An underlying policy of bankruptcy law is to help consumers receive a fresh start in their financial lives. Many times, the only way to help people receive this fresh start is to allow them to completely get rid of a certain amount of debt. Getting rid of debt through bankruptcy is a process called discharge.

Discharge of debt occurs at the end of a consumer’s bankruptcy case. After the consumer’s non-exempt property has been collected and sold at auction, the proceeds of the auction sale are distributed to the consumer’s creditors. Once all of the auctions proceeds are gone, the consumer can discharge many of her debts one and for all. Indeed, the ability to discharge burdensome debt is one of the more attractive provisions of the bankruptcy laws.

However, not all of kinds of debt can be discharged through bankruptcy, and it is important to be aware of the types of consumer debts that are “non-dischargeable.” Debt that is “non-dischargeable” is debt that survives through the end of bankruptcy, and the consumer will still owe the same amount of that particular debt. For example, many consumers likely wonder if they can discharge their student loan debt through bankruptcy. Unfortunately, student loan debt is non-dischargeable through bankruptcy. The reason for this is because Congress decided that if a consumer could discharge her student loan debt by filing for bankruptcy, then lenders of student loans would be less willing to loan students money to pay for tuition. So, Congress created bankruptcy laws that do no allow for the discharge of student loans in order to encourage more institutions to lend students money to pay for their education.   Other debts that are non-dischargeable include state and federal taxes, debt obtained through fraud by the consumer, domestic support obligations, fines or penalties payable to the government, and debt resulting from deliberate actions of the consumer resulting in harm to another person or entity.[1]

Importantly, however, a consumer might be able to discharge her student loans and other non-dischargeable debt if she can show what is called “undue hardship.” A consumer with undue hardship usually cannot maintain a minimal standard of living if forced to repay the loans and the court sees that these burdensome circumstances will persist into the future. It must be noted that the standard for proving undue hardship is a high standard and somewhat difficult for consumers to show in bankruptcy. If, however, the consumer can prove undue hardship, then a court has the ability to discharge the student loan debt or at least reduce the amount owed.

In addition, the bankruptcy laws are very clear in saying that dishonesty is frowned upon. In fact, a court may completely deny the ability of a consumer to discharge her debt if it finds that the consumer has lied to the court or to the consumer’s creditors. In these cases, where the court finds that the consumer has been intentionally dishonest regarding her bankruptcy, the consumer may not be able to discharge any of her debt thereby eliminating one of the most beneficial parts of filing for bankruptcy.

In summary, filing for bankruptcy can allow for a consumer to discharge a significant portion of her debt and allow the consumer to leave bankruptcy with a fresh start. However, some kinds of debt cannot be discharged, unless undue hardship is shown. As with all aspects of filing for bankruptcy, is it vital to consult with an attorney to discuss your options.

[1] For full list of non-dischargeable debt, see § 523(a).

In a traditional Chapter 7 liquidation bankruptcy, the court will gather all of the debtor’s property to eventually sell at auction. The proceeds from the auction sale are then disbursed to the debtor’s creditors to satisfy existing debts. Once all of the auction proceeds are disbursed, the debtor is discharged from bankruptcy.

While this process is seemingly straightforward, a consumer considering bankruptcy might wonder: can the court sell all of my property? The short answer to this question is no.

Certain property is exempt from sale at auction, and the debtor who filed bankruptcy is permitted to keep some of her property. These “exemptions” reflect an underlying policy of United States bankruptcy law – we want to leave every debtor with enough basic property to have a reasonable chance to successfully emerge from bankruptcy. In other words, exemptions help provide a debtor with a fresh start.

In Colorado, the following types of property are exempt from sale, up to a certain dollar amount, in a Chapter 7 liquidation bankruptcy[1]:

• Homestead: real property, mobile home or manufactured home you occupy up to $60,000 or $90,000 if occupied by an elderly (60+) or disabled debtor or spouse
• Insurance Benefits: disability benefits up to $200 per month; if lump sum received, the entire amount is exempt
  • Includes group life insurance policy or proceeds
• Pensions: ERISA – qualified benefits, including IRAs
• Personal Property:
  • Clothing up to $1,500;
  • Food and Fuel up to $600;
  • Household goods up to $3,000;
  • Jewelry and articles of adornment up to $1,000;
  • Motor vehicles used for work up to $3,000;
  • Pictures and books up to $1,500;
  • Full amount of any federal or state earned income tax credit refund
• Tools of the Trade: Horses, mules, wagons, carts, machinery, harness, and tools of farmer up to $25,000
  • Also includes the library of a professional up to $3,000 or stock in trade, supplies, fixtures, machines, tools, maps, equipment, books and business materials up to $10,000
  • Also includes livestock and poultry of farmer up to $3,000

A consumer might wonder what happens if she owns a piece of property that falls into one of these exemption categories, but the property is worth more than the dollar limit of the exemption. For example, a debtor owns an item of jewelry that is valued at $1,500, but Colorado law allows an exemption for jewelry only up to $1,000. In that case, the jewelry would be sold at auction for $1,500. The debtor would receive $1,000 from the sale, and the remaining $500 would be distributed to the creditors.

Importantly, property that is subject to a security interest affects whether the debtor may successfully claim an exemption. For example, let’s say a debtor who has filed for bankruptcy owns a car worth $3,000. When the debtor purchased the car, the dealership provided financing in exchange for a security interest in the car in the amount of $2,000. In that case, the car would be sold for $3,000, the dealership would receive $2,000, and the debtor would keep the remainder up to the limit of the exemption.

Finally, there is also something in the bankruptcy context called “exemption planning.” Let’s say a debtor knows that she will file for bankruptcy within the next few weeks. Aware of the exemptions available to her, the debtor converts non-exempt property into her homestead in order to maximize the amount of exemptions available. While some courts have found this type of conduct permissible, the debtor walks a fine line in these situations. If a court finds that the debtor has funneled assets into exempt property with the intent to defraud creditors, the court may completely prohibit the debtor from discharging any of her debt, or even dismiss the debtor’s case entirely.

[1] This is not an exhaustive list. For the full list of exemptions under Colorado law, see Colo. Rev. Stat. §13-54-102(1).