February 1, 1998

Honest debtors get fresh start

When Bob Thomas lost his job as vice president of a financial services company in 1987 in a merger, he and his family began what would become a major change in lifestyle, culminating with the Thomases filing for bankruptcy under Chapter 7 of the federal bankruptcy code.

“We had too much debt and not enough income,´ said Thomas, who asked that his real name not be used. “We had lots of children and private school bills as well as credit card obligations. We tried to pay our credit cards off using other credit cards and got caught in a vicious cycle. The credit debt was running up, and with no income, we were soon wiped out. We used up our IRA in good faith. It was a real heartbreaker. And on top of that, we had to pay medical insurance. We were frantic and our children weren’t old enough to help.”

Chapter 7 is the straight liquidation of a debtor’s non-exempt assets, which are turned into cash and distributed to creditors, followed by the discharge of the debtor’s dischargeable obligations. Debtors can keep “exempt” property. In Colorado, exempt property includes $30,000 worth of equity in a home, $1,000 worth of equity in an automobile, retirement funds and personal effects.

Filing bankruptcy allowed the Thomas family to start over. The couple now lives on a tight and closely monitored budget. They kept an American Express card, one car, their home and their children’s education debts. Thomas also kept his pension fund as allowed by law.

The underlying policy of bankruptcy law is that the honest debtor who is in debt beyond his ability to repay should receive a fresh start. Excluded from bankruptcy law are taxes, spousal and child support, debts from misconduct, liability for injury or death from driving while intoxicated, student loans, criminal fines and penalties and forfeitures.

The past 20 years have seen a steady increase in bankruptcies, both business and consumer, locally and nationally.

“We live in a capitalist, entrepreneurial, risk-taking society. Those who fail are forced to bail out through bankruptcy. The function of bankruptcy is to get the failures done and buried so that people can go on being productive members of society,´ said Tom Connolly, principal partner at Connolly, Halloran & Lofftedt PC in Louisville, and a bankruptcy trustee.

After seeing 12,000 Chapter 7 bankruptcies, Connolly knows what pushes people over the edge. Chapter 7, usually used for individuals, is usually the result of a divorce, a sudden loss of employment, disastrous uninsured health problems, or naive attempts at starting a business, he said.

Chapter 11, reserved for businesses, has been used by some companies with some well-known names. Oil giant Texaco Corp., Boulder County’s Storage Technology Corp., Dow Corning Corp.(manufacturer of breast implants among other things), Celotex (an asbestos manufacturer) and Longmont’s Rexon Corp. have all come through Chapter 11.

According to Connolly, businesses file for Chapter 11 in two cases:

* The underlying business is no longer profitable or

* The underlying business is still good, but the debt structure is “out of whack.” Chapter 11 allows businesses to restructure debt repayments and re-allocate ownership interest. In the case of outstanding lawsuits, a package of money and securities is usually presented for settlement.

“Business bankruptcies are part of the business cycle. They are a lagging indicator of business,” Connolly said. “They follow down times’ in the business world.”

The total number of bankruptcies filed in the state of Colorado rose to 19,075 in 1997, up from 16,336 in 1996 and 13,606 in 1995, said Brad Bolton, a U.S. Bankruptcy Court clerk. Colorado’s 1996 filings total (16,336) was composed of 13,086 Chapter 7 bankruptcies, 109 Chapter 11 bankruptcies and 3,075 Chapter 13 bankruptcies.

Chapter 13 bankruptcy, a variation of Chapter 7, involves a restructured debt-repayment plan, and affords individuals the opportunity to earn back assets.

There were 1,041 bankruptcies filed in Boulder County between Oct.1, 1996, and Sept. 30, 1997 — 882 Chapter 7s, 8 Chapter 11s and 151 Chapter 13s. The total for Colorado during the same period was 18,594 — 15,225 Chapter 7s, 3,264 Chapter 13s and 105 Chapter 11s.

Bankruptcy filings per capita virtually doubled during the 1980s — to 18.1 per 1,000 from 9.2 during the 1970s — and have shot up even further since then, with 32.3 filings per 1,000 people between 1990 and 1995.

And the stigma that used to be associated with bankruptcy has “diminished considerably in recent years.”

Yet despite the fading stigma, Tom Connolly says the downside of bankruptcy is a loss of pride, since bankruptcies are filed by people at the end of their financial ropes. A Chapter 7 bankruptcy remains on a consumer’s record for 10 years, a Chapter 13 filing is erased from the record after seven years.

When Bob Thomas lost his job as vice president of a financial services company in 1987 in a merger, he and his family began what would become a major change in lifestyle, culminating with the Thomases filing for bankruptcy under Chapter 7 of the federal bankruptcy code.

“We had too much debt and not enough income,´ said Thomas, who asked that his real name not be used. “We had lots of children and private school bills as well as credit card obligations. We tried to pay our credit cards off using other credit cards and got caught in a vicious cycle.…

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