Filing for bankruptcy in Arizona can be a difficult decision, but sometimes it is a necessary step toward eliminating debt and reclaiming your financial freedom. At Want A Fresh Start, our knowledgeable Phoenix Chapter 7 bankruptcy attorneys handle all types of bankruptcy filings and will help you determine the best option for your particular financial situation.
What Is It?
Also known as “liquidation” or “straight” bankruptcy, Chapter 7 is one of the most straightforward ways to file. It is designed to give those who file a clean, debt-free slate. Most types of debt can be wiped out by this, as the method for removing debt is fairly direct. Your assets are liquidated to provide creditors a portion or the entire sum of their owed payments, leaving you safe from creditor harassment.
How Does It Repay My Debt?
Under Chapter 7, a trustee is appointed and is likely to cancel some, many or all of your debts. It is also customary for the trustee to sell, or liquidate, some of your non-exempt assets. Non-exempt assets are commonly referred to as items you own that are NOT considered as necessities to reasonably live or work. It should be noted that there will be no payment plans enacted and no additional payments made to your creditors after the filing of your Chapter 7 bankruptcy petition. The debt will be settled through the cancelling of specific debts, called discharge, liquidation of identified non-exempt assets, or a combination of the two. The goal of a Chapter 7 bankruptcy proceeding is to get out from under overwhelming debt so you can get back on your feet and enjoy a fresh start financially without further worry.
Who Is Eligible?
There are several criteria that must be met before you are declared eligible to file for Chapter 7 bankruptcy. For example, your income cannot generally exceed a certain amount. Bankruptcy courts tend to favor repayment plans over straight liquidation proceedings, so if you are financially able to repay your debts in a reasonable amount of time, this might be one option. However, if you have a relatively high income but your debts far exceed it, you may still qualify for filing under Chapter 7 in Arizona.
Your claim may also be dismissed if you have successfully filed for bankruptcy within the past eight years or have been denied in the past 180 days due to a court order violation, a fraudulent claim ruling, or a request for dismissal following a creditor petition for relief from an automatic stay. It is also likely that your claim could fall under dismissal if you have previously defrauded creditors in another case.
Disabled veterans who have accrued their debts during their deployment, however, are highly eligible for Chapter 7 bankruptcy, as are those with no past filings or record of fraud. Speaking with a Phoenix Chapter 7 bankruptcy lawyer will help you better understand whether or not you are eligible to file for bankruptcy.
What Debts Will It Cover?
Chapter 7 bankruptcy is often used to cover unsecured debts, though secured debts are eligible, as well. Unsecured debts, which are those that exist without collateral backing, generally come in the form of credit card or medical charges. Chapter 7 is especially well-suited to these types of claims because it relies on the straight payment of debt through liquidation, eliminating future owing entirely. Utilizing Chapter 7 to reconcile secured debts, such as car or home loans, is a good way to make up the back payments and bring yourself current on your existing loans without losing your property.
What Debts Cannot be Discharged in Chapter 7?
Most back taxes: This includes income taxes, Social Security taxes, tax penalties or, for businesses, unpaid withholding tax for employees;
Child support and alimony;
Student loans: Normally, these cannot be discharged, but if you can show that you cannot afford to repay your student loans, are unlikely to be able to do so in the future and have genuinely tried, the court may consider discharging student loan debt;
Home mortgages and other property liens: If there is a lien on your property, such as a home mortgage, you cannot have the mortgage discharged in bankruptcy. State laws vary and provide differing amounts of “homestead exemptions” that allow you to protect a certain amount of equity, but in general your mortgage or lien holder’s interests cannot be discharged;
Debts from fraud, embezzlement, larceny, or from “willful and reckless acts”;
Automobile loans, if you want to keep your vehicle. If you don’t, the lender can repossess your vehicle and the debt is discharged, regardless of whether the car is worth what is still owed;
Debt that doesn’t belong to you: You cannot discharge debt that is in the name of your ex-spouse, child or another person other than you;
New credit card debt: You can’t run up credit card debt right before you file bankruptcy and expect to get rid of it.
What Property Is Exempt From Liquidation?
Though the term “liquidation of assets” may sound ominous, there are fortunately many important items that can be exempted from sale during a Chapter 7 proceeding. Arizona has opted out of federal exemptions and sets its own laws for what property and assets will be exempt. Among these are:
- Homes up to $250,000
- Motor vehicles up to $6,000, or $12,000 for the elderly
- Retirement benefits
- Certain personal property
If a cash value is exempted, it means a portion of your investment is guaranteed to remain in your possession. A $200,000 home, then, would only be worth $50,000 to the creditor under Arizona law, which would allow ample room for you to exempt your property entirely.
How can Chapter 7 Help Me
Chapter 7 bankruptcy often is called “liquidation bankruptcy.” There is a means test for individual debtors to file under Chapter 7, but other than that, debtor may be an individual, a partnership, a corporation or any other form of business.
Under Chapter 7, the debtor does not file a plan of repayment as in Chapter 13. The court appoints a bankruptcy trustee, who sells the debtor’s nonexempt assets and uses those funds to pay the creditors under the methods set forth in the bankruptcy code. Some property is exempt, but beyond exempt assets, the trustee will liquidate all of the debtor’s remaining assets. Under Chapter 7, then, a debtor is likely to lose some property of some kind. The law provides for a certain amount of persona property to be exempt, with the amount generally set by state law. The trustee will not be selling all of your furniture and clothing to pay off your debts. Still, you are likely to lose some personal property.
The upside is, as long as a debtor qualifies for a Chapter 7 filing, almost all debts are discharged in a Chapter 7 bankruptcy. Under Chapter 7 the debtor need not file a repayment plan. Some assets may be sold by the bankruptcy trustee to satisfy debts if those assets are non-exempt. Other of the debtor’s assets may be subject to security liens, such as property mortgages, and those debts may require that the secured properties be sold to satisfy the liens or mortgages. Secured creditors, such as the lenders for automobile loans and home mortgages, have collateral for their loans (the car or house) and are first in line. If the car or house is sold, the lender for that asset gets the proceeds.
Bankruptcy law allows debtors to keep “exempt” property. For example, most states have “homestead” exemptions that protect a certain amount of equity that the debtor has in his or her principal residence. However, the vast majority of a debtor’s unsecured debts will be discharged under Chapter 7.
A discharge under Chapter 7 discharge relieves the debtor of responsibility for most debts and halts creditors from attempting to collect on those debts. With the exception of secured creditors, who might retain rights to seize the secured property, unsecured debts generally are discharged fairly quickly under Chapter 7. If a debtor wants to retain secured property, such as an automobile, it is possible to reaffirm the debt, meaning there is a formal agreement between the debtor and the creditor that the debtor will continue to make payments for the vehicle. In the absence of such an agreement, the creditor may be able to repossess the vehicle, particularly if the debtor fails to continue to make payments. Reaffirmation must take place before discharge.
How Do I File Chapter 7
The debtor must file a petition with the bankruptcy court to launch a Chapter 7 case. The petition must be accompanied by a number of documents, including schedules of assets and liabilities, information on current income and expenditures, your tax return for the most recent tax year, and other documents the court might require. Also, individual debtors likely will have to file a certificate of credit counseling as well as evidence of income, among other things. These are the sorts of things a bankruptcy attorney will help you with.
Chapter 7 bankruptcy in Arizona can be a helpful step, but it is important that you understand exactly what filing can accomplish before beginning your bankruptcy proceedings. Contact us today to speak with a skilled Phoenix Chapter 7 bankruptcy attorney. We understand the difficulty of bankruptcy, personally, and can help you through this difficult time.