A lot of people don’t like the word “bankruptcy.” Understandably, the concept has some negative connotations attached to it. But if you study exactly what bankruptcy is and what happens when you file for bankruptcy, it’s not really as bad as what most people think. In fact, bankruptcy gives debtors an opportunity to get back on track financially and start anew with a clean financial slate.
One big misconception that people have about bankruptcy is that if they file, they’ll lose everything they own and they will be left with nothing. But that’s not true. Bankruptcy laws protect the debtor, which is why there are certain exceptions put in place that exempts certain properties from liquidation and allows the debtor to protect and keep these assets.
Colorado has bankruptcy exemptions that benefit the debtors:
Alimony and Child Support
Alimony and child support assets can be exempt from bankruptcy. However, the debtor should keep the money for this purpose segregated from other cash assets.
The home that you use as your primary residence can be exempted under the Colorado homestead exemption. According to law, real property can be exempted up to $75,000. In case the debtor, the spouse, or a dependent who is over 60 years old and disabled lives in the house as well, the exemption amount is $105,000.
If the house was sold more than two years prior to filing for bankruptcy, the proceeds of the sale are also included in the homestead exemption.
Some insurance policies and perks can also be exempted, which means that the debtor can keep the assets even during bankruptcy. Some insurance policies that are covered include:
- Disability benefits up to $400 a month. If received in a lump sum, the entire amount of disability benefits is exempted.
- Fraternal benefits and society benefits
- Group life insurance policies and their proceeds
- Homeowner’s insurance proceeds if it was received over 1 year prior to filing for bankruptcy. The exemption is also capped up to the homestead amount.
- Life insurance cash surrenders that are valued up to $100,000. However, contributions that were made within 48 months before filing for bankruptcy are excluded.
- Life insurance proceeds if the policy prohibits the use of the proceeds to pay creditors or settle debts.
Motor Vehicle Exemption
A car can also be exempted in a bankruptcy case, subject to the conditions that it is used to travel to work or it’s used by an elderly person or person with a disability. The motor vehicle’s value that can be exempt is generally $7,500. The amount is capped at $12,000 if in case of use by elderly or disabled persons.
Pensions are also exempt in a bankruptcy case. This includes the following:
- ERISA-qualified benefits
- IRAs and Roth IRAs up to the amount of $1,362,800
- Veteran’s pension for people who served in war or armed conflict
- Police officer and firefighter pensions
- Public employee’s pensions, including deferred compensation and defined contribution plans
- Tax-exempt retirement accounts. This includes 401(k)s, 403(k)s, defined benefit plans, money purchase plans, profit-sharing, and SEP and simple IRAs.
Personal property that is necessary for daily living is exempt. The following personal effects can be kept by the debtor in bankruptcy:
- Clothing up to $2,000
- Burial sites (1 per person)
- Health aids
- Household goods up to $3,000
- Family pictures and books up to $2,000
- Food and fuel up to $600
- Jewelry and articles of adornment up to $2,500
- Personal injury recoveries
- Proceeds for damaged exempt property
- Security deposits
Public benefits that are offered by the government to certain groups of individuals may also be exempt in a Chapter 7 bankruptcy. These include, but are not limited to:
- Aid to the aged, blind, disabled, and other public assistance benefits
- Crime victims’ compensation
- Disability benefits up to $3,000
- Income tax credit
- Unemployment compensation
- Veteran’s benefits for those who served in a war, as well as the benefits of their spouse or child.
- Worker’s compensation
Tools of Trade
Tools of a trade, or things that you use for your profession, are also exempt. The value that you can claim would depend on how the tools are used and whether or not they are utilized for the debtor’s primary occupation.
Tools used for a primary occupation can be exempted by up to $30,000. If they are used for an occupation other than the primary occupation of the debtor, the exemption amount is up to $10,000. These tools can include:
- Business materials
- Library belonging to a professional up to $3,000
- Stock in trade
Agricultural machinery and tools, including tractors, trucks, harvesting equipment, livestock, and other animals can be exempt up to $50,000.
A debtor’s wages can also be exempt. The exemption amount is either 75% of earned but unpaid wages or 30 times the federal minimum wage, whichever is greater.
It’s worth noting that married couples who are filing for bankruptcy together may be able to claim exemptions double the amount set forth by law, but only if both of them have ownership over the property.
As you can see, Colorado bankruptcy laws can protect you and your assets. Exemptions are in place to ensure that you don’t lose everything you own while discharging your debts and allowing you a clean financial slate.