Bankruptcy Is an Easy Tool to Eliminate Debt
When you file for bankruptcy with an attorney, it’s really easy. There’s little work you have to do. You’ll have to fill out some easy paperwork and provide some documentation to your attorney and to the court (such as bank statements and paystubs). There’s also a very short meeting with your bankruptcy trustee, and a couple of online classes that you’ll have to take, which only require a few hours of your time.
Filing for bankruptcy is also a terrific way to eliminate debt. Once it’s filed, you’ll completely eliminate credit card debt, medical bills, personal loans, old car repossessions, bank fees, some older tax debts, and the list goes on and on.
Bankruptcy is also a great technique for protecting yourself from your creditors. No credit card company, bank, or collection agency can go after you when you file. You won’t have to worry about repossessions or foreclosures. No sheriff is going to show up to your house, and nobody is going to show up at work to serve you papers. And no one will be able to put a lien on your house or car.
In other words, by filing for bankruptcy you’ll easily be eliminating your debt while protecting yourself from creditors. That should help you sleep at night.
What About My Assets – Are They Protected?
So there is a down-side to all of the great debt-eliminating benefits offered by bankruptcy. You can’t be rich when you file. In fact, you can’t even be kind of rich, a tad bit rich, or even a little wealthy.
Actually, that’s not entirely accurate. You can be rich and file. But here we are talking about a personal bankruptcy. It’s the kind your Average Joe files, not the type some business tycoon would file. If you file the type of bankruptcy that were talking about here and you’re rich (chapter 7), then the court will take most of your assets and you’ll be left with little to nothing.
In other words, when you file chapter 7 bankruptcy (the kind that usually eliminates all of your debt) you can’t have a lot of assets or money to your name. If you do, the court will take them and sell them (or in the case of cash – flat out take it) and divide the proceeds amongst your creditors, minus the fee that the trustee charges to do so.
It should be obvious that you have to be careful if you own anything of value when you file for bankruptcy. So do you have to be dirt poor in order to file? Can any assets be protected?
Exemptions Protect Your Assets
Technically all of your assets become part of what’s called the “Bankruptcy Estate” when you file for bankruptcy. It’s as though the court owns all of your assets until your bankruptcy is over. Essentially the court can do what it likes with your assets, following strict guidelines of course.
Anything of value that you own, such as a car or a house, could be very valuable to your creditors. Each one would like to get a piece of your assets, especially considering you are filing for bankruptcy and there’s no chance they’ll be getting paid back in the usual pay-your-bill-once-a-month way. Bankruptcy takes care of that for you when you file. So your creditors would like to get to your money in the only way left – through your assets.
But don’t fret – there’s a solution. It’s the exemption.
A bankruptcy exemption is a rule that allows you to protect a specific type of asset when you file for bankruptcy. Every state has its own list of bankruptcy exemptions covering a wide range of assets. Each exemption has a dollar limit. For example, you can protect equity in a house, but not a million dollars worth of equity.
Some states are more generous as to what you can protect and how much of it. If you are filing in Arizona, you’re in luck. It has an extensive list of exemptions and the values of the assets you are allowed to keep are high when compared to most states.
Arizona Bankruptcy Exemptions
The following list of exemptions should help give you an idea of what assets you’ll be allowed to keep if you file for bankruptcy in Arizona. Language in quotes are quotations directly from the Arizona bankruptcy statutes.
Of course, you definitely don’t want to rely on this list to make legal decisions about how to file your bankruptcy. Laws change, and they are open to interpretation. You should consult with a licensed bankruptcy attorney before making any decisions about your assets. Most reputable bankruptcy attorneys will consult with you free of charge so the only thing to lose is a little bit of your time.
Homestead Exemption – The homestead exemption allows you to protect equity in your house. If you are unfamiliar with the concept of equity, it’s simply the difference between what your home is worth, and what you owe on it. If you are having a hard time determining how much your home is worth, an internet search of recent home sales in your neighborhood should help. The website Zillow can be useful for this as well, but often can be fairly inaccurate. A real estate agent will be able to give you the most accurate valuation of your home. Some will even do this for free.
According to the Arizona statute, the homestead exemption is “Interest in real property upon which debtor’s house sits, condominium or cooperative, mobile home, or mobile home in which debtor resides plus the land upon which the mobile home is located in the amount of $150,000. May not be doubled by husband and wife.” In other words, you can protect $150,000 in equity in your primary residence. This doesn’t have to be just a single-family home and land. It includes condos, manufactured homes, and mobile homes.
Personal Property – There are several categories of personal property that are protected by bankruptcy exemptions. Some items have a certain dollar maximum, others are completely protected regardless of the value.
Household Furnishings – Household furnishings are protected up to $6,000 in value. This dollar figure is based on the used value of your things. The furnishings are defined in the statute as follows, “Household furniture and furnishings, household goods, including consumer electronic devices, and household appliances personally used by the debtor or a dependent of a debtor and not otherwise specifically prescribed in this chapter in an amount not greater than $6,000 (total fair market value).” Essentially your furnishings are furniture, appliances, electronic devices, and other similar items in your home.
Food, Fuel, and Provisions – You are allowed to have 6 month’s worth of food and fuel for cooking your food. There is no dollar figure assigned to its value – it’s simply what you can eat in six months.
Wearing Apparel – You can have up to $500 worth of clothing. Keep in mind that this is used value, and used clothes aren’t worth that much. So $500 is a lot of clothing! “All wearing apparel used primarily for personal, family or household purposes with a fair market value not greater than $500.”
Musical Instruments – Up to $400 worth of musical instruments can be protected. “All musical instruments for debtor’s individual or family use with a total fair market value not greater than $400.”
Pets – “Domestic pets, horses, milk cows and poultry with a fair market value not greater than $500.” Unless you live on a farm, you own horses, or you have some fairly exotic pets, you aren’t going to have to worry about going over the $500 limit. Spot may be priceless to you, but to the bankruptcy court everything has a price. And Spot isn’t worth much to them.
Engagement and Wedding Rings – “All engagement and wedding rings with a total fair market value not greater than $2,000.” Keep in mind that jewelry depreciates a lot. Your fiancé may have spent the obligatory three month’s salary on your wedding ring (is that too much to ask?), but once he put it on your finger, it’s more like a week’s worth of income – after taxes.
Your Library – If you’re rich enough to own your own library, should you need to file for bankruptcy in the first place? Well, this is how the bankruptcy court puts it, “Debtor’s library, including books, manuals, published materials and personal documents with a fair market value not greater than $250.” Really the court is talking about anything you own with written language inside, or even just pretty pictures. Virtually everyone has a “library” at home, even as the internet chisels away at the written word.
Watches – “One watch with a fair market value not greater than $150.” You are only allowed to protect one watch. After all, you really only need one to tell the time.
Random Items Including Bicycles, Bibles, and Burial Plots – This has to be the strangest set of exemptions in all of Arizona. Let’s let the list speak for itself. “One typewriter, one computer, one bicycle, one sewing machine, a family bible, a burial plot, one shotgun or one rifle or one pistol, with a total fair market value not greater than $1,000.”
Vehicles – This is one of the most critical exemptions. If you own anything with more equity than is protected by an exemption, it’s probably your car. “Equity in one car not greater than $6,000. If debtor (or debtor’s dependent) is physically disabled, the fair market value of the motor vehicle must not be greater than $12,000. (Equity is the fair market value of the motor vehicle minus debt to secured creditor).”
You can’t spread this exemption across more than one vehicle. If you are single, own two vehicles, and each one has $3,000 in equity, you can’t split up your $6,000 exemption. All $6,000 has to be applied to only one vehicle. If you want to protect the other car, you may have to sell it or get another loan that is secured by the car in order to eliminate any equity you have.
Wheelchairs and Other Medical Aids – “Professional prescribed prostheses for debtor or a dependent of the debtor, including a wheelchair.” There is no maximum value on these items.
Money, Benefits, or Proceeds – We are finally on to a new category. Most of these categories have no dollar maximum, but be sure to look carefully. There are a few that only allow you to protect a small amount of value.
Life Insurance – “Life insurance proceeds not greater than $20,000 if payable to surviving spouse or child upon the life of a deceased spouse, parent or legal guardian.”
Money Earned by Your Minor Child – “Minor child’s earnings unless debt to be discharged was contracted for the special benefit of the minor child.”
Child Support or Spousal Maintenance – “Child support or spousal maintenance received pursuant to a court order.”
Money From Health Insurance, Disability Insurance, or Accident Insurance etc. – “All money, proceeds or benefits from employer health, accident, disability insurance benefits or similar employer benefit program.”
Insurance and Other Monies Received for Damage to Exempt Property – “All proceeds from destruction of or damage to exempt property and all proceeds or benefits arising from fire or other insurance on exempt property.”
Cash Surrender Value of a Life Insurance Policy – “Cash surrender value of life insurance policies where for a continuous unexpired period of two years such policies have been owned by a debtor and have named as beneficiary the debtor’s surviving spouse, child, parent, brother or sister, or any other dependent family member, except for the amount of any premium that is avoidable by a creditor as a fraudulent transfer.” In other words, as long as you have had the life insurance policy for two years, its value is protected.
Annuity Contract – “An annuity contract where for a continuous unexpired period of two years such contract has been owned by a debtor and has named as beneficiary the debtor, debtor’s surviving spouse, child, parent, brother or sister, or any other dependent family member, except for the amount of any premium that is avoidable by a creditor as a fraudulent transfer.” As long as you have owned an annuity for more than 2 years prior to filing for bankruptcy, it should be safe from creditors and the court when you file.
Money in Your Savings and Checking Accounts – “Bank deposit not to exceed $300. This sum is not exempt from normal service charges assessed by the bank holding the funds.” Along with the vehicle exemption, this is the place where most debtors lose money when they file, especially when attempting to file without an attorney. The bankruptcy trustee is going to look at your checking and savings account statements. He or she will be looking to see how much money was in your account for the 24 hour period of the date on which your case was filed. Any dollar amount over the $300 can be taken by the trustee and distributed to your creditors. You have to be very careful to work with your attorney to ensure that on the date your case is filed, you have less than the maximum that is allowed in your account.
ERISA-qualified Retirement Benefits – “Benefits from ERISA-qualified retirement plan or deferred compensation plan except those amounts contributed within 120 days before a debtor files for bankruptcy. Does not apply to an alternate payee under a qualified domestic relations order. Bank deposit not to exceed $300. This sum is not exempt from normal service charges assessed by the bank holding the funds.”
Prepaid Rent and Security Deposits – “Prepaid rent, including security deposits as provided in § 33-1321(A) for debtor’s residence, not exceeding the lesser of $2,000 where debtor has not claimed a homestead exemption. Not exempt from orders resulting from a judgment for child support arrearages or child support debt.”
Life Insurance – A group life insurance policy or proceeds from the policy are protected.
Tools of the Trade – If you are self-employed or own your own tools for your job, this is an important exemption. “Tools, equipment, instruments and books (including telephone numbers, client or customer contact information, or marketing tools such as websites, domain names or any other intangible work product) in the possession of debtor or debtor’s spouse primarily used and necessary to carry or develop the commercial activity, trade, business or profession of debtor or debtor’s spouse, with a fair market value not greater than $5,000. Tools DO NOT include a motor vehicle primarily used for personal, family or household purposes such as transportation to debtor’s employment.”
Farm Equipment – Farm machinery, utensils, implements of husbandry, feed, seed, grain and animals belonging to debtor, with a value not to exceed $2,500, where debtor’s primary income is derived from farming.”
Pensions, IRA’s and Other Retirement Accounts – Arizona bankruptcy exemptions protect these with no dollar restrictions.
Unemployment Compensation – “Unemployment compensation benefits are exempt where proceeds are not commingled with other funds, except debts incurred for necessaries furnished to the individual or his or her spouse or dependents during the time when the individual was employed.”
Social Security Benefits – These are completely protected when you file for bankruptcy.
Hopefully this list will provide you with a good idea of what is protected when you file for bankruptcy. Please remember, before you make any decisions about bankruptcy and/or assets, you should consult with a bankruptcy attorney. This is the only way to guarantee you’ve had an expert review your case. This will help prevent the loss of your money or property when your case is filed.