When you have tried and failed to get control over your debt, bankruptcy may be the next option to consider. Even if you make extreme cuts to your budget and pay all you can afford, you are not making a dent in the balance. Your payments go toward interest and late fees, and creditors begin to contact you right after you miss one. You could eventually be sued in a debt collection lawsuit, followed by wage garnishment. You might face foreclosure on your home and repossession of your car, both of which can be financially devastating.
With bankruptcy, you cease these efforts and manage your debt through one of two types of bankruptcy. Chapter 7 discharges debt for those who qualify under the eligibility rules. With Chapter 13, you work out a debt repayment plan to pay creditors a monthly amount you can afford. With both types, you can move forward on building a new financial outlook.
There are important differences between the two types of bankruptcy, and they can affect your decision. Fortunately, you gain many benefits with both. An Arizona bankruptcy attorney will advise you on whether Chapter 7 or Chapter 13 is a good fit for your situation. Some background is also informative.
Chapter 7 Bankruptcy Cases in Arizona
Under Chapter 7 of the US Bankruptcy Code, eligible filers can discharge qualifying debt and owe nothing to creditors when the case concludes. However, when the bankruptcy trustee takes over the bankruptcy estate to manage your assets during the case, they will look for items that can be liquidated. Though exempt items like your home, a vehicle, and work equipment cannot be sold, nonexempt assets like jewelry, ATVs, and art collections can unless you protect them.
Discharging debt through Chapter 7 benefits you, but it is a harsh remedy for creditors. Bankruptcy rules are enacted to ensure only those who truly need to eliminate debt will qualify. Your income is the determining factor:
- If your income is at or below the state median income for Arizona, you are eligible for Chapter 7.
- You may still qualify for Chapter 7 if your income is higher, but you must instead meet the Means Test. This analysis takes your income and deducts monthly expenses for necessities, such as your mortgage, rent, utilities, and auto loan. If you have a minimal amount left over from your income after paying these expenses, you could pass the Means Test.
Debt Repayment Under Chapter 13 in Arizona
With Chapter 13, you can eliminate debt at the end of the process, but you will be paying creditors some of what you owe while the case is pending. For these cases, you prepare a debt repayment plan that reduces your monthly payments to an amount you can afford based upon your income. Chapter 13 may be your only bankruptcy option if you do not qualify for Chapter 7 because your earnings are too high. Even if you are eligible for Chapter 7, you might also opt for Chapter 13 because you have nonexempt assets that you want to protect from being liquidated.
With a Chapter 13 case, you propose the debt repayment plan to pay a percentage of what you owe each creditor. The court must approve the plan, and creditors are permitted to object. You can make modifications to satisfy their concerns, but once the judge confirms the debt repayment plan, it will be legally binding. The plan will be in effect for three to five years, during which time you make monthly payments to the trustee. You receive a discharge order from the court at the conclusion of the case.
The Automatic Stay in Bankruptcy
One of the most crucial benefits of filing for bankruptcy will affect your life right away, in a good way. As soon as you file a petition for Chapter 7 or Chapter 13, the bankruptcy court immediately imposes an automatic stay on all creditor efforts to collect. Creditors must stop calling, sending notices, threatening you, and harassing you to get you to pay. In addition, the automatic stay will stop:
- Debt collection lawsuits;
- Wage garnishments;
- Foreclosure actions on your home;
- Repossession of your car;
- Enforcement of certain liens; and,
- Any other efforts to collect on a debt.
Keep in mind that the automatic stay does not put a permanent end to these efforts. It is only in effect while your case is pending. When the debts related to these actions are secured by collateral or not discharged, creditor efforts to collect could pick up where they left off.
How Bankruptcy Proceedings Work in Arizona
Chapter 7 and Chapter 13 are very different types of bankruptcy cases, but there are some common elements when it comes to the process. With both, you will need to undertake preparations before filing the petition. You must complete a creditor counseling course within 180 days prior, and you will need to collect and organize your financial documents. For Chapter 7, your paperwork is important for proving eligibility and identifying exempt versus nonexempt assets. With Chapter 13, you need this information to prepare the proposed debt repayment plan.
After initial preparations, the steps for a typical bankruptcy case include:
- File the bankruptcy petition and all required schedules;
- Submit the Chapter 13 debt repayment plan with your petition or within 14 days thereafter;
- The bankruptcy trustee is appointed to manage the bankruptcy estate and proceedings;
- The meeting of creditors is held. With Chapter 7, the focus is on eligibility and liquidating nonexempt assets. Chapter 13 creditor’s meetings concentrate on the debt repayment plan. With both, you will be asked questions to confirm that the information you provided in your petition is true and correct.
- For a Chapter 13 case, there will be a confirmation hearing to approve the debt repayment plan.
- With Chapter 7, you may receive a discharge order within 60 to 75 days after the creditor’s meeting.
- Chapter 13 cases take longer because of the three- to five-year debt repayment plan, but a discharge order is forwarded once the plan is complete.
Advantages of Resolving Debt Through Bankruptcy in Arizona
Many filers agree that eliminating the strain and stress of overwhelming debt is among the key advantages of Chapter 7 and Chapter 13. You no longer face an uphill battle as you pay interest and late fees, without even having an effect on the actual debt you owe. You get a fresh start with your finances, and you have the funds to invest and save for your future.
There are some debts that are not eligible for discharge, including child support, alimony, and certain tax liens. You can also not eliminate a judgment from a DUI accident, in which someone was killed or injured because of your drunk driving. Despite some myths that persist about student loans, it is possible to eliminate them with the right strategy. You must be able to show extreme hardship and meet other criteria, so it is difficult to discharge student loans.
However, even when you cannot discharge all debts and will still owe when your Chapter 7 or Chapter 13 case is over, there are still benefits to bankruptcy. Through the process, you did eliminate many of your debts that you will no longer owe. Without these as part of your monthly expenses, you have more free funds to pay those debts that remain.
Rebuilding Credit After Bankruptcy in Arizona
Many people worry about their credit score with bankruptcy, and it is true that yours will take a hit. Your rating will drop, and the case will remain part of your credit history. A Chapter 7 case will be listed for 10 years, and a Chapter 13 case will be on your report for 7 years. These factors seem grim, but it is possible to start rebuilding your credit before they are removed from your history.
In fact, you may start to receive offers from credit card companies, which would typically be secured and intended to rebuild credit. This may be a good option to show your history of on-time payments. Also, stay current on all utilities and other monthly bills to increase your score.
Questions to Ask Your Bankruptcy Attorney
You can see that legal representation is essential for bankruptcy, from determining your options to filing paperwork to attending hearings. As you are looking into candidates to help with your case, there are some questions you should ask:
- Is bankruptcy your primary area of practice? Many attorneys handle a wide range of legal matters for clients, including just a small percentage of bankruptcy cases.
- Do you think Chapter 7 or Chapter 13 is a better option? Even after a short meeting, a bankruptcy lawyer should be able to advise you on which type of bankruptcy is suitable for your circumstances.
- How do you charge for bankruptcy cases? Some attorneys charge a flat fee for bankruptcy, such as where the case will be predictable and resolved without hassles. With cases that are complicated, including Chapter 13 with details on the debt repayment plan, you may be quoted an hourly rate.
- Who will be my contact person at your firm? Though you will be talking to an assistant at time, make sure you still have access to your attorney as the primary contact person.
Speak to an Arizona Bankruptcy Lawyer About Your Options
It is helpful to review some basics about the different types of bankruptcy, but this information is no replacement for legal representation. You will need qualified advice on your options and assistance with the process, and you can trust DebtBusters to guide you. Please contact our offices in Scottsdale, AZ by calling (866) 223-4395 or visiting our website. We are happy to set up a free consultation to discuss details about Chapter 7 and Chapter 13 bankruptcy.
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