Can I Keep My House and Car if I File for Bankruptcy in Arizona?

Bankruptcy in Arizona

For many people struggling with debt, the idea of filing for Bankruptcy in Arizona is scary and overwhelming. One of the most daunting factors is the possibility that you could lose assets as part of the process. While this is a legitimate fear, keep in mind that there is a lot of misinformation out there about bankruptcy. The myths can convince people that they may lose their house, car, or other property through Chapter 7 and Chapter 13. The truth is that it is unlikely, but even more important is that there are strategies to keep your assets.

Unfortunately, inaccurate details about Bankruptcy in Arizona could mean you miss out on key benefits of Chapter 7 and Chapter 13. You may qualify to discharge debts or pay them through a debt repayment plan you can afford. The stress of crushing debt is no longer hovering over your life, destroying your financial future.

However, the mere possibility that you could lose assets in bankruptcy is still concerning. This is especially true with unique types of property, like your home that is more than just a roof over your head. A vehicle may be critical for employment and supporting your family. When it comes to these assets, an effective strategy is necessary to protect them. An Arizona bankruptcy lawyer will consult with you about a plan, but you can also read on for some information on what happens to your house and car when you file.

Overview of Chapter 7 Bankruptcy in Arizona

Understanding the different types of bankruptcy is important for knowing what happens to assets. Chapter 7 is one of the most common because it allows you to eliminate your debt at the end of the process if you qualify. However, the eligibility rules are strict, and only lower earners will meet the criteria:

  • If you earn less than or equal to the state median income for Arizona, you qualify without additional assessment of your finances.
  • When you make more than the state median income, you could still be eligible for Chapter 7 through the Means Test. This assessment takes your earnings and deducts the highest priority expenses that you must pay monthly, such as your mortgage, utilities, and food.

The downside with Chapter 7 is that there is the possibility that the bankruptcy trustee will liquidate your assets to pay creditors some of what you owe. Some assets are exempt and cannot be sold, but nonexempt assets may be liquidated if the proceeds would be reasonable. For instance, an expensive diamond necklace would be worth selling, but clothing is not.

Chapter 13 Bankruptcy Basics

Your house and car could also be affected if you file for Chapter 13, which is an option for filers who do not qualify under Chapter 7 rules. Under Chapter 13, the key eligibility requirement is that you have a steady income. Plus, some people might choose Chapter 13 because they have significant nonexempt assets. Your real estate and personal property are not liquidated with this type of bankruptcy.

A debt repayment plan is the focus of Chapter 13, in which you assess your finances and pay back a percentage of what you owe. Your monthly plan will be an amount you can afford based on your income. It will not change over the course of the proceedings, unlike interest rates and late fees that are charged by some creditors. The debt repayment plan is in effect for three to five years, at which point qualifying debts are discharged from your record.

Steps in Bankruptcy Cases

Chapter 7 and Chapter 13 are very different, but there are some aspects of these cases that are similar. With both, there is some preparation before you file:

  1. You must take a credit counseling course within 180 days prior to starting the case, which is intended to help you understand your finances and determine whether bankruptcy could be a wise option.
  2. Filing bankruptcy requires documentation about your assets, debts, income, expenses, and many other financial details. For Chapter 7, this information is crucial for proving eligibility and classifying exempt versus nonexempt assets. Your financial documents are important for developing a debt repayment plan for Chapter 13.

When it is time to file for bankruptcy, the steps for Chapter 7 and Chapter 13 include:

  • File the appropriate bankruptcy petition, along with schedules. Chapter 13 filers should include a proposed debt repayment plan, but you can also do this within 14 days.
  • The automatic stay on creditor efforts goes into effect, meaning creditors cannot take action to collect payment from you.
  • The court appoints a bankruptcy trustee to oversee the process.
  • Within 30 days after filing a Chapter 13 petition, you begin complying with your debt repayment plan. Despite not yet being approved by the court, you pay the monthly amount to the bankruptcy trustee.
  • The meeting of creditors is held, where creditors may ask questions and request details to verify the information from your petition.
  • For Chapter 13, you must attend a confirmation hearing to get approval on your debt repayment plan.

Around 75 days after the creditor’s meeting, the court will issue a discharge order for a Chapter 7 case. Once your debt repayment plan is complete, three to five years, you will receive a discharge order for Chapter 13.

Treatment of Your House and Car in Bankruptcy

With these basics about Chapter 7 and Chapter 13 in mind, you can get a better grasp of what happens to your house and car in bankruptcy. These are secured debts, which means the lender has a financial interest in the collateral, which is the real estate or vehicle. The automatic stay for bankruptcy is only temporary with these assets.

The biggest threat of losing your assets is Chapter 7 because of the bankruptcy trustee’s powers to liquidate. With your home, you can exempt up to $150,000 of your equity in the house, which is what you for the total mortgage minus what you already paid on the property. If your equity is less, the bankruptcy trustee will not liquidate. If it is more, the bankruptcy trustee:

  • Sells the house;
  • Pays your mortgage;
  • Returns the value of the exemption you are entitled to protect, i.e., $150,000; and,
  • Uses the remainder to pay creditors.

To keep your home, Chapter 13 may be the better option. You can work your mortgage into your debt repayment plan, along with past due amounts and arrearages. Once your case is over, you resume the mortgage payments and keep your home.

As far as your car in Chapter 7 bankruptcy, you can exempt up to $6,000 of the equity of one vehicle. As such, if you have only a car worth $30,000, the bankruptcy trustee can liquidate it. When you do have an auto loan, only your equity counts for purposes of the exemption. The Bankruptcy in Arizona has the power to sell, pay the balance of the loan, return your exemption amount, and apply any remaining proceeds to pay creditors.

There is no liquidation with Chapter 13, so you will be able to keep your car when you file. However, there is the matter of dealing with an auto loan because this will be part of your debt repayment plan. Your total amount due on the loan will be reduced because creditors do not receive the full value of their claim with Chapter 13.

Debts You Cannot Discharge in Arizona Bankruptcy

For both Chapter 7 and Chapter 13 Bankruptcy in Arizona, there are some debts that you cannot eliminate under any circumstances. They include:

  • Fines and costs you owe a court system for a criminal or traffic case;
  • Child support;
  • Alimony; and,
  • A judgment you owe after being found liable in a DUI accident that caused fatalities or injuries to others.

Contrary to popular misconception, it is possible to discharge student loan debt in bankruptcy. The process is extremely complex, requiring a separate hearing on whether you experience extreme hardship and meet other requirements. Another myth is that you cannot eliminate tax debts. You can wipe out debts that are at least three years old, as long as you filed at least one tax return within two years of filing for bankruptcy. Plus, there are additional criteria to discharge tax debts. Note that you cannot discharge a tax lien, which is a security interest in your property.

Your Life After Bankruptcy in Arizona

It is reassuring to know that there are strategies to keep your house and car when filing for bankruptcy in Arizona. You can always file Chapter 13 to avoid losing them, and you can leverage your equity in these assets and exemptions for Chapter 7. As far as other benefits of going through bankruptcy, consider the following:

  • The case will stay on your credit report for 7 to 10 years. Compare this to the amount of time it would take you to pay off all debts, along with late fees and interest. Some individuals could be struggling with debt for decades.
  • With Chapter 7 and Chapter 13, you emerge from the process debt-free, for those debts that are dischargeable.
  • You can start rebuilding credit right away through options like secured credit cards and lines of credit. Be diligent about paying your mortgage and all utilities to show your positive track record.

Discuss Options with an Arizona Bankruptcy Attorney

If you are considering bankruptcy, it is understandable that you have concerns about losing your house and car. Our team at DebtBusters can provide additional details on how your assets are handled in bankruptcy, so please contact us to learn more. You can call (866) 223-4395 or go online to schedule a free consultation at our offices in Scottsdale, AZ.

Related Content: What Type of Debt Can Be Discharged Through Bankruptcy?