I’ll lose my home and car if I file bankruptcy.
It’s a common concern. Since “bankruptcy” means “no money” to a lot of people, most assume that when you file for bankruptcy you have to give up the things you do own. Truth be told, most people keep their house and cars when they file bankruptcy in Arizona. When you file for bankruptcy in Arizona, you’re allowed an exemption of up to $150,000 of equity in your house and up to $5000 of equity in one car for a single person or equity in one (or two) cars up to $10,000 for married couples. As part of a Chapter 7 bankruptcy, you can usually keep these assets if you are current and remain current on your monthly payments. When filing for Chapter 13 bankruptcy, car loans are usually paid through the plan. Mortgages are also paid through the plan, and you resume your regular monthly mortgage payments after the bankruptcy is filed.
Wait… What’s the difference between Chapter 7 and Chapter 13?
Before we go any further in de-mystifying the misconceptions around filing for bankruptcy, let’s clarify the different types of bankruptcy.
Most people have heard of Chapter 7, Chapter 13, and Chapter 11 bankruptcy. Since Chapter 11 bankruptcy is usually for businesses, we’ll focus on Chapter 7 and Chapter 13. Please do not hesitate to contact us though, if you are interested in learning more about Chapter 11 bankruptcy, which is also known as “reorganization bankruptcy.”
Chapter 7 is the most common form of bankruptcy and is commonly referred to as “straight bankruptcy.” 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. Chapter 7 is a good option for people dealing with the following:
- You unable to repay your debts
- You have debts that do not have co-signers
- You are going to be sued by creditors
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. Chapter 13 is a good option for people dealing with the following:
- You have already filed Chapter 7 within the past six years
- You have debts that have c-osigners
- You are able to re-pay your debts within three to five years
- Your income has disqualified you from filing for Chapter 7
- You need relief from impending collection proceedings or you want to pay your creditors back but are currently unable to
When I file bankruptcy someone from the court will go through my possessions.
Generally, when a person files for bankruptcy, no one goes out to a home to inventory any possessions. Rather, you will be asked to list your possessions on your bankruptcy schedules under oath.
If I file bankruptcy, I will never be able to finance a car again.
Many people actually find it easier to get financing for a car after a Chapter 7 because their debt to income ratio has improved. Additionally, car lenders know the individual cannot file bankruptcy in Arizona again for at least 6 years, which makes them an even “safer” candidate for a car loan.
If I file bankruptcy, I will never be able to get another credit card.
You might actually find that you’ll receive new credit card offers more often after filing for Chapter 7. Many card companies will send offers because they know you are looking to rebuild. Also, you are usually able to obtain a “secured” line of credit in order to rebuild your credit.
Filing a bankruptcy is easy and I can do it on my own.
This one is a bit of a true misconception. While it is easy to file on your own, the legal system is a complex maze of rules, laws, and regulations that can be very difficult to navigate. Creditors have aggressive legal counsel to fight you in an attempt to get the money they are owed. We always advise that you work with the best possible legal counsel to guide you through the system to ensure a favorable outcome.
When I file bankruptcy all my debts get erased.
Unfortunately, there are some debts that even bankruptcy cannot wipe out. These include student loans, child support obligations, criminal and civil penalties, along with some types of taxes. You will also need to keep paying on secured debt that you want to keep such as a house or car.
I must be delinquent on all my debts in order to file bankruptcy.
People often file when their debts are all current but they know they are headed towards bankruptcy. Sometimes a change in income, or a foreseen change in income forces bankruptcy or they realize they are in a vicious cycle they know they will not be able to get out of unless they file. In many ways, this is the best way to stop that cycle and get clear of debt.
I will have to go to court and face being humiliated in front of a judge and my creditors.
While you are required to attend what is called a “meeting of creditors”, creditors rarely actually show up. Your bankruptcy attorney will attend the meeting with you and the court-appointed trustee has only simple, straightforward questions for you. If you decide to work with an attorney, as advised, he or she will provide you with a list of the questions which you will be asked when you are in court.
If I filed a previous bankruptcy, I cannot file again.
While you are not allowed to file a new Chapter 7 Bankruptcy for 8 years after you receive a Chapter 7 discharge, the time requirement for filing Chapter 13 Bankruptcy is dependent upon whether you have filed a Chapter 7 or Chapter 13 previously.
I will lose my job if I file bankruptcy.
Under bankruptcy code, an employer cannot discriminate against you for filing for bankruptcy.
Chapter 7 Process
Filing for Chapter 7 bankruptcy can feel overwhelming, but the process is actually fairly straight-forward. As always, it’s advised that you work with a bankruptcy attorney to help guide you through the process.
From start to finish the entire Chapter 7 bankruptcy process takes from four to six months, and rarely do cases go to court. It should be noted that the process does require just one mandatory non-court appearance before the trustee. At the end of the process debtors are able to discharge most or all of their debt.
Steps of a typical Chapter 7
1. Pre-bankruptcy credit counseling. For a person to be able to file Chapter 7 bankruptcy, they must first receive credit counseling from an approved agency. This needs to happen within the six months prior to filing.
2. Bankruptcy petition. Filing consists filing out some paperwork, including: the bankruptcy petition, a schedule that details your financial information, and other forms that are there to help you calculate your income, expenses, and what can be considered exempt. This is where it is helpful to involved a bankruptcy attorney that can explain what needs to be included on these forms.
3. Automatic stay. When a debtor files a bankruptcy petition, an automatic stay goes into effect. This automatic stay prohibits creditors from continuing to collect from a debtor.
4. Assignment of a bankruptcy trustee. A court will assign a bankruptcy trustee to administer the case. This assigned trustee will attempt to maximize assets included in the bankruptcy estate so that the sales of the assets can be distributed to unsecured creditors. The trustee also reviews all the paperwork to check for inaccuracies and any possible fraud.
5. Meeting of creditors. Next, a debtor is required to attend a meeting of creditors hearing that is administered by the bankruptcy trustee. This is not a court hearing, but rather a meeting where a trustee will ask a debtor about his or her petition and finances. Creditors are allowed to appear, although most do not, and are also able to ask questions of the debtor.
6. Decision on Eligibility for Chapter 7. A court will next decide if the debtor is eligible for Chapter 7. A bankruptcy attorney will be able to assess this. One reason a court might deny eligibility of a debtor is because of the results of a means test that evaluates debts owed and income earned.
7. Decision on property. If property is exempt, a debtor keep it. If there is nonexempt property, the trustee decides next steps. One option is that it is seized and sold to repay creditors. There are a number of exemption options for property, and you’ll want to consult a bankruptcy attorney to review what assets you might be able to exempt in your filing.
8. Determination on Secured debts. Secured are debts that have property that can be used as collateral associated with them. You can often surrender the secured debt to reaffirm the loan or do nothing. Doing nothing means you will need to keep paying back the debt owed.
9. Financial management course. Before a debtor can receive a discharge, he or she must take a debtor’s education course.
10. Discharge. Between three and six months after a debtor file for bankruptcy, the court grants a bankruptcy discharge. At this point, the automatic stay is lifted.
11. Bankruptcy case closed. Once a discharge has been granted, a court closes the case. This usually happens a few days or weeks following the granting of the discharge.
Working with a Bankruptcy Attorney
Bankruptcy can be an overwhelming process. That’s why we advise that you work with a phoenix business 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