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Bankruptcy is a constitutionally guaranteed protection designed both to help an individual or business that cannot meet its financial obligations and to protect the creditors involved. This is a very complicated process and full of traps for the unwary. Always use experienced lawyers, who practice bankruptcy law full time.

What is Involved in Filing a Bankruptcy for a Consumer?

Bankruptcy is a Constitutional right (United States Constitution, Art. 1, Section 8). Bankruptcy is a very complex set of rules. See Chapter-7-flow-chart 9-12-18.pdf (13555 downloads ) (the simplest of bankruptcy). Only an experienced bankruptcy attorney can properly advise you on the process. Often, your question is not a legal one, but one based on emotion and urban legends. My experience has been that the decision to file bankruptcy is based partially on facts, partially on emotion and partially on a person’s view of their future. The law allows any person and most entities to file a bankruptcy.

This is not the time to depend on the “advice” of friends and others. What type of bankruptcy is the important question. We have attempted to clarify this issue in our series of questions for chapter 7 and chapter 13.

Bankruptcy may make it possible for you to:
Eliminate the legal obligation to pay most or all of your debts. This is called a “discharge” of debts. It is designed to give you a fresh financial start. (see bankruptcy – Arizona exemptions)
Depending on the chapter you file a bankruptcy may stop or slow down foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. But it does not normally eliminate mortgages and other liens on your property without payment.
Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
Restore or prevent termination of utility service.

Bankruptcy cannot, however, cure every financial problem. Nor is it the right step for every individual. In bankruptcy, it is usually not possible to:

Eliminate certain rights of “secured” creditors. A “secured” creditor has taken a mortgage or other lien on property as collateral for the loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money if your property is taken. Nevertheless, you generally cannot keep the collateral unless you continue to pay the debt
Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, certain other debts related to divorce, some student loans, court restitution orders, criminal fines, and some taxes. (see Non-Dischargeable Debts)

Protect cosigners on your debts. When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan.- Discharge debts that arise after bankruptcy has been filed.

There are alternatives, but each option fits only certain situations. Sometimes payment plans can be negotiated with creditors. Obtaining loan extensions, compromises and workout agreements require negotiation skills and experience. These alternatives may alert your creditors to the existence of non-exempt property that the creditor could reach and can involve considerable expense. You also have the option of doing nothing. In any event you should seek professional advise in dealing with most of these alternatives. The only company that I recommend is National Foundation of Consumer Credit Counselors. It was originally called Consumer Credit Counseling Service, Inc. It is a true non-profit.

BEWARE – using such services will be included in your credit report and will have the same impact as a bankruptcy. Also, the counselors will fail to disclose that there could be serious and expensive tax consequences to paying less than that you owe (called “forgiveness of debt). I do not recommend the use of “debt restructuring” companies. Most, like AmeriDebt and its progeny are scams.

YouTube video – Options to Bankruptcy

Yes, but your spouse needs to know the consequences of you filing a bankruptcy. (see Arizona exemptions) In some cases where only one spouse has debts or the other spouse has non-exempt property then it might be advisable to have only one spouse file. If the spouses have joint debts, the fact that one spouse discharged the debt may show on the other spouses credit report.  See community property – Arizona specific

Yes. Under the bankruptcy laws a husband and wife may file a joint bankruptcy petition, using the same set of forms. Only one filing fee is charged for a joint petition, so it costs no more to file a joint petition than to file a single petition.

First, the expectation is that both husband and wife will file a joint bankruptcy. If they do not, then they must explain the deviation from the norm. Both husband and wife should file when some of the debts are owed jointly by both the husband and the wife. If both husband and wife owe the debts and only the husband files bankruptcy, the creditors may try to force or harass the wife into paying the debts, even if she is unemployed. Citizens of Arizona have both a burden and protection of the community property laws. So, under Arizona law it may not be appropriate for the creditors to collect from the non-filer, but it depends on the specific circumstances surrounding the debt.

See YouTube: Who Can File Bankruptcy and a Non-Filing Spouse – Arizona specific

First, I want to say how sorry I am that you are going through this.  Divorce is extremely upsetting, not to mention adding bankruptcy issues to the mix.

Alimony, maintenance, and/or support are protected from discharge. Divorce decrees and separation agreements are covered by 11 U.S.C. Section 523(a)(15). This section set forth certain exceptions to non-dischargeability of the debts.  If you spouse files a chapter 13 this may affect your settlement, but not the child support or alimony payments.

5You cannot receive a discharge in a Chapter 7 case if you received a discharge under a Chapter 7 case filed in the last eight years or a Chapter 13 filed in the last six years.  You cannot receive a discharge in a Chapter 13 case if you received a discharge under a Chapter 7 case filed in the last four years or a Chapter 13 filed in the last two years.  If didn’t received a discharge in the previous bankruptcy filing, depending on why this is the case, you can file and receive a discharge without any time restrictions.  See important deadlines flowchart

There are two basic types of bankruptcies. The first is called a liquidation (chapter 7). In a chapter 7 an individual keeps certain items (house, furnishings, car, pension plan – see list of Arizona exemptions. Each state has a different list of exemptions. The second type is a reorganization (chapter 11, 12, 13 and 15). Each reorganization chapter is different and used for specific purposes. Individuals usually file a chapter 13 in order to cure the arrears on their homes, deal with the debt on their cars, and/or manage the payments on their tax debts. Chapter 12 is for farmers or fishermen – so that they can reorganize the debt on their livelihood. Chapter 11 is for businesses. Chapter 11 also has two mini-chapters for (a) small businesses and (b) companies that own only a single asset.  Chapter 15 is for foreign corporations.

Most people filing bankruptcy will want to file under either chapter 7 or chapter 13. Either type of case may be filed individually or by a married couple filing jointly.

Difference between Chapter 7 and Chapter 13
Timeline comparison between chapter 7 and chapter 13 cases.

A Chapter 7 bankruptcy is a tool to help individuals start over.

A chapter 7 bankruptcy is a proceeding under the federal law where a person is released (discharged) from paying his or her debts by filing bankruptcy, the person keeps those assets that are exempt, they continue to pay on secured items they want to keep (house, car) and turn over all of their non-exempt assets over to the trustee-in-bankruptcy. Some types of debts, however, are not affected by bankruptcy.

Some of the information in this article is specific to cases filed in Arizona, but the majority is bankruptcy law and applies to all Chapter 7 bankruptcy.

This basic information should assist you in understanding how bankruptcy works, but please understand that the information on this website is not all you need to know to file Chapter 7 bankruptcy. Video explaining chapter 7 basics.

Chapter 7 bankruptcy is designed to give an individual a “fresh start”. This includes eliminating or discharging all your unsecured debts after you have liquidated and paid to your creditors all of your non-exempt assets. Certain unsecured debts cannot be discharged in Chapter 7. Chapter 7 bankruptcy has no effect on secured debts. That means if you want to keep your home or car, and there are debts owing on that home or car, you need to keep the payments current.

What is Bankruptcy and How Does it Work?

You should consider filing a chapter 13 plan if you:

(1) own your home and are in danger of losing it because of money problems;

(2) are behind on debt payments, but can catch up if given some time;

(3) have valuable property which is not exempt, but you can afford to pay creditors from your income over time;

(4) owe back taxes or child support/alimony;

(5) have a property settlement;

(6) a debt that was not discharged in chapter 7, but is in chapter 13.

A chapter 13 which focuses on future income rather than on existing assets.  You keep all your assets and pay the creditors the value of those non-exempt assets out of your future income. Monthly payments are made to the bankruptcy trustee, who pays the arrears on the home, vehicles, taxes child support; then, only if there is money left over, the trustee pays some to the existing unsecured creditors. This is done through a court-approved plan which pays over a period of three to five years.

At the end of the plan the balance of the unpaid debts what were included in the plan are forgiven (discharged). Some debts survive both chapter 7 and chapter 13 – such as taxes and child support (if not paid through the chapter 13 plan) and student loans.

A few debtors must file chapter 13 because they earn too much money. The means test is used to determine income and expenses in order to determine this issue. The good news is that a chapter 13 bankruptcy often allows the debtor so save their home, remove junior liens from their homes and pay off their vehicles, plus back taxes and child support.

Difference between Chapter 7 and Chapter 13
Timeline comparison between chapter 7 and chapter 13 cases.
Chapter-7-flow-chart 9-12-18.pdf (91 downloads)
Chapter-13-flow-chart-9-12-18.pdf (200 downloads)

You will need to have enough income in chapter 13 to pay for your necessities and to keep up with the required payments as they come due. (see Arizona Chapter 13 bankruptcy)

The court filing fee is currently $335 (as of 10/20) to file for a chapter 7 bankruptcy and $310 to file for a chapter 13 bankruptcy (these fees change periodically). The court may allow you to pay this filing fee in installments if you cannot pay all at once. There are also two on-line classes that must be taken – one before filing a bankruptcy and one after.

Attorney fees: If you hire an attorney you will also have to pay their fees you agree to (make sure to shop around because hiring an attorney based solely on fees can be a nightmare and hiring a cheap attorney can be very expensive).  This is a situation where paying a lot for an attorney may not be the best attorney.  How to Find a Good Attorney.

Why is Professional Help Essential in Filing a Good Bankruptcy?

In most situations you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt. (see Arizona bankruptcy exemptions) Even if your property is not fully exempt, you will be able to keep it, if you pay its non-exempt value to creditors in chapter 13.

However, some of your creditors may have a “security interest” in your home, automobile or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If you don’t make your payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case. There are several ways that you can keep collateral or mortgaged property after you file bankruptcy. You can agree to keep making your payments on the debt until it is paid in full (reaffirmation or pay as agreed). Or you can pay the creditor the amount that the property you want to keep is worth (redeeming). If you put up your household goods as collateral for a loan (other than a loan to purchase the goods), you can usually keep your property without making any more payments on that debt.

An important concept in both Chapter 7 and Chapter 13 bankruptcy is “exemptions” or “exempt property.” When you file a Chapter 7 bankruptcy you keep what is exempt and the Chapter 7 Trustee takes all of your “non-exempt” property and sells it for the benefit of your unsecured creditors. The Trustee cannot take your exempt property and you may keep all of your exempt property regardless of its value and amount. What property is “exempt” and what property is “non-exempt” depends on the exemption laws of the applicable state. Each state has its own exemptions for bankruptcy purposes. For a link to Arizona exemptions go to the primary menu, Bankruptcy, Arizona Exemptions. There is a download PDF of the exemptions. Only Arizona residents are able to use Arizona exemptions (YouTube video).

Arizona Exemptions

For example, if you own a $250,000 house with a $140,000 mortgage, you count your exemption of $150,000 against the $110,000 which is your equity if you sell it. While your exemptions allow you to keep property in a chapter 7 case, you still have to pay any secured liens (your mortgage or HOA). In a chapter 13 case, you can keep all of your property if your plan meets the requirements of the bankruptcy law.  (see Chapter 7 Bankruptcy or Arizona Chapter 13 Bankruptcy? and Non-Dischargeable Debts)

If you receive an inheritance, a property settlement, or life insurance benefits within 180 days after your chapter 7 bankruptcy or the time your chapter 13 is open, that money or property may have to be paid to your creditors if the property or money is not exempt. You can also keep any property covered by Arizona exemptions through the bankruptcy.

Yes, but with some exceptions. Bankruptcy will normally NOT wipe out:

(1) money owed for child support or alimony, fines, and some taxes; (2) debts not listed on your bankruptcy petition; (3) loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan; (4) debts resulting from “willful and malicious” harm; (5) student loans owed to a school or government body, except if:– the court decides that payment would be an undue hardship; (6) mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by the creditor).  There is a difference between chapter 7 and chapter 13 as to what may be discharged for property settlement (see Non-Dischargeable Debts)

In most bankruptcy cases, you only have to go to a proceeding called the “meeting of creditors” to meet with the bankruptcy trustee and any creditor who chooses to come. Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and your financial situation (you are under oath so it is important to make sure your information is accurate). Occasionally, if complications arise, or if you choose to dispute a debt, you may have to appear before a judge at a hearing. If you need to go to court, you will receive notice of the court date and time from the court and/or from your attorney.  To find the location of the court that serves your area visit the Arizona Federal Bankruptcy Court Directory page.

Good question, but no specific answer. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse. The fact that you’ve filed a bankruptcy can appear on your credit record for ten years. But since bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit.

How to Rebuild Your Credit After Bankruptcy

Discharge vs Automatic Stay and Credit Reporting

Yes, there are several options available. While technically not a credit card you could use a bank or debit card to perform activities for which you normally would use a credit card. You also may be able to keep the credit card you already have if the creditor grants approval. If these options do not work you can get secured credit card which is backed by your own bank account.

For buying a home or vehicle – that will depend on several factors, such as your income, whether there was a foreclosure in the past.  As far as the vehicle – many car dealers will offer “deals” after the bankruptcy is filed.  Some of these deals are good and others are not.  Do your homework before buying.

The “Mean’s Test” is a formula that determines whether the person filing for bankruptcy protection has enough income to pay the expenses that are allowed, plus extra money to pay to non-priority, unsecured creditors such as credit cards.

The means test is a formula established by Congress to determine who may be eligible to file Chapter 7 bankruptcy. People under their state’s median income and people whose debts are primarily not consumer debts are exempt from means test qualification. This means if 51% or greater of the debts are related to business obligations then the potential debtor does not need to worry about the means test.

The Debtor must calculate their “current monthly income”, including all income from spouses, rents (minus expenses), bonuses, plus “help” Debtor has been receiving from family or friends. Allowed living expenses and payment of secured and priority debts are subtracted from the total income for a net income or monthly disposable income that could be used to pay unsecured non-priority debts. The chapter 7 can be challenged if the net income, multiplied by 60, is greater than (1) either 25% of the nonpriority unsecured claims or $6,000, or (2) greater than $10,000. The Debtor may be required to convert the case to a chapter 13 or lose the bankruptcy protection completely. §707(b). Basically, if the debtor can pay $100 per month to their unsecured creditors, then they may face a challenge to their chapter 7. Only time will tell what the law really means.

To understand the Mean’s Test you must first understand some of the terms:

Current monthly income before taxes – it is not current, monthly or income. Instead, it is the total income received by your family for the last 6 full months, plus regular gifts and contributions by others toward household expenses. Income does not include social security, perhaps unemployment (to be determined by a court), and payments to war crimes/terrorism victims. §101(10A). Allowed expenses are then deducted from the total current monthly income. Allowed expenses are in §707(b)(2)(A)(ii) and the IRS Standards. Refer to this final number as the Debtor’s “monthly disposable income”. Our office will provide you with the form to assist with gathering this information.

Once “monthly disposable income” is calculated, the Debtor must compare it with the median family income for the Debtor’s state of residence.

If the “monthly disposable income” is less than the median family income, then the Debtor may file a chapter 7. But, see the next paragraph.

Comparison of Schedule I and J:

If the Debtor’s real monthly income, minus the allowed monthly expenses, is greater than some unstated number (usually in the range of $200 to $300) the Debtor may still have a problem filing a chapter 7, even though the Debtor passed the net current monthly income test. This situation could occur when a Debtor has been unemployed for several months of the last 6 months, but now earns more than needed to pay the allowed expenses.

If the court determines that the Debtor should not be in a chapter 7, it is possible that the Court can sanction the Debtor, or their attorney, for reimbursement of the Trustee’s reasonable attorney fees incurred in prosecuting the action. (§707(b)(4)(A) and Rule 9011).

Section 109 of the Bankruptcy Code: “Notwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title”. There does not appear to be a “legal citizen requirement”. This may be changed by case law. Use of a social security number is the “norm” with most bankruptcies, yet the law does not specifically require it.

What is required by the US Trustee’s office is some type of identification which is issued by a governmental agency. Therefore, an ITIN (Individual Taxpayer Identification Number) number should also suffice. The problem that non-residents face is that many of them have used a false social security number to obtain credit, buy a home or car. By doing this they have committed a crime of moral turpitude. If these folks file for bankruptcy protection their creditors can bring an action which determines the debtors to have committed fraud. This will have serious consequences if that debtor ever tries to apply for citizenship.

Moral – don’t use someone else social security number to obtain credit.


If someone has co-signed a loan with you and you file for bankruptcy, the co-signer may have to pay your debt.  This may be treated differently in a chapter 13, but it is very fact specific.

Yes. The automatic stay prevents bill collectors from taking any action to collect debts, liking calling or suing.  After your bankruptcy is filed the court will mail a notice to all your creditors listed in your bankruptcy schedules (the law requires you list all your creditors).   By law, creditors will also stop calling if you inform them that you filed the bankruptcy petition, and give them your bankruptcy  case number.  If a creditor continues to demand payments you can ask the court to hold them in contempt of a court order (the automatic stay).  But, there are situations when a creditor can file an action in your bankruptcy case or ask the Bankruptcy Court for permission to continue the state court action.

When you file the bankruptcy make sure to get a copy of the Notice of Bankruptcy Filing from the Bankruptcy Court.

Generally, student loans are not discharged in bankruptcy, but the laws are constantly changing so it is important to talk to an experienced bankruptcy and student loan lawyer (a very rare attorney, be careful of attorneys who exaggerate their skills).  I am happy to provide a referral to another attorney who may be able to help – just call me.

In 11 U.S.C. sec. 523(a)(8) there are two exceptions to this general rule:

The student loan may be discharged if it is neither – Insured or guaranteed by a governmental unit, nor
– Made under any program funded in whole or in part by a governmental unit or nonprofit institution.
The student loan may be discharged if paying the loan will “impose an undue hardship on the debtor and the debtor’s dependents.”

Whether an exception applies depends on the facts of the particular case and may also depend on local court decisions. Even if a student loan falls into one of the two exceptions, discharge of the loan may not be automatic. You may have to file an adversary proceeding in the bankruptcy court to obtain a court order declaring the debt discharged.  NOTE – the law is constantly changing.

Link to several articles and resources dealing with defaulted student loans

Without exception you must disclose all assets and liabilities. The United States Trustee’s Office is very aggressive about uncovering bankruptcy fraud.  If anyone, including a lawyer, tells you differently then run, don’t walk, away.

Bad Faith Bankruptcy