Filing Bankruptcy in Arizona
Bankruptcy law is a federal system so it’s similar throughout the country. Federal law controls most of what happens when you file a bankruptcy case. However, each state is allowed to ad its own spin to bankruptcy, such as what assets you can protect, or how much money you can have in the bank when your case is filed.
Since every state is a bit different, let’s take a look at what it’s like to file for bankruptcy specifically in Arizona. If you’re filing here you’ll be happy, because Arizona offers debtors more protections than most states in the United States.
Do Your Research First
The easiest way to understand bankruptcy and get all of your questions answered is to meet with an attorney. Most reputable bankruptcy attorneys offer a free consultation where you can sit down with an attorney and analyze your debt issues. He or she will be able to tell you how bankruptcy applies to your unique set of circumstances, and whether or not bankruptcy will be a useful tool for you.
Be sure to meet with an actual attorney. Some firms offer a consultation but only with a paralegal or some “bankruptcy intake exert” who may or may not have any real training in the bankruptcy field. If you ultimately will be paying good money to have an attorney file your case, you might as well deal with an actual attorney right from the start.
Bankruptcy in Arizona
Filing bankruptcy in Arizona is a straightforward process when you use an attorney. Your attorney will deal with the minutia so you don’t have to. He or she will make sure your assets are protected, and will make sure that your case is presented to the court in a way that ensures you will have no problems with your bankruptcy. You shouldn’t have to worry about losing assets or money because your attorney will do that worrying for you.
The two types of bankruptcy you will encounter are chapter 7 and chapter 13. There are some differences between the two, but most of the differences will involve what your attorney has to do rather than what you have to do. The main difference you will encounter is that a chapter 13 requires a monthly payment to your bankruptcy trustee that a chapter 7 case does not. Other than that, most of what you see below about filing for bankruptcy in Arizona will apply to you no matter what chapter of bankruptcy you file.
Regardless of how much work your attorney does for you, there will still be a few hoops to jump through when you file your case in Arizona. Let’s outline those steps so you can have an accurate expectation of what you’ll have to do when you file.
Get Your Paperwork Together
Your attorney is going to want to look at a copy of a recent bank statement and a paystub from your job. If you are self-employed or retired, he or she will want to look at whatever proof of income you have available, whether it be a profit and loss statement, social security statement, etc. Typically you’ll also have to provide a copy of your income taxes from the last two years as well.
Most attorneys are also going to ask you to fill out a detailed form that is specific to their office. There will usually be lots of yes or no questions about various details of your recent financial history. You’ll also be asked to disclose all of your assets (including homes, cars, household furnishings, etc.) and a breakdown of your income and expenses.
Credit Counseling Class
In Arizona (as in all states) you must take two credit counseling classes. There’s one you take before filing and one after filing your case. These classes are not difficult, nor are they expensive. They can be done online and each one takes less than two hours. They are educational, and you may learn something useful in the process.
Qualifying for Chapter 7 Bankruptcy
Before your attorney files your case, he or she will have to make sure you qualify. Not everyone qualifies for chapter 7 because there are restrictions on how much income you can make and still file for bankruptcy. There are two tests that your attorney will apply to see if you qualify.
The first test is often referred to as the “median test.” This is a simple test that looks at the size of your family and the amount of your income and compares it to the median income for where you live in Arizona. If your income is under the median for your size of family, then you qualify. If it’s over the median, you don’t automatically qualify for chapter 7 under this test.
The second test is called the “means test.” The means test looks at more factors than just your income. It allows you to compare your expenses to your income. If you don’t qualify under the median test you might still qualify under the means test if your expenses are high enough. Unfortunately, not all expenses are allowed under this test.
For example, your credit card debt does not factor into the means test. You could have $100,000 in credit card debt and it wouldn’t help you qualify at all. Consequently the means test allows you to make more money than the median income in your area and still qualify for chapter 7 bankruptcy, but you can’t be over the median by too much money, or you won’t qualify.
Qualifying for Chapter 13 Bankruptcy
Chapter 13 bankruptcy is easier to qualify for than chapter 7 in Arizona. It lacks the income restrictions, so you don’t have to worry about a median test or means test. It also allows you more flexibility when it comes to what assets you can keep. Sometimes this forces you to file chapter 13 instead of chapter 7.
For example, chapter 7 only allows you to keep your primary residence when you file for bankruptcy. However, chapter 13 allows you to file and protect not just your primary residence, but a vacation home. So why doesn’t everyone file for chapter 13 if it’s so easy to qualify for? Keep reading and you’ll see.
Specific Chapter 13 Bankruptcy Requirements
Everyone tries to qualify for chapter 7 bankruptcy before looking into chapter 13. Here’s why. When you file for chapter 7, you simply file your case and eliminate your debt. But when you file for chapter 13, your attorney will propose a payment plan for the repayment of your debt. The court then has to approve this repayment plan in order for your case to be successful.
Essentially, you will be sending a monthly payment to the court that will last from three to five years. So why would you ever file chapter 13 if you have to repay your debt? If you don’t qualify for chapter 7 and chapter 13 is a repayment, why bother filing in the first place?
The repayment that you make in Chapter 13 doesn’t necessarily mean that you will repay all of your debt. Depending on your case, you might repay only a small portion of what you owe on debt such as credit cards and medical bills. Sometimes you’ll pay nothing at all towards these debts. When the three to five years are over, all of your debts are eliminated.
Who Gets Paid When I Make My Monthly Chapter 13 Payment?
Your secured creditors are going to get paid first, and they’ll usually be paid in full. So your house, your cars, and any other creditors that have your property as collateral will be paid what they are owed fully, with some exceptions. Priority debts will also be paid in full. These are debts that receive special treatment by the Arizona bankruptcy court. Debts such as back child support and taxes are usually paid in full through your payment plan.
There are also some fees that will be paid through your payment plan. The court is going to charge a monthly administrative fee, and much of what you owe your attorney will also be paid through your monthly payment plan.
Whatever is left over after paying all of these other creditors will be paid to your unsecured creditors. There are some other factors involved that determine how much you’ll have to pay the unsecured creditors, but to keep things simple, just think of them as getting the scraps after everyone else is paid first. So if there’s a lot of money left over at the end of the month when you finishing paying the other guys, your unsecured creditors will get paid quite a bit of money. If there’s no money left over when the rest of your creditors are paid, then your unsecured creditors will get nothing.
No matter how much you pay monthly to your unsecured creditors, when your payment plan is over in three to five years, your unsecured debts are completely eliminated. They aren’t allowed to ask you for another penny. In fact if they do, they are breaking the law.
So you can see how Chapter 13 bankruptcy is a useful tool to eliminate debt even though you have to pay into a payment plan. When all is said and done you end up eliminating some, if not all of your unsecured debts in most cases.
How Much Is This Monthly Payment Going to Be?
As we’ve already seen, there’s a lot that goes on when you file for chapter 13 in Arizona. You’ve got all sorts of different categories of creditors, and your income plays a major role in what you have to pay. There are many additional factors that will determine what your monthly payment will be when you file that are too complicated to go into here. The important thing to remember is that you don’t need to be a master at calculating chapter 13 plan payments because a quality bankruptcy attorney will be. And he or she probably will provide you a free consultation. So your best bet is to sit down with an attorney and figure out what your monthly payment would be like if you were to file for chapter 13.
There’s One More Benefit to Chapter 13 Bankruptcy in Arizona
Now we know that chapter 13 bankruptcy will allow you to protect more assets than a chapter 7. So if you’ve got two homes, an expensive car with a lot of equity, or a boat or other recreational vehicles that have a decent amount of value, you’ll want to file a chapter 13 bankruptcy because it will allow you to protect these assets.
Chapter 13 bankruptcy can help you if you are behind on your mortgage or car payments. Chapter 7 doesn’t do much to help you protect an asset when you are behind on payments. If you file chapter 13 in Arizona, you’ll be able to protect any asset that you are behind on, and you’ll be given the chance to repay what you owe over the course of three to five years. Also, there are some special cases where you might be allowed to even reduce what you owe on your car or home.
What’s a Bankruptcy Trustee?
If you file for bankruptcy in Arizona, you will be assigned a bankruptcy trustee. He or she will painstakingly review your case to see if there is anything that is not protected by a bankruptcy exemption and therefore, something you will have to turn over to the court. For example, if you own a vacation home and you file for chapter 7 bankruptcy, it will not be protected. The trustee will be allowed to sell the home and divide any proceeds among your creditors. This is why it’s so important to provide your attorney with a thorough and complete picture of all of your assets and income. If you fail to do so, you stand to lose cash, lose an asset, or maybe even have your case dismissed.
How Bankruptcy Protects You
When you file for bankruptcy, the court immediately creates something called the automatic stay which offers you vast protections under the law. The automatic stay prevents any creditor from contacting you directly. If a creditor needs to communicate with you about something, it will be through the court and/or your attorney. This puts an end to any harassing phone calls or letters that you might receive. More importantly, the automatic stay also prevents any creditor from taking action to collect on a debt once your case is filed. This means that your risk of having anyone garnish your wages, foreclose on your home, or repossess your car goes down to zero.
The Meeting of Creditors
In Arizona, you’ll have something called a 341 meeting of creditors about five to six weeks after filing for bankruptcy. You’ll get to meet with your bankruptcy trustee face-to-face, and your attorney should be there with you to represent you at this hearing. It’s a quick, five minute meeting. Under oath, you’ll be asked some basic, simple questions. Everyone gets asked the same ones. Then, if the trustee has any questions specific to your case he will ask those as well, but this is fairly unusual.
Calling it a “meeting of creditors” is a bit misleading. Most bankruptcy filers assume this means that they will be entering a room full of their creditors. However, this is not the case. It’s very unusual for any creditor to show up to one of these meetings. This only happens when a creditor feels that he or she may be able to object to a debt being discharged. Since ordinary unsecured debts are easily eliminated by filing for bankruptcy, there is little a creditor can do to object, so having someone appear at a 341 meeting of creditors is a waste of time for them. In other words, if you file for bankruptcy, don’t expect to see any creditors at the meeting of creditors.
What’s It Going to Cost?
Attorney fees vary widely depending on many factors, so it’s difficult to provide an estimate of what your case may cost. However, it’s safe to say that a chapter 7 bankruptcy will cost less than a chapter 13 bankruptcy because your attorney will have to commit to working on your chapter 13 case for three to five years. A chapter 7 bankruptcy is over in a fraction of that time and requires less ongoing administration and legal re-analysis and planning. The court filing fee for each case is the same for everyone in Arizona. Currently, the fee is $335 for a chapter 7 and $310 for a chapter 13.