What is the difference between chapter 7 and chapter 13?

The basic difference between Chapter 7 and Chapter 13 is this: in a chapter 7 case, you discharge your debt in one fell swoop and lose any un-protectable assets. In a chapter 13, on the other hand, you make payments to your creditors for a period of three to five years. Ordinarily, most Arizona clients would rather file a chapter 7 because it's faster, easier, and much cheaper. But there may be reasons why either you cannot or should not file a chapter 7. One example is if you make too much money to qualify for a chapter 7. Another is if you want to force your mortgage, vehicle, or other secured lender to let you cure your default over a long period of time. There are lots of other reasons as well. Check with us to determine whether you should file a chapter 7 or chapter 13.

How long will my bankruptcy case last?

The typical chapter 7 bankruptcy case in Arizona lasts approximately five months. But you will see results immediately, because on the very day your bankruptcy petition is filed with the Arizona Bankruptcy Court, something called the “automatic stay” is invoked. This is a freeze on all creditors' efforts to collect from you. They can't sue you. They can't garnish your wages. They can't seize your bank account. They can't foreclose your house. They can't do any of those things as well as a host of other things without first getting permission from the Arizona bankruptcy court, which is typically impossible unless you are defaulting on post-bankruptcy-petition, secured obligations or some other rare exceptions apply. The typical chapter 13 bankruptcy, on the other hand, lasts five years. If you qualify, shorter periods may be possible.

Will I lose my house in bankruptcy?

Most people who file bankruptcy in Arizona are able to keep their homes. In Arizona, the homestead exemption is either $150,000 or a slightly lesser amount if you recently purchased the home (call us for details). However, if you are in arrears on your payments on the day we file your bankruptcy case, the creditor will most likely take swift action to obtain the Arizona bankruptcy court's permission to proceed with a foreclosure. On the other hand, most people who are not behind on payments on the date their case is filed and who continue to make timely payments are rarely in trouble of losing their homes in Arizona if they reside in them on the date the bankruptcy case is filed and have equity less than the relevant limits stated above. Notably, if you are one of those people whose income exceeds the median for your household size, you will have to take the means test unless you fall within one of the few exceptions. Having a mortgage payment will help you to pass the means test, because you will get to deduct the full cost of the mortgage in the means test calculations.

Can I get rid of my mortgage in a bankruptcy?

In Arizona, if you file a chapter 7 bankruptcy, you will not be able to strip away the mortgage debt and keep the house. If you want to keep the house, you'll have to find a way to make those mortgage payments. If you are filing a chapter 13 and you have a completely unsecured second or third mortgage, you will be able to strip it away so that it is no longer a lien on your residence. But the following situation must be true for this to happen: your first mortgage balance is so high that it exceeds the value of your home. Thus, the entire amount of your second mortgage (or third) is not covered by any of the value of your home. Stated differently, if you hypothetically sell your home and not even one dollar would be available to pay the second or third mortgage, you should be able to remove that mortgage. Likewise, if you have investment properties you may be able to either reduce or entirely remove liens (including mortgages) against that investment property.

Will I lose my car in bankruptcy?

If you are using the Arizona exemptions, a married couple will be able to keep two vehicles provided that the equity (not the value of the car, but the value of the car minus the loan balance) in those cars does not exceed $10,000 (up to $5,000 per car). If there are more than two vehicles, a married couple may be able to keep all of them in certain circumstances. If you are one of those people who needs to pass the means test in order to qualify for a chapter 7 bankruptcy, having a car payment will help you to pass that means test.

Whether you will lose your car in an Arizona bankruptcy case also depends on whether Arizona's exemptions will be used. Assuming the Arizona exemptions will be used, a married couple may keep up to two vehicles that have not more than $10,000 in equity (up to $5,000 per vehicle). A single individual may keep up to one vehicle that has not more than $5,000 in equity. Equity is the key, not value. Suppose your car is worth $30,000 but your car loan balance (assuming the loan is properly secured by the vehicle) is $31,000. In that case, your vehicle has zero equity so you would be able to keep that car as long as you remain current on your payments. See the discussion on reaffirmations for more information about how secured loans are affected by bankruptcy. If you are filing a chapter 13 bankruptcy in Arizona rather than a chapter 7 bankruptcy, you will not necessarily lose the vehicle even if your vehicle has more than the allowed equity. This is because a chapter 13 involves payments to creditors and if you will be paying out more than the value of what you would lose from seizure of your car in a hypothetical chapter 7 case in Arizona, you should be able to keep your vehicle despite the fact you have exceeded the Arizona exemption limit for that vehicle.

Can I stop paying my creditors?

Typically, you can stop paying unsecured creditors when you are going to be filing a bankruptcy soon. When specifically to stop making payments will vary from client to client. Be careful to continue making payments on loans that are secured by collateral you wish to keep. If you've already fallen far behind on such secured loans, you should contact our office immediately to see if a chapter 13 bankruptcy would solve your problem by enabling you to catch up those payments over time.

What are the Arizona exemptions?

The Arizona exemptions can be found at http://www.azleg.state.az.us/ArizonaRevisedStatutes.asp?Title=33.

I moved here from another state. Do the Arizona exemptions apply?

The Arizona exemptions do not apply if you have lived in Arizona less than two years. You will need to use the exemptions from the jurisdiction you last lived in if you lived in that jurisdiction for more than two years. And you may not even qualify to use that state's exemptions and if so, you may have to use the federal exemptions. If you lived in the other state there for less than two years, too, call our office for a careful analysis of which exemptions to use. Determining whether exemptions apply is critical to a proper analysis of whether bankruptcy is right for you. Never rely on general rules such as are provided here; rather, you will need to meet with an Arizona attorney to carefully determine which exemptions apply and whether or not you have a choice between two sets of exemptions.

What are the exemptions in my former state?

If you moved here from Arizona less than two years ago, you will probably need to use a different set of exemptions. If you lived in the other state for more than two years continuously, then that state's exemptions (or the federal exemptions, if applicable) must be used, unless you don't even qualify to use their exemptions. If you lived in various states over the past couple of years, we must carefully determine which state's exemptions apply or whether you must use the federal exemptions. During your in-office consultation, we will determine which exemptions apply.

I transferred property to someone recently. Will that be a problem in my bankruptcy?

Probably you will face difficulties because of the transfer, especially if you did not receive fair value and/or if you disposed of the funds you received from that transaction in an inappropriate way. You must be very careful not to transfer anything without first seeking the advice of legal counsel, because there could be significant ramifications involved. If you have already transferred the property, you may still be able to minimize the probable damage you have caused. Call our office now to schedule an appointment so that we can properly assess the situation and determine your best options.

I have recently incurred debt. Is that OK?

Creditors can try to object to discharge of debt that was incurred shortly before a bankruptcy. If certain kinds of debt are incurred within a relatively short period of time prior to the bankruptcy, whether in Arizona or some other state, the burden of proof is on the debtor to show that certain presumptions don't apply.

I own some land. Will I lose it?

It depends on which state's exemptions need to be used. If Arizona's exemptions are the ones that need to be used, you will be able to keep one house if it has equity of less than $150,000 (unless you recently purchased the property, in which case the exemption amount is slightly lower) and meets several other conditions. We will analyze this for you at your first appointment. However, what you own is only raw land and it has value, you are likely to risk losing it in a chapter 7 bankruptcy in Arizona, if Arizona's exemptions apply.

I own a time share. Will I lose it?

It depends on which state's exemptions need to be used. If Arizona's exemptions are the ones that need to be used, you will lose it if it has enough equity to make it worthwhile for the trustee to sell it and distribute the net proceeds to your creditors.

I own a boat. Will I lose it?

It depends on which state's exemptions need to be used. If Arizona's exemptions are the ones that need to be used, you will lose if it has enough equity to make it worthwhile for the trustee to sell it and distribute the net proceeds to your creditors.

I own a business. Will I lose it?

It depends on which state's exemptions need to be used. If Arizona's exemptions are the ones that need to be used, you will lose if it has enough equity to make it worthwhile for the trustee to sell it and distribute the net proceeds to your creditors.

I own an antique. Will I lose it?

It depends on which state's exemptions need to be used. If Arizona's exemptions are the ones that need to be used, you will lose if it has enough equity to make it worthwhile for the trustee to sell it and distribute the net proceeds to your creditors.

I have a savings account. Will I lose it?

It depends on which state's exemptions need to be used. If Arizona's exemptions are the ones that need to be used, you are allowed to have only one bank account with not more than $150 (if single) or $300 (if married) in that account. Any amount over and above the limit on the day you file your bankruptcy case can be taken from you and distributed to your creditors. Even if you wrote checks and in your mind you consider the money to be “gone,” if it is still technically in the account because the checks have not cleared your account, the trustee will make you turn over those funds (or write a new check if the funds are gone by the time the trustee makes the claim against you) to the Arizona bankruptcy court.

I own stocks. Will I lose them?

It depends on which state's exemptions need to be used. If Arizona's exemptions are the ones that need to be used, stocks are not exempt unless they are held in an IRA, 401K, or other allowed status, and if other certain conditions exist. We will analyze the situation for you when you come to our office.

Someone owes me money. Will I be able to pursue them after the bankruptcy to collect what they owe me?

It depends on which state's exemptions need to be u sed. If Arizona's exemptions are the ones that need to be used, you will lose it if the both the claim and the target are strong enough to make it worthwhile for the trustee to pursue the claim (by settlement or lawsuit) and distribute the net sales proceeds to your creditors. Exceptions apply in Arizona for child support debt, spousal maintenance debt, and other limited situations.

Why does my household size matter?

Your household size determines the median income “cutoff” that will be used to determine whether you must take the “means test.” If your gross income for the past six months was less than the cutoff for your household size, you have cleared that hurdle on the way toward a chapter 7. If you are over the cutoff, you must take the means test. The means test deducts from your past six months' gross income certain permitted expenses and allows certain additional expenses to be taken into consideration. The resulting figure will determine whether you qualify for a chapter 7 or must file a chapter 13.

Can individuals file a chapter 11?

Yes. We are seeing more of these cases in Arizona, mostly due to the large real estate loans that people incurred during the boom. Also, real estate investors typically need to file personal chapter 11, depending on their secured and unsecured debts. Debt limits exist for chapter 13 cases. Therefore, if you would normally need to file a chapter 13 but do not qualify for a chapter 13 due to the debt limits, a chapter 11 may be the best option. There are other reasons for filing an individual chapter 11 in Arizona, but the most common reason Arizona individuals file chapter 11s is the debt limit. The cost of chapter 11s is much higher than is the case for chapter 7s or chapter 13s. Be prepared to spend a minimum of $5,000 for a chapter 11 bankruptcy, whereas chapter 13s in Arizona typically do not cost more than $4,000 in legal fees.

What is the Meeting of Creditors?

This is almost always your only bankruptcy hearing. In Arizona, if you file your case in the Phoenix metro area, your hearing will almost always be held downtown at the United States Bankruptcy Court for the district of Arizona. The meeting is typically not held in the courtroom but rather in a hearing room. Contrary to the implication in the name of the hearing, creditors usually do not show up for a meeting with you. Although they have the right to question you about certain relevant matters, most creditors do not have the time or money to send legal counsel on their behalf. The creditors that do show up usually need some specific information, believe that you committed fraud, or are unsophisticated small business owners in Arizona who mistakenly believe they are required to attend the standard meeting (they are not).

How long does the Meeting of Creditors last?

It typically lasts only five to ten minutes. However, you should be prepared to wait for up to a couple of hours in case the trustee is not on schedule. Occasionally, there will be one or more complicated cases that cause the docket to become backed up from a few minutes to a couple of hours. You should remember to take with you your social security card and drivers license. If you don't have those documents, certain other ones will suffice (ask us). You must, however, use only the permitted ones.

What is a confirmation hearing?

This is the hearing in which the judge decides whether to accept your proposed repayment plan in a chapter 13 case. In Arizona, we can often structure your plan in such a way as to avoid your having to attend the confirmation hearing. You will need to attend the Meeting of Creditors, but you can often avoid being required to attend the confirmation hearing.

What does it mean to reaffirm a debt?

To reaffirm a debt means to essentially take it out of your bankruptcy and fully recommit yourself to paying it back. Almost always, this is a bad idea. Creditors often push hard to convince debtors that it's in their best interest to reaffirm a debt when there is collateral securing the debt, but this is usually not really necessary in practice. There are risks to not reaffirming your debt, but those risks are often worth the benefits of simply retaining the property and making regular timely payments. We will analyze whether you should or should not reaffirm your particular secured obligations.

Creditors are threatening to garnish my wages. Can they do this?

Creditors will probably be able to garnish your Arizona wages at some point in time. What we often see is that Arizona clients are scared that creditors will be able to garnish their wages immediately. This is often not possible, because the creditor must first sue the client in order to obtain a legal judgment before wages can be garnished. This takes time. If you are sued, someone will come to your door to hand you a copy of the debt collection lawsuit. I often advise clients that they should not resist this process. It is better to obtain a copy and hand it to us, so that we can determine whether there is some way to fight it while we get the bankruptcy case prepared for filing. The bankruptcy case will stop the lawsuit in its tracks, pending the outcome of the bankruptcy and some other factors.