Legal Blog

Chapter 7 or Chapter 13 bankruptcy in Arizona, which is right for me?  Most debtors must choose between a liquidation proceeding under Chapter 7 of the Bankruptcy Code and a debt adjustment proceeding under Chapter 13 of the Bankruptcy Code.  There are 6 important factors that should be considered. 

            First, a debtor must consider the dischargeability of debts.  There are many classes of debts that are not dischargeable under a Chapter 7 bankruptcy.  Some types of debts that are not dischargeable under a Chapter 7 bankruptcy may be dischargeable under a Chapter 13 bankruptcy.  A person who has received a discharge through a bankruptcy proceeding in the last 8 years is not eligible for a Chapter 7 discharge but may be eligible for a Chapter 13 discharge. 

            The second thing a debtor should consider is retaining secured property.  A debtor who is in default on a secured obligation is usually permitted to cure the default within a reasonable period under Chapter 13 and thereby retain the secured property.  The curing of defaults in secured obligations is not usually feasible in a Chapter 7 bankruptcy.  However, in a Chapter 7 bankruptcy, liens against certain exempt personal property may be redeemed or set aside by the debtor.   

            The third thing a debtor should consider is retaining nonexempt assets.  In a Chapter 7 bankruptcy a debtor must turn over all nonexempt property to its trustee.  However, in a Chapter 13 bankruptcy a debtor is usually permitted to retain their nonexempt property, so long as meaningful payments are made to unsecured creditors.  Therefore, Chapter 13 may be preferable if a debtor has a large equity in his or her home or other important nonexempt assets.  According to www.ezinearticles.com/?The-Differences-Between-Chapter-7-and-Chapter-13-Bankruptcies&id=2631055, filing Chapter 13 also helps to prevent losing assets that people may not wish to part with such as family mementos and other items.  

            The fourth thing to consider is income.  A debtor must have “regular income” in order to qualify under a Chapter 13 bankruptcy.  “Regular Income” is defined as income sufficiently stable and regular to enable a debtor to make payments under a Chapter 13 plan.  A Chapter 13 bankruptcy may not be feasible if the debtor is unemployed or otherwise devoid of regular income. 

            The fifth thing a debtor should consider is the attitude toward debts.  According to http://www.bankruptcyaction.com/chapter13.htm, a Chapter 13 bankruptcy may be preferable to a debtor, if a debtor has a sincere and realistic desire to repay all or most of the debtors’ unsecured debts.  The best practice is to file a Chapter 7 bankruptcy if the debtor only desires to repay one or two debts. 

            The sixth thing a debtor should consider is the time and expense.  According to http://www.totalbankruptcy.com/chapter-13/process-timeline.aspx, a Chapter 13 bankruptcy proceeding normally lasts from 3 to 5 years, with the discharge being granted at the close of the case.  On the other hand, Chapter 7 cases typically last about 6 months with the discharge being granted about four months after the case is filed.  Chapter 13 bankruptcies are significantly more expensive than in Chapter 7 bankruptcies.  If a debtor is not willing to comply with the Chapter 13 plan during the entire duration of the plan and to bear the additional expenses involved, Chapter 13 is not advisable for that debtor.

The right time to file a Chapter 7 bankruptcy in Chandler, Arizona depends on the specific person’s dischargeable debts, the status and nature of the person’s nonexempt assets, and the actions threatened by or taken by creditors of the person filing bankruptcy.

A person should not file a Chapter 7 bankruptcy in Arizona until all anticipated debts have been incurred.  This is because only debts that have been incurred when the case is filed are dischargeable.  If the debts have not been incurred, a person will have to wait eight years before they become eligible for another Chapter 7 discharge.  According to www.doney.net/timeline.htm, a debtor cannot receive a discharge under Chapter 7 if the debtor received a discharge in a Chapter 7 or 11 bankruptcy which was filed within 8 years prior to the present Chapter 7 proceeding.

A person should not file a Chapter 7 bankruptcy in Arizona until the person filing has received all nonexempt assets to which they are entitled.  If a person does not wait until they receive all their nonexempt assets then the asset will have to be turned over to the trustee.

According to www.bankruptcy.findlaw.com/bankruptcy/bankruptcy-chapter-7/exempt-vs-nonexempt-property.html, nonexempt property includes but is not limited to: expensive musical instruments, unless the debtor is a professional musician; collections of stamps, coins, and other valuable items; family heirlooms; cash, bank accounts, stocks, bonds, and other investments; a second car or truck; and a second or vacation home.

A person should not file a Chapter 7 bankruptcy in Arizona if that person is expecting to acquire nonexempt property through a life insurance policy, divorce, or inheritance, in the next 180 days, otherwise the property may have to be turned over to the trustee.

A person should file a Chapter 7 bankruptcy in Arizona if that person is dealing with an aggressive creditor who has threatened to attach or garnish a person’s assets or income.  A person would want to file immediately to take advantage of the automatic stay that accompanies the filing of a Chapter 7 bankruptcy in Arizona.  It may also be necessary to file the Chapter 7 bankruptcy immediately to protect the debtor’s interest in property if a foreclosure action has been filed against the debtor.

I’VE BEEN SERVED WITH A LAWSUIT, WHAT SHOULD I DO?

In Arizona, you have 20 days to file an Answer to the Complaint in the Court where the lawsuit was filed.  Consult with an attorney who is knowledgeable in Consumer Rights Litigation and Bankruptcy as early as possible to give yourself time to plan ahead.  Maricopa County Justice Court Flowchart.

• A lawsuit is commenced when the creditor files a Complaint with the Court
• The debtor can admit or deny the allegations in the Complaint by filing an Answer with the Court.
• If no Answer is filed or if the allegations are admitted, the judge will issue a judgment which is an Order establishing the creditor’s legal right to collect money from the debtor.
• Collection of a judgment is commenced when the Court issues a writ of Garnishment.
• If the writ of garnishment is served on your employer, the employer must withhold 25% of your net wages from each paycheck which is sent to the creditor.
• If the writ of garnishment is served on your bank, the bank must turn over your money on deposit to the creditor.

So, don’t ignore a lawsuit.

You do not want to allow a creditor to obtain a judgment against you; however, the impact of a judgment can be minimized by filing bankruptcy.  Consult with a knowledgeable attorney as early as possible even before you are served with a lawsuit.

STEP #1, ANSWER THE LAWSUIT:

The Federal Trade Commission insists on the importance of filing an answer to preserve your rights (FTC).  If you fail to file an Answer which denies the allegations and raises legal defenses to the Complaint, the Court will grant the creditor a judgment which will include interest, costs and attorney fees.  Even if you owe the creditor money, you may have a dispute over the amount owed or the amount of its claim for interest, costs or attorney fees.  Filing a properly worded Answer will slow down the process and give you some additional time to prepare for filing bankruptcy or minimizing the exposure to your assets before the creditor obtains a judgment.  Court Forms.

STEP #2, MOVE YOUR BANK ACCOUNT OR STOP DEPOSITS INTO YOUR BANK:

Pre-bankruptcy estate planning is the most valuable benefit from consulting with an attorney before filing bankruptcy.  Once the creditor has a judgment the creditor will attempt to find your assets and execute the judgment.  Perhaps the creditor already knows where you work and where you bank.  Has your creditor called you at work to request payment before a lawsuit is filed?  Have you used a check on your bank account to pay the creditor in the past?  If so, then the creditor knows where to go to get your money.  Move your bank account. If the creditor does not know this information, you may be ordered to appear at a “judgment debtor examination” which is a deposition conducted by the creditor’s attorney to ask you questions under oath about what you own and where you keep your assets, including bank accounts.  After the judgment debtor examination, during which you must testify truthfully, you might think it wise to move your account or stop making deposits into the bank account.  Use a check cashing service to cash your paycheck and use money orders to pay your bills.

A bank cannot turn over to the creditor a bank account which is exempt.  If you receive funds which are exempt, such as Social Security or Worker’s Compensation Benefits, those funds must not be co-mingled with other non-exempt funds.  Keep those funds in a totally separate account which the bank has labeled as your “Social Security Account” or “Worker’s Compensation Account” and the bank will not touch those funds in responding to the writ of garnishment.  However, if these funds are co-mingled with non-exempt funds, the entire amount is non-exempt.

Chapter 7 or Chapter 13 bankruptcy in Arizona, which is right for me?  Most debtors must choose between a liquidation proceeding under Chapter 7 of the Bankruptcy Code and a debt adjustment proceeding under Chapter 13 of the Bankruptcy Code.  There are 6 important factors that should be considered.

First, a debtor must consider the dischargeability of debts.  There are many classes of debts that are not dischargeable under a Chapter 7 bankruptcy.  Some types of debts that are not dischargeable under a Chapter 7 bankruptcy may be dischargeable under a Chapter 13 bankruptcy.  A person who has received a discharge through a bankruptcy proceeding in the last 8 years is not eligible for a Chapter 7 discharge but may be eligible for a Chapter 13 discharge.

The second thing a debtor should consider is retaining secured property.  A debtor who is in default on a secured obligation is usually permitted to cure the default within a reasonable period under Chapter 13 and thereby retain the secured property.  The curing of defaults in secured obligations is not usually feasible in a Chapter 7 bankruptcy.  However, in a Chapter 7 bankruptcy, liens against certain exempt personal property may be redeemed or set aside by the debtor.

The third thing a debtor should consider is retaining nonexempt assets.  In a Chapter 7 bankruptcy a debtor must turn over all nonexempt property to its trustee.  However, in a Chapter 13 bankruptcy a debtor is usually permitted to retain their nonexempt property, so long as meaningful payments are made to unsecured creditors.  Therefore, Chapter 13 may be preferable if a debtor has a large equity in his or her home or other important nonexempt assets.  According to www.ezinearticles.com/?The-Differences-Between-Chapter-7-and-Chapter-13-Bankruptcies&id=2631055, filing Chapter 13 also helps to prevent losing assets that people may not wish to part with such as family mementos and other items.

The fourth thing to consider is income.  A debtor must have “regular income” in order to qualify under a Chapter 13 bankruptcy.  “Regular Income” is defined as income sufficiently stable and regular to enable a debtor to make payments under a Chapter 13 plan.  A Chapter 13 bankruptcy may not be feasible if the debtor is unemployed or otherwise devoid of regular income.

The fifth thing a debtor should consider is the attitude toward debts.  According to http://www.bankruptcyaction.com/chapter13.htm, a Chapter 13 bankruptcy may be preferable to a debtor, if a debtor has a sincere and realistic desire to repay all or most of the debtors’ unsecured debts.  The best practice is to file a Chapter 7 bankruptcy if the debtor only desires to repay one or two debts.

The sixth thing a debtor should consider is the time and expense.  According to http://www.totalbankruptcy.com/chapter-13/process-timeline.aspx, a Chapter 13 bankruptcy proceeding normally lasts from 3 to 5 years, with the discharge being granted at the close of the case.  On the other hand, Chapter 7 cases typically last about 6 months with the discharge being granted about four months after the case is filed.  Chapter 13 bankruptcies are significantly more expensive than in Chapter 7 bankruptcies.  If a debtor is not willing to comply with the Chapter 13 plan during the entire duration of the plan and to bear the additional expenses involved, Chapter 13 is not advisable for that debtor.

We are putting on a seminar next week about Chapter 7 Bankruptcy.  Everyone really enjoys the Q & A portion.  Here’s some things we will cover.

Topics That will be covered.

• Overview of Chapter 7 Bankruptcy
• Chapter 7 FAQ
• Chapter 7 Bankruptcy–Who Can’t File?
• The Bankruptcy Means Test:  Are You Eligible for Chapter 7 Bankruptcy?
• When Chapter 7 Bankruptcy Isn’t the Right Choice
• Chapter 7 vs. Chapter 13
• Your Home in Chapter 7 Bankruptcy
• What Happens to Your Car in Chapter 7 Bankruptcy?
• Can Chapter 7 Bankruptcy Solve Business Debt Problems?

Click below to register:

http://azbankruptcyhelp.com/free-bankruptcy-seminar/

Planning for bankruptcy in Arizona can get tricky.  Here are some tips to follow.

1. Do continue to make payments on vehicles which you intend to keep. Read More.
   
2. Don’t borrow from or withdraw 401K, IRA, and ERISA qualified savings and retirement plans to pay bills.  Read More.
3. Don’t borrow money on your home to pay unsecured debts such as credit cards, utilities, debt on surrendered or repossessed vehicles or medical bills.  Read More.
4. Do give “friendly” creditors a security interest in non-exempt property.  Read More.
5. Don’t pay $600 or more to relatives or business associates who have lent you money. Read More.
6. Don’t use your credit cards when you know that you are planning to avoid paying them through bankruptcy.  Read More.
7. Don’t put property you own into someone else’s name to avoid it being taken by creditors or the trustee. Read More.
8. Do close bank accounts where you owe money.  Read More.
9. Do reduce the amount withheld from your pay for taxes.  Read More.

Think of the refund as money you gave to your “uncle” to hold for you until after your bankruptcy was filed.  Here is how it works:

When your employer pays you, the employer is required to withhold a portion of your earnings for payment of various taxes including the state and federal income tax.  These withholdings are sent to the federal IRS and state Department of revenue but the money still belongs to you until the amount of your tax liability is determined from the tax return you filed.  If the amount withheld by your employer exceeds the tax liability, you are owed a refund.

Income taxes for a given year are generally due by April 15 of the following year.  If you filed your tax return early in the year during which you filed bankruptcy, you may have received your tax refund and spent the money before you filed bankruptcy.  This is the best practice and that is why we routinely advise our clients to file their tax return and spend the tax refund before filing bankruptcy.  If you are not going to receive a tax refund, there is no refund for the trustee to claim.

If you are owed a refund or if you have received the refund and not spent the money before you filed bankruptcy, the trustee will claim that money as a non-exempt asset which is part of the debtor’s estate to be administered by the trustee for the benefit of the creditors.  So, even though you have already filed bankruptcy, if you receive a refund that was from tax withholdings on earnings prior to the date you filed bankruptcy, the refund is going to be claimed by the trustee.

The trustee, for the benefit of your creditors, is entitled to any of your money which the government (your “uncle”), or anyone else, was holding for you as of the date you filed bankruptcy.  One exception is that you have an exemption for up to $150 per debtor for money in one bank account.  You can also exempt money held for you in a qualified retirement account.  The tax refund is not exempt.

If your tax liability for 2009 was determined prior to the date you filed bankruptcy, and you were not entitled to a refund, or if the refund check was already sent to you and spent by you prior to the date you filed bankruptcy, the trustee is not going to get anything because, as of the date you filed bankruptcy, the government was not holding any of your money.

As for the trustee’s claim to any tax refund owed to your from over-withholdings paid to the government during the same year you filed bankruptcy, that claim is limited to a pro-rata share of any refund attributable to the money withheld from your earnings prior to the date you filed bankruptcy.  If you filed bankruptcy half way through the year, the trustee will claim ½ of the refund you receive the next year.

If you typically get a refund each year, you are over-withholding.  You are depriving yourself of the use of some of the money you earn each pay period and sending that money off to the government to hold until it is time to calculate your tax liability.  You may need the help of some tax advisers to calculate the amount you should withhold or you may just need to speak with someone in your employer’s HR department.  The best practice is to end up with no surprises when tax time rolls around each year.  Remember, in the context of bankruptcy planning, over-withholding can result in losing some of your money to the trustee for the benefit of your creditors.

Many trustees will not claim a small refund for the estate because the amount involved is too small to justify their time and expense.  This is especially true if the tax refund is the only non-exempt asset to be administered.  If you send your tax refund check to the trustee, the trustee will calculate the amount that can b be claimed by the estate and may decide to abandon that claim and return the check to you.

Every chapter 7 bankruptcy case and every chapter 13 bankruptcy case is assigned to a trustee who will administer the bankruptcy case. They are called panel trustees and are not employees of the Court of or the U.S. Government. However, they are independent contractors appointed by the U.S. Department of Justice and are paid a small sum (approximately $60) per case assigned plus they receive a percentage of the value of the assets administered. There are approximately 20 of them in Arizona.

Primarily the “trustee” protects the interest of the creditors. They are acting in such a way to maximize the amount of money that can be paid to the creditors from the assets being administered. They also has the duty of reviewing the bankruptcy papers (petition, schedules and statements) and the relevant supporting documents such as bank statements, tax returns, pay stubs, etc. searching for assets, income and expenses. The law requires that they examine the debtor under oath primarily to determine that the debtor is eligible to file bankruptcy and to insure that the debtor has knowledge of the information filed and that the debtor is on record as attesting to the accuracy of that information.

In a chapter 7 case, often referred to as a “liquidation” type of bankruptcy, the trustee is focusing on those assets which might be liquidated (sold at auction usually) and then distributed to the creditors. They may question whether the claim of an “exemption” for an asset is appropriate and will also be interested to know whether the debtor has failed to disclose assets or has undervalued assets at the expense of the creditors.

In a chapter 13 case, the debtor is not required to liquidate non-exempt assets. However, the trustee is interested in maximizing the available funds for payment to creditors from the future income of the debtor. That available amount (net disposable income) is collected on a monthly basis from the debtor and is distributed to the creditors in accordance with the plan prepared by your attorney and approved by the trustee, the creditors and ultimately by the Court. The chapter 13 trustee is paid a percentage, not to exceed 10%, of the amount they collect and distribute. At this time (July 2010) there are two chapter 13 trustees in Phoenix which share those cases filed in Maricopa County and those areas to the North of Phoenix and one chapter 13 case in Tucson who is assigned cases in Pinal County and those areas to the South of Maricopa County.

To Pay or Not to Pay My HOA?

If you are going through foreclosure and considering bankruptcy, paying your HOA dues is probably not on the top of your list of things to pay.  You need to know how your HOA dues are handled before and after your bankruptcy.  When you file bankruptcy the debt owed to the HOA for dues and assessments incurred prior to the date of the bankruptcy will be discharged in the bankruptcy.  However, if the property is still in your name on the date you file bankruptcy, it is likely that you will incur additional charges from the HOA for that period of time after the date your bankruptcy case was filed.  Those HOA fees and assessments incurred post-bankruptcy are debts you will be responsible to pay.  There is a no way to know for sure when the property will actually be transferred out of your name during the process in which the lender exercises its right to sell the property in a trustee sale.  You cannot rely on the home being sold on the date indicated in the Notice of Trustee Sale.  Often the date of the sale is postponed and it may be postponed more than once.

Because you will likely have some HOA debts which will be incurred after you file bankruptcy, it may be wise to remain current on your HOA dues until after your home is sold in  the trustee sale.  If you are maximizing the rent free housing you are able to enjoy, remain in your home for as long as you can and after the home has been sold at the trustee sale, prepare to move on short notice.

Can I Choose The Type Of Bankruptcy I Want?

There is some degree of choice but there are limits.  The limitation of choice is based upon income.  If your income is below the median income for the same size household, you may have some power to choose either a chapter 7 or a chapter 13.  If your income is above the median you may have less power to choose and will probably have to file under chapter 13 if you file bankruptcy.  However, some people with income above the median may still file under chapter 7, if they have a sufficient level of the right types of debt and whose living expenses conform to those favored by Congress as per 11 USC §707(b)

What are the right types of debts and living expenses?

• Non-consumer debts which are greater than consumer debts
• Debts which are secured by your home, the higher they are the more likely you will have a choice
• Debts which are secured by two vehicles you own; the higher the  payments the more likelihood you will have a choice in bankruptcy
• Expense for mandatory payment of union dues as deductions from your paycheck.
• Expenses which are for  mandatory payroll deductions for retirement
• Expenses for non-real estate taxes (income taxes, Social Security taxes, Medicare taxes, self employment taxes)
• Expenses for  term life insurance insuring your life
• Expenses which are Court ordered such as child support or spousal support
• Expenses for education which are a condition of your employment
• Expenses for the education of a physically or mentally challenged dependent child where there is no available public education providing similar services
• Expenses for health care which exceed the standard deduction
• Expenses for reasonably necessary health insurance premiums, disability insurance premiums or monthly costs for a health savings account
• Expenses for care and support of an elderly, chronically ill or disabled household or family member who is unable to pay such expenses
• Expenses for home energy costs which are in excess of the standard amount allowed in the IRS local standards
• Document-able education expenses for a child under age 18 up to $137.50 per month per child.
• Expenses for continued charitable contributions which are in the form of cash or financial instruments