Thinking About Bankruptcy? What You Need to Know Before you File

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Thinking About Bankruptcy?
What You Need to Know Before you File

by Southern Arizona Legal Aid, Inc.

What Types of Bankruptcy Can I Choose?
What property Can I Keep?
Will I Have to Go to Court?
How Much Does Bankruptcy Cost?
How Will Bankruptcy Affect My Credit Rating?
Can I Be Discriminated Against for Filing Bankruptcy?
Can I File Bankruptcy by Myself?
What About Attorneys and Document preparation?
Exempt Property List

Bankruptcy

Do you have problems paying your debts? Are you threatened with garnishment, foreclosure or repossession? If so, you may want to consider bankruptcy as a way to deal with these problems.

You have the right under federal law to file for bankruptcy relief from your creditors. Bankruptcy is a legal proceeding in which a person can get a fresh financial start. Bankruptcy can be very useful and effective in resolving financial problems in certain cases. However, it is not the answer to all financial problems or the right step for everyone. Also, it can be very important to choose the right time to file for bankruptcy relief.

For instance, in general, you should always wait as long as possible before filing bankruptcy because you can do so only once every six years. In most cases, you will want to save this valuable option until you really need it. Also, you may not need to file bankruptcy even though creditors are threatening you because you may have no nonexempt property or wages. This means you have nothing the creditors can take from you. You can't be put in jail for failing to pay your civil debts (other than fines or other court ordered amounts).

The only way to be sure bankruptcy is right for you is to discuss your situation with a lawyer familiar with bankruptcy. Every case is different, and laws change from time to time. This article gives you some basic information, but it does not substitute for consultation with an attorney.

Some things bankruptcy can do:

Eliminate the legal obligation to pay most or all of your debts. This is called a "discharge" of debts.
Stop foreclosure of your home and allow you to catch up on missed payments.
Stop repossession of a car or other property, or, in some situations, force the creditor to return property even after it has been repossessed.
Stop wage garnishments.
Stop debt collection harassment.
Restore or prevent termination of utility service for nonpayment of previous bills (you will probably have to pay a deposit, but the deposit cannot be more than 1-1/2 to 2 times your previous regular bills according to the Arizona Administrative Code).
Get your drivers license back if it has been suspended because you didn't pay court-ordered damages for a driving accident (unless you were driving under the influence of drugs or alcohol).
Some things bankruptcy can't do

Eliminate certain rights of secured creditors. Some examples of secured debts are car loans and home mortgages. You can force secured creditors to take payments over time, but generally, you cannot keep the collateral unless you continue to pay the debt.
Discharge debts that arise after the bankruptcy has been filed.
Discharge certain types of debts, such as child support, alimony (spousal maintenance), certain other debts related to divorce, most student loans, court restitution orders, criminal fines, and most taxes.
Eliminate the obligation of a co-signer on your loan in most cases.
What types of bankruptcy can I choose?

Chapter 7
This is also known as a "fresh start" bankruptcy, or "liquidation". Your debts are discharged (canceled), but you must give up any nonexempt property to the trustee to pay to your creditors. You can keep secured property if you are current on the payments and continue making the payments regularly.
Chapter 13
This is also called "reorganization", "Wage earner plan." Chapter 13 allows you to keep valuable property, such as your home or car, which you might otherwise lose due to past due payments. You can keep this type of property in Chapter 13 if you are able to make the necessary payments. Usually that will be the regular monthly payments plus a payment toward the arrears. In Chapter 13, you can have between three and five years to pay back the arrears.
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What property can I keep?

At the bottom of this page, there is a list of property exempt under Arizona law, which you will be able to keep.

In Chapter 7 bankruptcy, the trustee must take your non-exempt property and use it to pay your creditors. Usually, though, you can make an agreement with the trustee to buy it back, if you want to and are able to. In Chapter 13, you can keep all property, even non-exempt property, so long as your unsecured creditors get the value of the non-exempt property through your Chapter 13 plan.

Tax refunds and earned income credits are not exempt and can be taken by the bankruptcy trustee, depending on the time when you file your bankruptcy case. You should consult a lawyer before filing bankruptcy to see if this will affect you.

If you have property, which is non-exempt, you could sell it before filing bankruptcy and use the money to purchase things, which are exempt; such are food, furniture, or clothing. However, you cannot give property away to friends or relatives, and have them give it back to you after the bankruptcy. Any transfers of property without receiving fair value for it within one year before filing bankruptcy are called a fraudulent transfer. The property could be taken by the bankruptcy court and sold to pay some of your debts. If the court finds you have been dishonest in your bankruptcy, you could be denied your discharge. You could also be charged with federal or state crimes, which carry serious fines and jail sentences.

Also, you cannot prefer one creditor over another by making payments on the debt within 90 days before filing bankruptcy (one year if the person paid is an "insider" (family, friend, etc.) If you do so, the bankruptcy court can take that money away from the person you paid. This is to insure that all creditors are treated equally. This does not apply, however, to regular monthly payments such as your car payment, house payment, rent, utilities.

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Will I have to go to court?

In most cases, you will only have to go to one hearing called "meeting of creditors". Usually, this will be short and simple. The trustee, including your name, address will ask you a few questions, whether you have had a bankruptcy discharge before, how long you have lived here. Creditors are permitted to attend and ask you questions. They cannot be abusive, however, so this is nothing to worry about. Usually, your case will be completed within 4 to 6 months from filing it.

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How much does bankruptcy cost?

The Court charges a filing fee, which cannot be waived. That fee is $200.00 for a Chapter 7 case, and $185.00 for a Chapter 13 case. You do not have to pay any money to get your case filed, but you will be required to pay the fee within a reasonable time after filing. Payment plans can be set up for the fee. You may also have to pay attorneys fees.

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How will bankruptcy affect my credit rating?

The fact that you filed bankruptcy will be on your credit report for 10 years. However, if you have a lot of debt and are behind on it, then your credit probably isn't very good anyway. Late payments and unpaid debts will stay on your credit rating for 7 years. Filing bankruptcy doesn't necessarily mean you won't be able to get credit during the 10 years afterward. Many companies will lend to people who have filed bankruptcy, but they may charge you a higher interest rate than if you had not.

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Can I be discriminated against for filing bankruptcy?

Law prohibits employers or government agencies from discriminating against you because you have filed for bankruptcy.

Can I file bankruptcy by myself?

You can file bankruptcy by yourself. There are do-it-yourself kits available at book and stationary stores, which cost approximately $25.00. However, we do not recommend that you file by yourself. Every case is different. You could lose valuable property or rights if you don't know what to do or not do. The people at the bankruptcy court are not allowed to advise or help you with your case.

While Chapter 7 is generally easier than Chapter 13, even in Chapter 7, there can be legal problems you won't know how to handle. It's always best to consult an experienced attorney. Very few people have successfully completed a Chapter 13 case without an attorney.

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What about attorneys and document preparation?

When you consult an attorney, ask him/her if he/she is experienced in bankruptcy. Before you make an appointment, ask if there will be a charge for the initial consultation. If you consult an attorney, be sure to ask him/her how much it will cost you for representation and what services you will get for the fee. Ask to see this in writing.

Non-lawyer document preparation: There are a number of non-lawyers who will prepare bankruptcy documents for a fee. Generally, it is not a good idea to use these services. Since they are not lawyers, there is no one overseeing their work, as the Bar Association does with lawyers. They are not supposed to advise you about how to complete your papers Also, in many cases, you can hire an attorney for the same cost, or only a slightly higher cost than you will pay the non-lawyer for preparation. The court does not allow non-lawyers to charge more than $200 and does not allow them to take your filing fee. Rather than take a chance on losing money to someone, who may not handle your case properly, call several bankruptcy lawyers and ask their fees. If you don't know an attorney, ask friends or family or look in the telephone yellow pages.

There are legal aid organizations that may prepare bankruptcy papers if you qualify for the service. Choose the tab labeled Find a Lawyer to see a list of organizations in your area.

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Exempt Property

Except for the Homestead exemption, each debtor is entitled to claim the exemption separately, either in the same property, or different property. For the Homestead exemption, $100,000 equity is the maximum exemption for single people or two spouses together.


Statute (Law)

Property

Amount Exempt


ARS 33-1101
(equity)

Homestead (your residence which can be a house, mobile home, or mobile home and land)

$100,000

ARS 33-1123

Household furniture and appliances

$4,000

ARS 33-1124

Food, fuel and provisions for 6 months

No Limit

ARS 33-1125

Personal items used primarily for family or personal purposes:





Clothing

$500



Musical instruments

$250



Pets, domestic animals

$500



Engagement and/or wedding rings

$1,000



Library

$250



Watch

$100



Motor vehicle (If owner is physically disabled)

$5,000
$10,000



Professionally prescribed prosthesis, including wheelchair

No Limit



Miscellaneous: (bicycle, sewing machine, typewriter, family bible, burial plot, gun)

500

ARS 33-1126

Money benefits or proceeds:





Life Insurance Proceeds (spouse or parent)

$20,000



Interest in qualified retirement plan

No Limit



Earnings of minors

No Limit



Health, accident and disability insurance payments

No Limit



Life insurance cash surrender value

$5,000



Money in one bank account

$150



Personal property homestead in prepaid rent

$1,000 or
1-1/2 months rent, whichever is less

ARS 33-1130

Tools and equipment of trade

$2,500

ARS 33-1131

Wages which are less than 30 times the federal minimum wage per week. Wages in excess of this amount can be garnished, but maximum that can be garnished is 25% of excess



45 USC 228(l)

Railroad retirement



42 USC 407

Social Security (retirement and disability) (Not exempt for child support and alimony)



42 USC 1383(d)

SSI (Supplemental Security Income)



38 USC 3101

Veterans Benefits



5 USC 2265(a)

Federal Civil Service Retirement



ARS 23-1068B

Worker's Compensation



ARS 23-783

Unemployment Insurance



ARS 46-208

Cash Assistance, Food Stamps, General Assistance