Unless you were one of those kids (and you probably turned out to be a lawyer when you grew up), chapters were not something to get too excited about. Chapter books were just a clever way to move you from reading awesome books full of colored pictures to tedious, dull, completely colorless books full of pages with words and nothing but. It’s been all downhill since.
Let’s not even start on chapters in your math book. Nobody except maybe for that one kid in the front row had any interest in the next chapter of your math book. Seriously – we get to transition from easy division to long division today? Sign me up!
As you grew up, you got to learn about another depressing aspect of chapters. You know – those chapters in your life. Some of them are alright. Your first job is a new chapter, and so is the birth of your children. But growing old and death are also chapters in your life. Rational people don’t look forward to those chapters.
However, as you’ve probably already surmised by now, not all chapters are bad. When it comes to bankruptcy the word “chapter” really means “option.” You’ve got different options when you file for bankruptcy. Choosing the right option for you is crucial for your success as a candidate for bankruptcy. Of course, consulting with an experienced bankruptcy attorney is the only way to know for sure whether or not the chapter you file is right for you, but let’s take a look at the most popular chapter of bankruptcy. You’ll at least get an idea of what you’re in for if your attorney decides that it’s the best option for your case.
Chapter 7 – Completely Eliminate your Debt
You’ve probably heard of chapter 7 bankruptcy, although the glamorous people of Gilbert, Phoenix, Scottsdale, and the rest of the Valley of the Sun tend to file something else. The rich in Arizona tend to file for Chapter 11, which is a reorganization of debt rather than a complete elimination. This is the kind of bankruptcy big businesses and business owners file. Unless you own a good-sized business or you have lots of money and assets, you won’t be filing this one.
Another chapter of bankruptcy that you may have heard of is chapter 13. This is also a reorganization like chapter 11, but typically it’s geared towards small business owners or people with too many assets or too much income to qualify for chapter 7. You may actually meet somebody from Glendale, or Surprise, or Queen Creek who has filed this type of bankruptcy. It’s pretty common in Arizona, although not nearly as popular as chapter 7.
A common reason to file for chapter 13 is owning a house that is worth too much to protect in a chapter 7. With the real estate market turning around in Arizona the past few years, people in towns like Gilbert, Chandler, Mesa, and the rest of the Phoenix area have seen a large increase in their property values. Another reason to file chapter 13 is if you’ve already filed a chapter 7 and not enough time has passed to file another 7. You are allowed to file chapter 13 much sooner.
So what is the downside to a reorganization bankruptcy versus chapter 7? Well, both of these bankruptcies require a payment plan through the court that lasts for several years. More than likely you will end up paying some of your debt back rather than completely eliminating it.
Completely eliminating it, you say? I want to hear more about that.
This all leads us to chapter 7 bankruptcy. Chapter 7 bankruptcy allows the good people of Arizona to completely eliminate your debts. There’s no long-term payment plan to the court. There’s no reorganization of your assets. You simply file, and the debt you are allowed to eliminate goes away. The only thing that remains is a record of the old debt on your credit report with a note stating “discharged in chapter 7 bankruptcy.” This applies to everyone who files for chapter 7 in Arizona, whether from Goodyear or Fountain Hills or Tempe.
How do I Qualify?
Now that you know chapter 7 bankruptcy can completely eliminate much if not all of your debt, you are probably wondering how to qualify. Unfortunately, it’s not for everyone, and not everyone will qualify. Let’s look at what’s required to qualify.
Unfortunately, prior to 2005, chapter 7 bankruptcy was pretty hard not to qualify for. Your attorney simply looked at your debts versus your income, and if they were close enough together, you almost always qualified. But in 2005 Joe Biden spearheaded a change to the bankruptcy laws in congress. His goal was to narrow who qualified for chapter 7 bankruptcy so that not so many could qualify to eliminate their debt through filing.
So what changed, and what is the law now?
A lot changed back then in 2005. The most important change to those of us in the Phoenix area is how to qualify for bankruptcy. Gone is the income versus expenses bit. Although some of that still enters into the equation, it works completely differently. Back in the old days, anyone in Gilbert or Scottsdale or Peoria with an insane monthly payment on a Sport Utility Vehicle, could actually use that as an expense to help you qualify. This is no longer true. You are essentially allotted a fixed amount for vehicle expenses, and that’s it. The court doesn’t care that in reality, you are actually spending two or three times more for your car. This is true for all sorts of expenses.
Eliminating the additional expenses leveled the playing field somewhat when it came to filing for bankruptcy. Big spenders weren’t any more qualified to file chapter 7 bankruptcy than the average joe.
Another big change was a stricter focus on income. So not only can you no longer claim a lot of additional expenses to offset your income, your income itself is more scrutinized. If your income is over a certain amount, you simply aren’t going to qualify for chapter 7 bankruptcy no matter how hard you try. Let’s take a look at how this works.
The post-Biden chapter 7 bankruptcy law has two tests built into it. This will be one of the first things your attorney looks at when you step into his bankruptcy office. After all, if you don’t qualify for chapter 7 bankruptcy, why waste each other’s time?
The first test is known by many as the “Median Test.” This is a straightforward test that involves comparing your family size and the total income of your family against the average for families where you live, whether it be Mesa, Surprise, Fountain Hills, Scottsdale, Peoria, San Tan Valley, or any other part of the Phoenix area. If you make more than the cutoff, you don’t qualify via this test. If your income is under the cutoff, then you automatically qualify.
If you fail the Median Test then you get to do the dreaded “Means Test.” This is where your qualified expenses become important (remember those from above?). The Means Test is a somewhat complicated calculation that compares your income against fixed standards for expenses that you are allowed to claim. Like we mentioned before, your overpriced SUV payment isn’t going to help you qualify. You only get the standard expense for a vehicle allotted to everyone.
Now this is an oversimplification and isn’t completely accurate. There’s a bit of wiggle room when it comes to some of these qualified expenses. This is why it’s so important to consult with a qualified bankruptcy attorney to see whether or not you pass that Means Test. There are Means Test calculators online, but because of the nuances of the law, you may fail online and still qualify for bankruptcy if you meet with the right attorney. A bankruptcy attorney with a lot of experience who is well-versed in Arizona law is going to be able to tell you whether or not you pass the Means Test with a lot more accuracy than you can do on your own. And he or she will probably do this for you for free.
All this income versus expenses talk and the Means and Median tests all come down to one, simple idea. Do you have enough money left over at the end of the month to make payments toward your creditors, or is there no way you are going to be able to pay them anything? Before 2005 we simply looked at your income versus your expenses. We now have to apply the Median Test and the Means Test to figure this out.
What’s Eliminated When I File?
The bad news is, not every debt is eliminated when you file for bankruptcy. The good news is, however, that an awful lot of your debt will go bye bye when you file for bankruptcy. The key in most cases is whether or not the debt is unsecured.
So what is unsecured debt anyway?
An unsecured debt is a debt that is not secured by some type of collateral. For example, a credit card isn’t secured by your house or car. If you choose to stop paying on a credit card, they can’t take any property from you. All they can do is trash your credit, garnish your wages, levy your bank account, or put a lien on some property you own. They can’t just automatically repossess your vehicle or put a lien on your house like a car loan or a mortgage is allowed to. Medical debts and personal loans are two other common types of unsecured debt that you may have.
So that brings us to the question that logically follows. What is secured debt?
Secured debt is any debt that is secured by property. A car loan and a mortgage are both perfect examples. Anyone in the Phoenix area such as Peoria, Gilbert, or Queen Creek who sops paying a mortgage, doesn’t get to live in a house indefinitely. One day the sheriff is probably going to show up and tell you that the house is no longer yours and that you’re going to have to move. The same goes for your car. If you don’t pay, the repo man will inevitably strap your car to his truck and tote it on down the road.
Are My Assets Protected When I File?
So now we know what’s eliminated when you file, but what about your assets? Is the court just going to take all of your stuff when you file? If so, it might not be worth it to many people to file for bankruptcy if it means losing your stuff.
Luckily the bankruptcy legal system in Arizona offers exemptions to protect your most important assets. For example, you are allowed to file bankruptcy and own a home as long as the amount of equity in your home isn’t too high. This goes for other assets such as your car, your clothes, and your furniture. In fact, there is a long list of exemptions to protect your assets. It’s a complete enough list that most people don’t have assets that the court can take from them when they file.
Why aren’t we including a list of exemptions here?
Unlike most of the bankruptcy law, which is federally controlled, the exemption rules are determined by your state. Therefore, depending on where you live there is a wide variety of protections and dollar amounts when it comes to exemptions. For example, in one state you may be able to protect $150,000 in equity in your home, while another state might allow only a small fraction of that. As with all things bankruptcy, the best way to know for sure if your assets are protected is to consult with a local, experienced bankruptcy attorney who will know all of the ins and outs of the bankruptcy laws in your hometown.