Alternatives to Bankruptcy in Colorado

July 23, 2012

By: David M. Serafin

Although our office annually files plenty of chapter 7 and chapter 13 bankruptcy cases in Denver and other areas of Colorado, it is often the case that Bankruptcy is not the most optimal solution for somebody who owes money to creditors and intends to wipe away debt. For instance, we help clients negotiate down debts resulting from foreclosure, credit cards, medical bills and taxes in lieu of filing a bankruptcy case, especially if there are not many creditors. As a Denver and Aurora, Colorado based Bankruptcy and Tax lawyer, I have successfully settled many different types of debts.

Particularly, in Colorado’s plummeting real estate market, I am retained by many homeowners whose only liability is that resulting from a mortgage deficiency. For instance, a home may have been lost to foreclosure whereby the debtor owes more than the property is worth. If the foreclosed home only sells at auction for $250,000 but the underlying mortgage balance is $300,000, the mortgage lender may opt to pursue the homeowner for the $50,000 deficiency, plus the lender’s reasonable costs and fees associated with commencing and completing the foreclosure process. (These lender fees, including the cost of late fees, appraiser fees, and the cost of hiring local counsel to administer the foreclosure can add up quickly.)

Many mortgage lenders (or third party collection agency or law firm) – instead of receiving little or nothing if the homeowner is forced into chapter 7 or 13 bankruptcy – will be agreeable to settling the debt resulting from a foreclosure deficiency for as little as pennies on the dollar and for as much as 75 cents on the dollar. The exact amount a lender will agree to depends on the homeowner’s household income, expenses, family size, assets and liabilities, and even health – a higher income debtor with little expenses may not expect to always settle such a debt for pennies on the dollar. In comparison, unsecured creditors (including a lender who has already foreclosed) rarely receiving anything in chapter 7 bankruptcy and, even in chapter 13 bankruptcy, may receive little depending upon the Debtor’s projected disposable income under the Means Test for the next 3-5 years. Nonetheless, when a lender refuses to significantly abate the underlying debt, I highly recommend the bankruptcy option as it’s quicker and easier (and costs less in attorneys fees) than continually dealing with a recalcitrant creditor.

Other clients may desire to negotiate directly with credit card companies or with medical providers regarding medical bills as an alternative to bankruptcy. A lesser number of creditors (typically less than five creditors) make this a realistic option. A debtor (without assets) and creditor may be agreeable to pay back of part of the debt in monthly (interest free) installments. Again, a creditor will be made aware that a debtor can easily file for bankruptcy if no resolution of the debt is made (e.g. will get nothing if it refuses to work with the client). Creditors are well aware that medical bills and credit card bills are given low priority in the U.S. Bankruptcy Code and can be easily discharged in full or part.

Whether a tax debt drives a debtor into bankruptcy really depends on how much of the balance is dischargeable. Of course, the Internal Revenue Service or Colorado Department of Revenue hold more bargaining power for non-dischargeable taxes which are given priority by the Bankruptcy Code.) For those with tax debts three years old or longer and who have filed their tax returns at least two years prior to bankruptcy, a chapter 7 or 13 filing may eliminate this tax liability. (The next best option to discharge of tax debt is to pay it back without further accumulation of penalties or interest over 3-5 years in chapter 13.) Another option is to negotiate down the non-dischargeable taxes owed with the IRS or State of Colorado, or file an Offer in Compromise based on inability to pay.