Bankruptcy is a process that takes place in Federal Court. The Bankruptcy Code governs the process and it is designed to provide debt and other relief to consumers and small businesses. Most consumers and small business people file a bankruptcy as a “liquidation” case called a Chapter 7, and some consumers and small business people file a “Reorganization” bankruptcy or Chapter 13. Very few Consumers or Small Business People file a Chapter 11 Bankruptcy, which is typically used for Corporate Reorganization of Debt.
In a Chapter 7 Bankruptcy you are asking the Court to wipe away as many debts as can be wiped out according to Bankruptcy Code. In a Chapter 13 Bankruptcy you are asking the Court to reorganize your financial life, pay some debts, wipe away others, primarily based on what you can afford and what types of debt you have.When you file a bankruptcy a Court Order automatically goes into affect. This is called the Automatic Stay and it stops most creditors from collecting during the case.
Certain types of debt survive a chapter 7 bankruptcy like child support, spousal maintenance, certain tax debt, most student loan debt and debts incurred fraudulently.
2. HOW DO I KNOW WHICH CHAPTER, CHAPTER 7 OR CHAPTER 13 I SHOULD FILE?
When you file a chapter 7 bankruptcy you are asking the Bankruptcy Court to sever your obligation to pay most of your debt. In exchange for that “discharge” of debt you have to give the Bankruptcy Trustee your assets or at least those that aren’t protected by various asset exemption laws in Arizona. The Trustee will take those non-exempt assets and divide them amongst your creditors.
A Chapter 13 Bankruptcy is not a liquidation case like a chapter 7 case. You don’t have to give up any assets. You do have to pay your creditors on a monthly basis a certain amount of money. The amount of money you pay your creditors depends on several factors. The most important are
a. Your income levy in the past and in the future.
b. Your budget
c. The amount of priority debt i.e. debt the bankruptcy code considers so important that it can’t be “discharged” and it must be paid in a chapter 13 in full.
d. The amount of secured debts you have like car loans
e. The value of your non-exempt assets: Again, those assets that aren’t protected by the Arizona Exemption Statutes.
With a good breakdown of the above information we can determine how large your plan payment will be in a chapter 13 case, whether that amount will protect your non exempt assets, and how much of your non priority debt will be wiped away after the case is over.
If you qualify to file a chapter 7 bankruptcy there are a number of reasons why you may choose to file a chapter 13 bankruptcy anyway: Some of the more common are:
a. You have assets that are not exempt that would be lost in a chapter 7 filing and that you consider important enough to keep that you are willing to pay their value to your creditors in a chapter 13 case.
b. You are about to lose your home to foreclosure and have no other way to bring it current. A chapter 13 case will allow you to spread the amount you are behind over 3-5 years and stop the foreclosure.
c. You have a car that is worth much less than you owe on it and/or that is about to be repossessed. The chapter 13 will stop the repossession and allow you to pay the market value of the car over 3-5 years at a reduced interest rate (in most cases) if you purchased the car more than 2.5 years ago.
d. You have non-support related debt obligations as a result of a divorce decree. These obligations are dischargeable in a chapter 7 but are in a chapter 13 Bankruptcy.
e. You feel the need to pay something back to your creditors and have a steady income.
3. SO I CAN JUST CHOOSE WHICH TYPE OF BANKRUPTCY TO FILE?
If you qualify to file both a chapter 7 Bankruptcy and a chapter 13 Bankruptcy than you can choose which one better suits your needs.
There are a number of ways a person doesn’t “qualify” to file a chapter 7 Bankruptcy or a chapter 13 Bankruptcy, but it is important to understand that even if you qualify for either, the choice you make could be a difficult one. An experienced Arizona Bankruptcy Attorney can help to make sure all of the issues are considered before making such an important decision.
4. WHEN AM I INELIGIBLE TO FILE A CHAPTER 7 OR A CHAPTER 13 BANKRUPTCY?
The most common situations that prevent a person from qualifying to file a chapter 7 Bankruptcy are:
a. Failed Means Test – Bankruptcy Law requires that each filer is “means tested”. In order to pass the test your disposable income after subtracting certain expenses and debt payments must result in less than a specific amount payable to your creditors over 5 years. This test can be complex in some cases and planning is often involved. If you fail it, you can’t file a chapter 7 bankruptcy UNLESS the majority of your debt is business or tax related.
b. Filed a Previous Bankruptcy – If you filed a chapter 7 bankruptcy within the last 8 years and received a Discharge you can’t file another. If you filed a Chapter 13 within the last 6 years and received a Discharge you can’t file a Chapter 7 Bankruptcy.
c. Dismissal – If your Bankruptcy case was dismissed within the last 180 days in certain circumstances.
d. Fraud – You defrauded your Creditors
The most common situations that prevent a person from qualifying to file a Chapter 13 Bankruptcy are:
a. Filed a Previous Bankruptcy – If you filed a chapter 7 Bankruptcy and received a discharge within the last 4 years you are ineligible to file a chapter 13 Bankruptcy and receive a discharge.
b. Too Much Debt – Chapter 13 bankruptcy is limited to those who have less than $1,184,200.00 in secured debt and unsecured debt of $394,725.00.
c. Business – Business Entities can’t file a chapter 13 Bankruptcy. (Self employed individuals can)
d. Disposable Income – You must have income that is high enough to pay your basic living expenses and a payment to the Bankruptcy Trustee that will pay car loans, mortgage arrears, priority debt, fees, value of non-exempt assets, and an amount to unsecured creditors required by the means test.
e. Haven’t Filed Tax Returns – You must file at least the last 4 years and continue to file during the case.
5. WHAT CAN BANKRUPTCY DO FOR ME?
Bankruptcy can do a number of things for you if you are having serious debt problems. The most common are:
a. Eliminate your obligation to pay most of your debt.
b. Eliminate the obligation to pay tax on the eliminated debt as you may have to if it were forgiven outside of bankruptcy
c. Stop a foreclosure on a home and allow you to pay the arrears over time
d. Stop the repossession of your car and even force the return of it in certain circumstances.
e. Stop wage garnishment, debt collection calls.
f. Restore or prevent termination of utility service.
g. Allow you to challenge creditor claims
h. Allow you to pay less per month on your debt obligation than you may have had to pay the IRS directly.
6. BANKRUPTCY CAN DISCHARGE DEBT, SAVE MY HOME FROM FORECLOSURE, PROTECT CERTAIN ASSETS AND SOME OTHER GREAT THINGS, BUT, WHAT CAN’T IT DO
a. It can’t eliminate certain debt obligations
Certain debt obligations aren’t discharged in Bankruptcy. The most common are: Child Support/Spousal Maintenance, Property Settlement Debt related to divorce (chapter 7 only), Certain taxes, Most student loan debt, debt you forget to list (there are exceptions in a chapter 7 bankruptcy), debts related to drunk driving or criminal activity and fraudulently incurred debt
b. It can’t prevent a creditor whose debt is secured with property from taking the property. Bankruptcy can eliminate the obligation to pay the debt, but it doesn’t eliminate most liens. So if you don’t continue to pay for your car, you won’t be obligated to pay for it but the bank can take it.
c. It can’t protect co-signers. When a relative or friend has co-signed a loan, and you discharge the loan obligation in your bankruptcy, the co-signer may still be on the hook. (This may not be true in Arizona re: your spouse)
d. Discharge debts that you incur after Bankruptcy
7. CAN BANKRUPTCY ELIMINATE MY TAX OBLIGATION?
The most common type of tax debt obligation eliminated in bankruptcy is income tax. There are some basic requirements for this type of debt obligation to be eliminated in Bankruptcy.
a. The Tax Return must have been due more than three years before you file the bankruptcy.
b. The Tax Return must have been filed by you more than two years before you file the bankruptcy
c. The Tax Debt must have been assessed by the IRS more than 240 day before you file the bankruptcy case
d. You cannot have filed a fraudulent tax return or otherwise willfully tried to evade paying tax.
We have helped hundreds of clients discharge millions of dollars in income tax debt using bankruptcy and the rules although simple on their face can get confusing and an experienced tax and bankruptcy attorney is often necessary to sort them out.
There are other benefits that bankruptcy can provide in relation to tax debt as well like:
a. A chapter 7 bankruptcy will discharge the obligation on most income tax penalties and interest on the penalty older than 3 years
b. A chapter 13 bankruptcy will allow you to treat most income tax penalty and interest on the penalty as dischargeable debt no matter how old the tax debt is
c. The non trust fund portion of employment tax if owed by the individual business owner is dischargeable in bankruptcy if it meets the date requirements.
d. Arizona Sales Tax (Transaction Privilege Tax) is dischargeable in bankruptcy if it meets the date requirements, as it is not a trust fund tax.
8. WILL BANKRUPTCY ALLOW ME TO GET RID OF MY SECOND MORTGAGE?
In Arizona, a Bankruptcy can be used to “get rid” of your obligation on the second mortgage if:
a. The home is worth less than the 1st mortgage is owed making the second mortgage fully unsecured
b. You file a chapter 13 Bankruptcy and follow the local rules in filing certain documents and following certain procedures
c. You complete the chapter 13 Bankruptcy and obtain a discharge.
9. CAN I FILE THE BANKRUPTCY WITHOUT MY SPOUSE?
In Arizona you may be entitled to what is called a “community discharge” of your debt. This means that even if your spouse doesn’t file with you he or she may protect community assets and income from creditors as long as you are married.
10. HOW WILL BANKRUPTCY AFFECT MY CREDIT?
The affect on your credit score as a result of bankruptcy is difficult to determine. Generally, if you have bad credit now and bankruptcy will wipe out the obligation on a number of debts listed on your credit report, your credit should improve. Bankruptcy should be considered a last resort and if the decision between filing and not filing is being made based solely on the effect the bankruptcy will have on the credit report, you may not be a good bankruptcy candidate.