it is “nonexempt” — that is, can be liquidated and used to pay off creditors. Every state has exemptions that debtors can apply to protect much of their property from liquidation, including Colorado. After the trustee has liquidated the nonexempt property and paid the unsecured creditors, the debtor receives a discharge.
In a Chapter 13, the debtor typically enters a three-to-five year court-certified plan to repay their debts. Chapter 13 is most common for those who face foreclosure and want to keep their homes, and who have enough income to make payments over time. Once a debtor has completed a Chapter 13, he or she cannot file again for four years.
In both Chapter 7 and Chapter 13, the debtor receives an injunction called an automatic stay at the time he or she files. It prevents creditors from harassing or attempting to repossess property while the bankruptcy remains in effect, providing debtors with peace of mind.
When Members of a Couple File For Bankruptcy
A couple may either file for bankruptcy jointly, or one member of the couple may file individually. Couples often file for bankruptcy jointly in an effort to protect as much of their property as possible, because couples in Colorado receive double the exemptions available to an individual. That works best when the couple has a lot of joint debts. However, if only one of the couple has a lot of debt, the one without debt might not want to be responsible for paying debts owed by the spouse. In that case, it might be better for that spouse to file individually. Since Colorado is a marital property state, rather than community property, it is not a given that any property acquired during the marriage will be considered part of the bankruptcy estate. The other spouse will still be responsible for his or her individual debts.
If bankruptcy appears complicated when couples are still married, it becomes even more complicated when they separate or divorce.
If you are planning to divorce, it is crucial to have a knowledgeable Colorado family law on your side. Contact the experienced Denver family law attorneys at Plog & Stein, P.C.