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Introduction
A Chapter 7 bankruptcy is a tool to help individuals start over. 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.
Who Can File Chapter 7 Bankruptcy in Arizona?
A permanent resident of Arizona can file bankruptcy in the Arizona bankruptcy court. But, you must have lived in Arizona for at least half of the last 180 days (6 months) in order to file in Arizona.
Exempt Property
An important concept in both Chapter 7 and Chapter 13 bankruptcy is “exemptions” or “exempt property.” When you file a Chapter 7 bankruptcy, 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).
Just because you are an Arizona resident when you file for bankruptcy does not mean you are entitled to Arizona exemptions in bankruptcy. Therefore, before you file bankruptcy you and your bankruptcy attorney must determine which state laws will determine your exempt assets. The state exemption law applicable to your bankruptcy is determined by the state in which you have been domiciled for the 730 days (two years) immediately prior to filing your bankruptcy. If you have not been a resident of Arizona for the two-year period before filing your bankruptcy, then your bankruptcy exemptions will be those allowed by the state in which you lived for 180 (6 months) days immediately before the two year period, or the state in which you lived for the longer portion of that 180-day period. Confused yet? I recommend making a diagram of where you lived and when.
For example: a person filing bankruptcy in Arizona today may use the Arizona property exemptions if he or she lived in Arizona for more than two years. But, if that person did not live in Arizona for two full years, then that person will need to look to the exemptions of the state where he or she lived in that last two years. It is possible that the exemptions of the prior state are limited to residents only. Therefore, the person filing for bankruptcy will need to use federal exemptions. In many cases, the state where the person moved from will provide better bankruptcy exemptions than Arizona law.
Consider John. John sells his residence in Georgia for $100,000 and moves to Arizona in January. In March of that year John purchases an Arizona homestead for $100,000; he gets an Arizona drivers license and registers to vote in Arizona. Then, 14 months after moving to Arizona, John loses his job and files bankruptcy. Under the bankruptcy law, Georgia’s relatively limited exemption laws would apply to John’s bankruptcy, and John would not have the benefit of Arizona $150,000 homestead protection.
Means Test:
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.
Secured or Unsecured Debts.
In the bankruptcy documents you list secured debts separately from unsecured debts. Unsecured debts include personal loans and credit cards issued by banks, such as Visa, MasterCard, American Express, or Discover, and other credit cards used to purchase consumable items. Vehicle leases, medical bills, and personal loans are also unsecured debts. Secured debts include those debts where the creditor has a security interest in your property to guarantee payment. Examples of secured debts include mortgages, car loans, loans from finance companies (usually secured by household items), furniture, computers or electronics. If you purchased goods at a store using a store credit card, such as a card from Home Depot, Best Buy, etc., the store probably has a security interest in certain items purchased, which makes the store a secured creditor.
Secured Property
After filing a Chapter 7 bankruptcy, you will have to choose to either reaffirm or redeem secured debts or surrender the secured items to the creditor. You are entitled to keep any secured property as long as you continue to pay the loan for that property in a timely manner. If, however, you elect to surrender secured property, the secured creditor may not sue you for and try to collect any money from you. Some mortgage companies recently have required borrowers to sign cross-collateralizated agreements. This means that the borrower agreed to allow their bank or savings union to seize their bank accounts in order to pay delinquent payments for the vehicle. If you are unsure whether you signed this type of documents, you should review the papers you signed when you purchased your vehicle and/or when you opened your account. You may want to move your money to a new bank before defaulting on a vehicle loan. Do not bank at Wells Fargo — they will freeze your account even if you did not sign a cross-collateralized agreement.
The Bankruptcy Estate
Your bankruptcy estate refers to your non-exempt assets that are subject to administration by the bankruptcy trustee. Exempt assets, such as your homestead and IRA, are not part of your bankruptcy estate.
Reaffirmation Agreements
The creditor (or you) must file a reaffirmation agreement for all secured personal property you want to retain within 60 days of the first scheduled meeting with the trustee (the meeting of creditors or 341 meeting). If you do not sign the reaffirmation agreement or redeem the property within 60 days, the automatic stay is lifted as to that property and the creditor is permitted to take all legal action allowable under the law to repossess the property. Signing a reaffirmation agreement means that you will be personally liable to pay the debts after your bankruptcy is over.
Your attorney may choose whether or not to sign your reaffirmation agreement. Issues such as negative disposable income, no concessions by the creditor as to principal or interest or the attorney believes there is a presumption of undue hardship. If your attorney does not “approve” reaffirmation, you must prepare and sign a Reaffirmation Agreement Explanation explaining why you now have the financial ability to pay a reaffirmed debt. The bankruptcy judge will review your explanation and either deny or approve the reaffirmation. The bankruptcy judge will deny reaffirmation if he believes that reaffirmation is not in your best interest for a “fresh start.”
If the reaffirmation is denied you still may be able to keep your property if payments are current, or you could request a hearing with the judge. If the court refuses to approve your reaffirmation many creditors will let you keep your property if maintain current payments. (A creditor usually will not provide a reaffirmation agreement if you are delinquent in your payments.)
The Automatic Stay
The bankruptcy stay is the bankruptcy tool that stops creditors from contacting you in any way after you file bankruptcy. This could be a problem because the lender o your home or car may stop sending monthly statements. It is your responsibility to make sure you pay these debts on time, otherwise the lender may ask the court for permission to take your home or vehicle.
Executory Contracts
An executory contract is a legal term referring to an agreement between parties and an obligation due by at least one of the parties (such as a car lease or a residential lease). The most common example is a lease agreement for a car or a residence.
Chapter 7 bankruptcy permits the debtor, or the trustee, to assume or reject an executory contract. A debtor has to decide what to do about an executory contract before the court issues a bankruptcy discharge which usually happens about 90 days after filing.
An example of an executory contract is a vehicle lease. If the debtor does not want to keep the leased vehicle then he can surrender the vehicle to the leasing company and has no further liability. If the debtor wants to keep the vehicle then will need to assume the lease and keep the payments current. The debtor and creditor must sign the lease assumption, but it is not necessary for the judge to approve the lease assumption. If the debtor cannot make the lease payments the leasing company can repossess the car, but cannot sue the debtor for any deficiency.
Redemption
A debtor’s tool in bankruptcy is to “redeem” secured personal property such as furniture, computers, automobiles, or other property purchased on credit. To redeem means to purchase the property from the secured lender at its current fair market value considering its age and condition. If the property is worth less than the secured debt then this may be a good option. The problem is that most redemptions require payment in full at the time the redemption is accepted or approved by the court..
Student Loans
Start with the understanding that student loans will not be discharged in a bankruptcy. But, there are always exceptions to every rule. In some circumstances student loans can be dischargeable if you can show that your loan payments impose “undue hardship.” This issue must be filed as a separate action within the bankruptcy. This separate action is called a adversary. You must appear before the bankruptcy judge with proof of your hardship. Most likely this will be hotly litigated by the student loan creditor. It is wise not to assume you will be one of the very few who receive a partial or full discharge for their student loan. Each bankruptcy judge, in each bankruptcy district, in each federal court has a different opinion what is an “undue hardship”.
Contingent and Disputed Liabilities
Make certain you provide your attorney information about all liabilities, no matter how remote. List any claim that anyone might have against you even if you are certain that claim will never arise. If you are a co-debtor on a note, have personally guaranteed any debt, or are liable on any mortgage, the debt should be listed and explained in the bankruptcy. You also must list debts you dispute. This includes any past obligations to any mortgage companies for a foreclosed home or even a short sale, make sure to include any mortgage insurance company (such as a VA loan). You should also include any obligations that someone promised to pay for you, such as selling your home to someone who promised to pay you, but the sale was done without paying off the entire debt.
Bankruptcy Discharge
The discharge is the legal process that eliminates most of your legal liability to your creditors. Creditors who have been discharged in bankruptcy can never again try to collect debts that you incurred prior to filing bankruptcy. There are certain debts that remain even after the discharge is entered. These debts include child support, alimony, student loans, most taxes, and several other obligations. A good bankruptcy attorney can guide you as to what debts are discharged and what are not. Video explaining the discharge.
By Jon Alper, as edited by Diane L. Drain
The most difficult aspect of filing bankruptcy is not the interaction with the court. It is trying to understand the legal questions and issues as they relate to your particular situation; identifying the best time to file, or whether or not you should file. Once those difficult questions are answered then you must prepare the mountains of complex legal paperwork that are required in every bankruptcy. No question on the paperwork should be answered without understanding the term and the consequences of any particular answer.
These issues are all entail the practice of law and, by federal and state law, no one except a licensed attorney, experienced in bankruptcy law, can explain them. The new bankruptcy law has now turned what was a complicated law into a series of mine fields and quick sand. Even the experienced bankruptcy lawyer is unsure of some of the problems raised by the poorly drafted new bankruptcy law.
If anyone tells you that bankruptcy is simple and they will file one for you for $200 or $600 – run, don’t walk. These folks are fancy typists and only in the business to take your money. I guarantee they will leave you in a worse position than if you never filed a bankruptcy. Also, do not use firms who advertise on TV. They are paying millions of dollars a year for those ads – where do you think the money comes from pay for them? Of course, from their clients. They charge two or three times more than most other lawyers charge for the same services. Again, they are in the business to make money and mass produce as many files as possible. That industrial assembly-line process worked well for Ford Motor Company, but does not work for a client needing individual attention. I do not tell you this in order to scare you into being my client, I say this because I have seen hundreds of examples of horrible abuses by documents preparers and incompetent lawyers suffered on innocent people who were only “trying to save a few bucks” or thought using a TV lawyer was their only option. This would be like using an untrained, unlicensed person to do open heart surgery in a filthy room with roaches crawling on the instruments. I know this sounds sick, but I have seen people lose their homes, cars, monies paid to their mothers and tax refunds.
Self-help in the legal world is not always smart. You may have tried to take care of your financial situation in ways that the law prohibits. A year after a payment or transfer a court can set aside the payment or transfer and require that the asset or money be paid to your creditors. Lack of understanding of the law is not an excuse that the court will accept. For instances, your mother helps support your family while you are unemployed. Good news – you are back to work and get a large tax refund. You use the refund to pay your mother back. A few months later your new company goes out of business. You finally decide that bankruptcy is the only way to save your marriage and your home; so you file. A couple of months later you receive a copy of a complaint that has been served on your mother – she is being sued for all of the money you paid her. Yet, had you used the money to pay other expenses (see your lawyer for a list) then you would receive the coveted bankruptcy discharge, get your fresh start and your mother would never have been sued and forced to refinance her home in order to pay the creditors the money you paid to her. Plus, you can pay your mother back after your bankruptcy is discharged.
The same problem would arise if you sold, transferred or gave away property before filing a bankruptcy, or being sued by a creditor. I am not making any of this up – the legal issues are called preferential treatment and fraudulent conveyances.
If you are reading this article some of you may be thinking that I am trying to scare you in order to increase my business. Not so, I am happy to refer you to very good bankruptcy attorneys. In fact, I refer out a good number of folks who call my office. Why? Because another attorney is better equipped to address their specific issues. My fear is that you not understand the full breadth of the issues in bankruptcy and take that path without proper guidance.
WHY HIRE US? Because we are here for you and committed to treat you with respect. You are not just a number and a paycheck. Instead, you are a unique person with unique needs. We are dedicated to help you help yourself at a very difficult time in your life. We offer you a free consultation with Diane. Please take advantage of that opportunity before deciding what the best step is for you and your family.
You may wonder why I decided to concentrate on bankruptcy as my primary area of practice. It’s simple – this is an area of law that reminds me of why I went to law school – to help others in their time of need. My goal is to be an experienced guide for my clients. Help them to traverse the crevasses between their needs, the law and the bankruptcy system. I don’t tell my clients what to do; I explain the legal and practical issues in order for them to make informed decisions.
Speak Directly to Diane Drain
Your free bankruptcy consultation is personally provided by Diane Drain to help you on your road to a fresh start.
As a law professor I share with my students how bankruptcy laws resemble magic. When a bankruptcy is filed a “magical” umbrella, called the automatic stay, protects the debtor and their property. This umbrella is so powerful that it stops almost everyone in their tracks – even the IRS. Unless a court orders otherwise a mortgage company, bill collector or creditor cannot meddle with the debtor or any property of the debtor.
Warning: bankruptcy is complicated and must be treated with respect. Many people file bankruptcy on their own or using inexperienced attorneys. This can be the beginning of a nightmare. These folks lose their tax refunds, vehicles, inheritance and certain property that is important to them. Normally these problems can be avoided if a bankruptcy is planned properly.
Our reputation is built on our client’s trust that we could help them during a very difficult time. Our commitment to each client is to provide them the best guidance we can. Here are some comments from my clients.
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Bankruptcy
We are dedicated to helping Arizona residents and small businesses protect both their assets and their future; whether through bankruptcy or other options. It is very important to us that everyone understand their rights and how to use all available resources to protect their property.
Foreclosures
Since 1985 our firm has represented hundreds of lenders, from large national firms to individual lenders. As a result we have the expertise to assist both Arizona homeowners and Arizona lenders who are faced with the challenges of a trustees sale, foreclosure, short sale, loan workout or eviction.
About
Meet Diane L. Drain
Diane truly believes that “when you find your passion, going to work every day is a joy, not a job.” Her clients can attest to her passion and commitment to excellence. In 1990 Diane L. Drain left her large firm to open her own law firm, Law Office of D.L. Drain, P.A. which focuses on debtor and creditor rights and real property lien enforcement. Diane is licensed by the State Bar of Arizona, the United States District Court of Arizona and regularly appears before the United States Bankruptcy Court. She is a conservative and practical advocate for her debtor and creditor clients. Diane is a retired law professor, where she taught bankruptcy, and since 1988 she teaches bankruptcy and foreclosure at the Arizona School of Real Estate. She is also a mentor for fellow bankruptcy lawyers. More about Diane.
My wife and I would highly recommend Diane Drain to any one who is considering bankruptcy. She handled our case professionally and in a very timely manner. Diane and her team made a long, frustrating process pretty painless. Thank you Diane!!- Signed D & B
Bankruptcy
Experienced Bankruptcy Lawyer in Phoenix, Arizona
We are dedicated to helping Arizona citizens and Arizona small companies protect both their assets and their future; whether through bankruptcy or other practical avenues. It is extremely important to us that everyone understand their rights and are able to use all available legal resources in protecting their property.
Bankruptcy is a very complicated interplay of several laws and should not be undertaken without adequate representation. Each state has a different set of laws or procedures related to bankruptcy. Do not use document preparers or inexperienced attorneys who do not practice bankruptcy law full time. Most bankruptcy lawyers offer free consultations.
I understand that you are afraid. I also understand that even calling me is scary. I am as much a teacher as a lawyer.
Trustee Sale
Reliable Arizona Trustee Sale & Foreclosure Attorney
Since 1985 our firm has represented hundreds of lenders, from large national firms to individual lenders and completed thousands of trustee sales. As a result we have the expertise to assist both homeowners and lenders who are faced with the challenges of a trustees sale, foreclosure, short sale, loan workout or eviction.
Excess Proceeds
Arizona Excess Sale Proceeds
This firm is extremely proud that we have returned more than $800,000 to homeowners after the trustee’s sale is completed. This is a process that allows the original homeowner to recoup some of their equity in their home that was foreclosed.
For Lawyers
Basic Legal Information for Lawyers
The practice of law becomes more complex each day. The day of the attorney who “does it all” is rapidly waning. Not because one attorney cannot provide good legal and practical advice in several areas of law, but because they probably should not.
Each day there are new laws, new court decisions, new policies or administrative procedures that directly influence existing laws. Each of these changes impact other areas of law. For instance, a change in the tax law affects bankruptcy or real estate law. Or, a federal court decision directly impacts existing state laws.
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