Arizona Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the most common form of bankruptcy in Arizona and throughout the U.S. It wipes out most forms of debt, such as credit cards, medical bills, and most tax debt over three years old. It also eliminates debt stemming from vehicle repossessions and real estate foreclosures. Not everyone qualifies for Chapter 7 Bankruptcy.

In order to be eligible to file this type of bankruptcy, your income must be less than Arizona’s median income for your family size or you must pass the Means Test, which is a complicated test based on your income and expenses. Alternatively, a person may qualify for Chapter 7 based on the types of debt they have. If more than half of one’s debt is investment or business related, they may still be able to file Chapter 7 irrespective of their income.

You cannot receive a discharge in a Chapter 7 bankruptcy if you previously completed a Chapter 7 Bankruptcy within the last eight years.

Jump to a topic:

What debts can I eliminate?
How Does Bankruptcy Protect Me?
What Property Can I Keep?
How to Keep Secured Property
Should I File for Bankruptcy?
How do I qualify?
Do I Need an Attorney to File for Bankruptcy?
What is the Bankruptcy Process from Start to Finish and How Long Does it Take?
How do I Rebuild Once My Bankruptcy Is Over?

1) What Debts can I eliminate?

Unsecured Debt versus Secured Debt
Unsecured debts are debts that aren’t secured by collateral, or lien. Most forms of unsecured debt will be eliminated in chapter 7 bankruptcy.
These include…

  • Credit cards
  • Department store credit cards
  • Payday loans
  • Medical bills
  • Some tax debt
  • Utility bills
  • Some personal loans
  • Some signature loans
  • Parking tickets

Debts that are protected by collateral or lien are secured debts. If you default on a secured debt, then the bank is allowed to take back the asset that was used as collateral. A mortgage is an example of a secured debt. A secured debt is typically eliminated in a bankruptcy, but if you want to keep the asset that was collateral for the debt, you must continue to make the payments after bankruptcy.

Lien avoidance 
When a lien is recorded against your property, such as a lien on a home due to taxes owed to the IRS, it sometimes can be eliminated through chapter 7 bankruptcy via a process called “lien avoidance.” Only certain liens can be avoided in bankruptcy. It is best to consult with an experienced bankruptcy attorney to see if your lien would qualify to be avoided through bankruptcy.

Second Mortgage 
A second mortgage on your home can be eliminated in chapter 7 bankruptcy through a process called “stripping.” Your second mortgage can be stripped only when the current value of your home is less than what you owe on your first mortgage.

For example, let’s say you own a home currently worth $100,000 and you have two mortgages. The first mortgage is for $125,000 and the second is for $50,000. Because the first mortgage is greater than the actual value of your home, the entire $50,000 second mortgage can be stripped. In this scenario, when your bankruptcy is filed, the second mortgage would be completely eliminated. However, in the same scenario, if your first mortgage was for only $75,000, the second mortgage could not be eliminated because the first mortgage is less than the value of the home. In a Chapter 7 Bankruptcy, although the debt from the second mortgage is discharged, the lien still remains. The removal of the lien can usually be negotiated by paying a relatively small sum to the company that holds the second mortgage. With Chapter 13, on the other hand, the lien can be stripped or removed via the bankruptcy courts.

Certain Debts Cannot be Eliminated in Bankruptcy 

Some types of debt are given greater protection by the bankruptcy laws and cannot be eliminated in a chapter 7 bankruptcy. Some of the more common examples of these debts are…

  • Most student loans
  • Spousal maintenance (alimony)
  • Child support
  • Court fees
  • Penalties, restitution, and fines imposed by a government agency
  • Recent taxes (federal, state, and local)
  • Some debts owed to other governmental agencies such as the Social Security Administration, Department of Justice, and Medicare
  • Debts that were the result of fraud by the debtor
  • Debts from accidents involving alcohol offenses such as DUI

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2) How Does Bankruptcy Protect Me?

As soon as you file for bankruptcy, the automatic stay takes effect. The automatic stay is a legal protection that immediately stops most actions against your property, and all lawsuits filed against you. The automatic stay stops immediately

  • Creditor calls
  • Wage garnishments
  • Foreclosures
  • Evictions
  • Utility disconnections

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3) What Property Can I Keep?

Exempt Property 
Property that is classified as exempt in a chapter 7 bankruptcy is property that you are allowed keep when the bankruptcy is over. Most property is only protected up to a specific value. This value usually reflects what the average person would own for his own, personal use. For example, the books in your home are usually protected. However, if you owned enough books to fill a large bookstore, this would likely exceed what is protected by the bankruptcy exemptions.

State law typically determines what property is exempt in bankruptcy. In Arizona, some exempt property includes…

  • Your primary residence
  • Your vehicles ($5,000 in value for single individual, $10,000 for married couple)
  • Personal property such as
  • Furniture
  • Clothing
  • Appliances
  • Books
  • Some jewelry/ watches
  • Limited quantities of guns, bicycles, musical instruments
  • Most pets
  • Money in a bank account ($150 for an individual, $300 for a married couple)
  • Some insurance policies
  • Pensions and retirement accounts
  • Tools and equipment used for your business

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4) How to Keep Secured Property

Debts that are secured by a lien or collateral are secured debts. In bankruptcy, you can typically keep your personal residence and your vehicle if you continue to make the required payments on time. In some instances, you may be required (or it may be beneficial), to file a reaffirmation or redemption for your secured property.

What is a Reaffirmation Agreement?
A reaffirmation agreement is a special arrangement on a secured debt through chapter 7 bankruptcy. Essentially, it is a new agreement between you and the lender. You are promising that even though you filed for bankruptcy, you will still be obligated to keep making the payments. 

The advantage of a reaffirmation agreement is that it will help rebuild your credit. If you don’t file a reaffirmation, any payments you make after bankruptcy will not show up on your credit report. The down side of a reaffirmation is you no longer are protected by your bankruptcy for that particular asset. For example, an individual who does not file a reaffirmation would be able to stop making payments, return his vehicle to the bank, and be protected by his bankruptcy, an option that is lost when filing a reaffirmation. Certain banks require you to file a reaffirmation agreement if you want to keep your asset, so you may not be given the option.

What is a Redemption? 
A redemption is another option available under chapter 7 bankruptcy that allows you to reduce the amount owed on your vehicle and still keep it. A redemption is only available if you owe more on the vehicle than what it is worth. When you redeem a vehicle, you are essentially signing a new contract that states that you will keep paying on the vehicle if the bank agrees to lower the amount that is owed on it.
For example, you might own a vehicle that is only worth $10,000, but you owe $15,000. Through a redemption, the bank will create new terms for your loan where you now only owe $10,000 when you begin making payments on the new loan.

A redemption usually has a higher interest rate than your original loan, but because the amount is owed is less, it typically lowers your monthly payment and/or duration of your payments. The disadvantage of the redemption is, like a reaffirmation, you lose your bankruptcy protection on the vehicle. If you were to give your vehicle back to the bank, you would still owe on the remaining balance. Not everyone will qualify for a redemption. You will have to owe significantly more on the vehicle than what it is worth, and the bank will have to be amenable to completing a redemption through your bankruptcy.

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5) Should I File for a Chapter 7 Bankruptcy?

Chapter 7 bankruptcy protection has helped countless individuals get out of debt and have a fresh start. However, it is a difficult decision and not the right choice for everyone. Also, everyone’s situation is different, so it is a good idea to discuss chapter 7 bankruptcy with an experienced bankruptcy attorney before choosing whether or not to file. Some important factors to consider include…

  • You owe a lot owed on credit cards, medical bills, or other debts that would be discharged in bankruptcy
  • After you pay for your everyday living expenses, you have insufficient income to realistically pay off creditors
  • You have little to no assets that you would lose if you filed for bankruptcy
  • You have damaged credit and want to being again with a clean slate

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6) How do I qualify?

Not everyone qualifies for a chapter 7 bankruptcy. In most circumstances there are income restrictions that prevent you from filing a chapter 7 bankruptcy if you make too much money.

The Median Test and the Means Test

The first test to qualify for chapter 7 bankruptcy is the median test. It is a simple test that compares your family size and income to the median family income set by the bankruptcy rules for the area where you live. As long as you make less than the maximum amount allowed for your family size, you pass the test and qualify for a chapter 7 bankruptcy. However, if you fail the median test, you may still qualify under the means test.

The means test is a complex calculation that factors in not only your income and family size, but also your monthly expenses. If you have a large amount of certain expenses, you may qualify for chapter 7 bankruptcy under the means test even though you failed the median test. Only certain, very specific expenses are allowed in this calculation, so it is best to consult your bankruptcy attorney and have him or her run the numbers to determine whether or not you pass the means test.

Special Circumstances: Non-Consumer Debt and IRS debt

The chapter 7 bankruptcy rules have a special provision for both non-consumer and IRS tax debt. If your debt is primarily non-consumer debt (usually debt from a business) or primarily IRS debt, then you can fail both the median test and the means test and still qualify for chapter 7 bankruptcy.

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7) Do I Need an Attorney to File for Bankruptcy?

Is it a Good Idea to File My Own Case?

Legally you do not need an attorney to file for a chapter 7 bankruptcy. However, we strongly discourage filing without one. But don’t take our word for it. Here is a quote from the United States Bankruptcy Court…

“While individuals can file a bankruptcy case without an attorney or “pro se,” it is extremely difficult to do it successfully.

It is very important that a bankruptcy case be filed and handled correctly. The rules are very technical, and a misstep may affect a debtor’s rights. For example, a debtor whose case is dismissed for failure to file a required document, such as a credit counseling certificate, may lose the right to file another case or lose protections in a later case, including the benefit of the automatic stay. Bankruptcy has long-term financial and legal consequences – hiring a competent attorney is strongly recommended.”

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8) What is the Chapter 7 Bankruptcy Process from Start to Finish and How Long Does it Take?

1. Your Case is Filed with the Court 
There is no definite time frame for how long it will take to file your case. Typically, after meeting with your attorney, you will have forms to fill out and paperwork to gather. You might have some pre-bankruptcy planning to do, such as selling assets, or spending cash in a bank account. So it is up to you how long this all takes.

After you do your part, it is up to the law firm you have hired to file the case with the court. This involves filing a tremendous amount of specific forms and documents that are required by the federal bankruptcy court in accordance with both federal and state statutes.

The particular law firm you hire also affects how long the process takes. Virtually all firms operate the same way. They require several meetings between you and an attorney, and after those meetings are completed, they require significant time to prepare the documents for filing.

Unlike other firms, at Meyer Law we have a unique process called Bankruptcy in a Day. As long as you have the right documents available, such as bank statements, pay stubs, and copies of taxes, you can meet with us at Meyer Law for just one meeting, and your case will be filed the same day.

2. Credit Counseling and Debtor Education Courses 
As part of the chapter 7 bankruptcy process, you are required to take two classes. These can be completed online and are offered by many agencies that are certified to do so. In total, they take a few hours to complete. After each class is completed, you earn a certificate proving that you have completed the class. This must be filed with your bankruptcy case, or your case will be rejected by the court.

The credit counseling class must be completed before your case is filed. It is an informational class covering topics such as creating a budget and some pointers on financial planning. The certificate from this class must be included with the rest of your Chapter 7 bankruptcy paperwork when your case is filed.

The debtor education course must be completed shortly after your case is filed. This course deals with how to proceed with your financial life after the fresh start created by your bankruptcy. Topics include the wise use of credit, budgeting, and money management.

3. Who is the Bankruptcy Trustee and What Does He Do? 
A bankruptcy trustee is a private individual, typically an attorney, who has several duties in administering your case. The trustee is randomly selected from a panel of trustees when your case is filed. The trustee is not an advocate for you or for the court, thus his or her role is to remain neutral throughout the process. The trustee is in a powerful position because he or she has the authority to sell any of your assets that aren’t protected in the bankruptcy. The proceeds from the sale are then given to your creditors. The trustee’s duties include…

  • Review of documents filed with the court to check accuracy and look for fraud
  • Review of assets to determine if any are not exempt and can therefore be sold at auction (maybe link to exemptions topic above)
  • Conduct the meeting of creditors (link to meeting of creditors #4 below)
  • Collect and sell non-exempt assets at auction
  • Distribute the proceeds from sale of assets to creditors in order of priority determined by the court

4. What is the Meeting of Creditors? 
Every Chapter 7 bankruptcy case has a Meeting of Creditors. Yours will be scheduled about a month after your case is filed. You are required to appear at this meeting along with your attorney, and you will be answering questions under oath. Your answers will be recorded for the record. Your trustee will preside over the meeting and will be the one asking you the questions. There are standard questions the court requires him or her to ask in every case, and he or she will typically start with these first.

Your trustee may ask further questions that are specific to your case. This usually happens if there is something that is unclear in your paperwork, or if the trustee feels you have assets that are not protected, and he or she needs details about the assets to determine their value.

Creditors can also appear at your meeting. This is very unusual and typically only occurs in special circumstances. It is very unlikely you will ever see any of your creditors at the meeting. 

There is no need to worry about your meeting of creditors. It is not meant to be a trial or a test. It is simply a meeting for the purpose of fact-finding where the trustee will be asking you straightforward questions that will not be difficult to answer. The typical trustee meeting questions will go like this…

  • Your Trustee will read you an oath while you raise your right hand and you will agree to the oath when he or she is done.
  • The trustee will ask for your current phone number and address.
  • “Did you meet with your attorney to discuss your financial situation?”
  • “Did your attorney explain that there are different chapters of bankruptcy such as Chapter 7 and Chapter 13?”
  • “Have you read all of your statements and schedules?”
  • “Have you listed all of your assets?”
  • “Have you listed all of your debts?”
  • “Have you received an inheritance or will you receive an inheritance in the next six months?”
  • “Do you have a personal injury claim or any other claim for money damages pending at this time?”

5. The Last Step: Your Discharge
Your ultimate goal in a chapter 7 bankruptcy is the bankruptcy discharge. You can look at this as the conclusion of your case, which usually takes place three to four months after your bankruptcy was first filed with the court. For more information read (link to what is a discharge blog)

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9) How do I Rebuild Once My Chapter 7 Bankruptcy Is Over?

Rebuilding Your Credit 
Immediately after your bankruptcy, some simple steps can be taken to start rebuilding your credit.

How Long do I Have to Wait to Buy a House or Car? 
Your bankruptcy will be listed on your credit report for some years to come, but that does not mean you will not be able to purchase a new car or home.

You can usually purchase a car right after your bankruptcy. You might be required to jump through some extra hoops approval wise, and you might not get the best interest rate, but most clients are able to purchase a vehicle right away. If you work on rebuilding your credit after the bankruptcy, then you will be able to purchase a car at a better interest rate fairly quickly.

Qualifying for a home after bankruptcy takes a little more time and effort. You should be taking all the steps necessary to help rebuild your credit as soon as possible. You should also get a copy of your credit report soon after your bankruptcy and check to be sure that all discharged debt is removed. Sometimes a mortgage expert can even help you with this process. If you diligently do these things, you often will qualify for a home in as little as two years after your bankruptcy.

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For any additional question you may have about Chapter 7 Bankruptcy, contact the Attorneys at Meyer Law today!