When you’re facing a large amount of debt, it can feel insurmountable. Should you file for bankruptcy? How does bankruptcy work? As always, it’s advised that you work with a phoenix chapter 7 bankruptcy lawyer or phoenix chapter 11 bankruptcy lawyer to help you determine if bankruptcy is the next step for you, or if there are other options for you. Below we review what forms of bankruptcy might work for you, what a means test is, and questions you should consider if you are already considering bankruptcy.
What Form of Bankruptcy?
Depending on your situation, if you’re considering filing for bankruptcy, you’ll need to determine which form of bankruptcy, either Chapter 7 or Chapter 13, you should file.
Overview of Chapter 7 and Chapter 13
Chapter 7 (also known an straight bankruptcy) is the most common form of bankruptcy and is available to consumers and businesses.
Under Chapter 7, assets are sold off so that the proceeds can go to paying debt. All proceeds from the sales of those assets are handed over to a trustee, who then pays down any and all creditors. After all creditors have been paid off they are no longer able to collect funds directly from you and your debts are cancelled, meaning you are no longer responsible for them.
You are not able to discharge the following debts under Chapter 7:
- Alimony and child support
- Drunk driving judgments, criminal fines, restitution
- Debts incurred as the result of fraud or intentional wrongdoing
- Back taxes under 3 years old
- Student loans
- Recent purchases made for substantial amounts
- Contracts involving titles or liens such as land or automobiles
Chapter 13 reorganizes debt so that you are able to pay back debts over the next three to five years. This pay-back plan is called a debt repayment schedule. Based on your income, and how much you owe, you’ll repay 10-100% of the debt you owe.
You are not able to discharge the following debts under Chapter 13:
- Alimony and child support
- Drunk driving judgments
- Criminal fines
- Student loans
Reasons to File Chapter 7
Chapter 7 bankruptcy should be chosen if the following apply:
- You have no hope and have no future hope of being able to repay any debts
- Your debts do not have co-signers on them
- You are going to be sued by creditors
- You don’t qualify for Chapter 13
Reasons to File Chapter 13
Chapter 13 bankruptcy should be chosen if the following apply:
- You have already filed Chapter 7 in the past six years
- Your debts have cosigners
- You will be able to pay your debts within three to five years
- Your income disqualifies you from filing for Chapter 7
- You need relief from collection proceedings and you want to pay your creditors back but just need some breathing room to get your finances under control
- You want to be able to file a Chapter 7 bankruptcy some time in the future
- You are behind on your mortgage
- You owe back taxes
- You have assets that could be liquidated in Chapter 7
- You’re a farmer with debt not related to your farming operations and do not qualify for Chapter 12
Do I Owe Enough to File Bankruptcy?
So many people these days owe a lot of debt. But do you owe enough to be able to file for bankruptcy? A phoenix chapter 7 bankruptcy lawyer will be able to look at your debt situation and determine if you are a good candidate for bankruptcy. In the meantime, here’s a little more information to determine if you owe enough to consider bankruptcy.
Bankruptcy law does not require that debtors to have a certain minimum debt amount to be eligible for filing bankruptcy. Filing for bankruptcy is dependent on your individual circumstances.
Quick Note: There are maximum debt limits for Chapter 13 bankruptcy. While there is no minimum debt amount required to file for bankruptcy, a debtor cannot have more than $1,149,525 in secured debt or $383,175 in unsecured debt if he or she wants to file for Chapter 13 bankruptcy. These amounts are adjusted periodically to account for inflation.
Remember that a phoenix chapter 7 bankruptcy lawyer will be able to look at your debt situation and determine if you are a good candidate for bankruptcy.
The Arizona Means Test When You File Chapter 7
To qualify for a Chapter 7 bankruptcy in Arizona you will need to take the Arizona Means Test, during which your income is compared to the median income for a household of your size. You’ll want to work with a phoenix chapter 7 bankruptcy lawyer that is familiar with Arizona’s specific laws regarding bankruptcy.
The means text compares Arizona state annual median income to your household “annual” income. Your “annual” income will be based on an average of the 6 months before you file your bankruptcy petition. If it is determined that your income is below the state median income, you will qualify for a Chapter 7 bankruptcy.
Here are the annual income limits for filing a Chapter 7 bankruptcy in Arizona (these are as of November 1, 2015):
Single Person Household: $45,933
Two Person Household: $56,351
Three Person Household $60,392
Four Person Household $71,195
Based on the size of your household, your annual income will need to be less than these figures to qualify to file Chapter 7.
More Than Annual Median Income
You might still be able to qualify for Chapter 7 even if your income is above Arizona’s median income. You will need to go through another means test, during which your disposable income is included in the calculation. Disposable income is the income left over after certain monthly expenses are deducted, including: mortgage payments, taxes you pay, medical bills, and child care.
If your disposable income meets certain state-set thresholds, you will still be able to file a Chapter 7 bankruptcy.
Settling Debt If You Don’t Qualify
If you still do not qualify for Chapter 7 after the means test, there are still options for you to help deal with your debt. You might be eligible for debt settlement, or even Chapter 13 bankruptcy, which requires you to set up a repayment plan to pay off debt within 3 to 5 years.
Bankruptcy Exemptions in Arizona
Just like with any legal actions or processes, there are rules that vary from state to state. When it comes to declaring bankruptcy in the state of Arizona, there are some exemptions that you will come across.
When a person files for Chapter 7 bankruptcy or Chapter 13 bankruptcy in Arizona they are able to protect some or all of their property under Arizona’s bankruptcy exemptions. Additionally, Arizona has “opted out” of federal bankruptcy exemptions so a debtor is only allowed to exempt property under the state’s laws.
Here are some of the exemptions a debtor has in Arizona:
Married couples filing for joint bankruptcy in Arizona are allowed to “double” the exemption amount for certain items including motor vehicles and household goods.
Alimony and child support, up to the amount needed for support.
Debtors are allowed to exempt up to $150,000 (per debtor or married couple) of their home or other property under the homestead exemption.
Life insurance benefits up to $20,000. They must be payable or received by a surviving spouse or child.
Claims for the destruction of, or damage to, any exempted property.
Up to $6,000 in one or more motor vehicles. For debtor’s that are elderly or disabled, or an elderly or disabled spouse that is a dependent of a debtor, the exemption amount is up to $12,000.
All benefits from various employee pension systems are exempt.
Just as with federal rules, tax exempt retirement accounts (401ks and IRAs) are exempt.
A debtor may exempt the following personal property items:
- up to $150 in watches
- up to $250 in books
- up to $400 in musical instruments
- up to $500 in clothing
- up to $800 in animals
- up to $1,000 total of the following: bible, bicycle, typewriter, sewing machine, computer, burial plot, rifle, pistol, or shotgun
- up to $2,000 in engagement and wedding rings
- up to $6,000 in household furniture as well as appliances that are not already covered by other exemptions
- prepaid rent or security deposit to $2,000 or 1.5 times your rent (whichever is less), in lieu of using the homestead exemption
- awards received as the result of wrongful death
- all teaching materials for youth, and
- certain professionally prescribed health aids.
Unemployment compensation is exempt only if it is not co-mingled with other funds and only if it is not being used for child support orders.
A debtor is able to exempt the lesser of the following wages, per week:
- 25% of disposable earnings, or
- earnings in excess of 30 times the federal minimum wage.
This does not apply to taxes and is also modifiable to account for any support claims.
Workers’ compensation is exempt. Employers are entitled to receive a credit for benefits that have already been awarded.
Working with a Bankruptcy Attorney
Bankruptcy can be an overwhelming process. That’s why we advise that you work with a phoenix chapter 7 bankruptcy lawyer that is familiar with various debt repayment options. We are committed to helping our clients understand their rights and options under the bankruptcy law and developing the debt relief solution that makes the most sense for each individual. We invite you to call (602) 648-3274 or contact our Arizona office to schedule a free initial consultation.
668 N. 44th St., Ste 320, Phoenix, AZ 85008