Chapter 7 Bankruptcy - Best Way to Repair Credit

Summary:  For almost everyone, a Chapter 7 liquidation filing is the best and fastest way to get back on track and establish good credit. You can get rid of all of your bills, except a few exceptions such as recent income tax and family Domestic Support Obligations. Most people can keep all of their assets. And since you are getting rid of your debt in a bankruptcy case, you will not owe any income tax on the discharge of that debt.

Using a Colorado Chapter 7 Bankruptcy to Get Back on Track

There is nothing as powerful as a Chapter 7 to get immediately free of debt. It immediately gets rid of almost all debt, including credit card bills, mortgages and car loans (if you surrender the collateral), attorney fees, medical bills, and income taxes more than 3 years old.

And this discharge of debt will not be taxable income to you.

About the only debts it will not get rid of are recent income tax, some student loans, fraud or theft bills, drunk driving, and Domestic Support Obligations (“DSO”.) In some cases, recent income taxes can be reduced through the use of an Offer in Compromise. A DSO is a family support obligation, including child support, maintenance (alimony), and debts which are established in a divorce. That is why you should generally take bankruptcy before you get a divorce, as is explained in the page on divorce and your bills.

When you get rid of all of these bills, you free up your income to make mortgage payments and other payments to support your family and get back on track with top credit.

A disadvantage of a Chapter 7, compared to a Chapter 13, is that in a Chapter 7 you do not have the right to catch up on any arrears (delinquent payments) on your home mortgage or car loans.

Keep Your Assets and Stop Lawsuits, Garnishment, and Collection Harassment

Most Chapter 7 filers are able to keep all of their assets, because of the generous Colorado exemptions. See Chapter 19 for a listing of assets which are exempt from the reach of creditors and can be kept if you file either a Chapter 7 or a Chapter 13.

This usually means that you can keep your home and vehicles, as long as you are or become current.

Any action to collect a debt from you must immediately stop, even telephone calls, wage garnishment, and the mailing of collection letters.

Get Started Re-building Your Credit

Since a Chapter 7 immediately gets rid of your debt, you immediately begin re-building your credit. The 3 credit reporting agencies must report your debt balances as $0. You can get a new credit card secured by a savings account. You can usually qualify for the lowest interest rate prime mortgage loans in about 2 years.

This is the fastest way to get back on track with good credit.

Qualification for a Chapter 7

After the 2005 change in the law, your household income must be below the median income in Colorado. Or, if you are above the median income, you must “pass” the means test.

The Colorado median income as of January 1, 2011 is:

Number in Your Home	1	2	3	4	5 or more
Colo. Median Income	$47,814	$63,635	$69,717	$82,621	add $7,500/pers.

If your household income is above the median income, then you must “pass” the means test.

The determination of whether you can “pass” the means test is a complicated calculation which depends on your specific circumstances, including all of your income for the prior 6 months. In most cases, it takes 2 to 4 hours of input into a computer program in order to do the analysis.

The following is a repeat of the example which appears on the page on using bankruptcy to prevent foreclosure.

	Example for Chapter 7: Value of the Home: $250,000 Mortgage Balance: $200,000 Equity $ 50,000 Mortgage Arrears: $ 11,000 Credit Card Bills: $ 45,000 Car Loan or Lease: $ 20,000 Here, the Trustee cannot sell the home since the homestead exemption of $60,000 fully protects the $50,000 equity in the home. However, the homeowner will have to pay the $11,000 mortgage arrears after the Chapter 7 ends (or sometimes before it ends) to prevent the foreclosure. The lender might go along with a payment arrangement. However, there is no payment plan for the payment of the arrears similar to that in a Chapter 13 plan. Thus, in a Chapter 7 if the arrears cannot be cured, then the foreclosure may be completed after the Chapter 7 is completed (or earlier if the stay is lifted during the Chapter 7. The big advantage of a Chapter 7 is that your unsecured debt such as the $45,000 of credit card bills and judgments are discharged (eliminated.) And this discharge of debt is not taxable income. This frees up your income to save your home. Also if you have a car loan or lease, you can turn the car back in and also eliminate any debt there, too. In this example, all of the $45,000 credit card bills and the $20,000 car loan or lease will be eliminated and you have no more debt other than your home. You will have to turn the car back in to eliminate that debt or lease.