What Debts in Bankruptcy Are Eligible for Discharge?

Debts in bankruptcy are a vicious cycle once it get beyond your control, and you find yourself unable to stay current with monthly payments, interest, and late fees. You pay the minimum to keep your head above water, but you are not even making a dent in the underlying balance. Meanwhile, creditors are calling, writing harassing notes and making threats of a collection lawsuit. You could even be subjected to wage garnishment, or a lender could foreclose on your home.

When debt has taken over and you feel powerless to overcome the burden, you might consider bankruptcy in Arizona as an option. There are two types of cases under US bankruptcy laws, and each aims to discharge debt. The process works very differently for Chapter 7 and Chapter 13, both of which are bankruptcy for individuals. Still, at the conclusion of the process, you will be free of qualifying debts.

The term “qualifying” is used because not all debts can be eliminated in bankruptcy. With both Chapter 7 and Chapter 13, there are limitations on what you can discharge. There are numerous variables that determine whether a debt can be eliminated through bankruptcy, so it is wise to consult with an Arizona bankruptcy attorney about your options. You can also read on for some information on what debts can be discharged in bankruptcy.

Understanding Types of Debt in Bankruptcy

There can be some confusion over the language used to describe debt, and the distinctions are important because they are treated differently depending on your circumstances.

Unsecured debt includes accounts and loans where you have not leveraged your property as collateral. The most common types that individual filers incur are credit cards, medical debt, lines of credit, and other personal loans.
When you have given a lender a secured interest in your property as collateral for a loan, the arrangement is secured debt. The most common types of secured loans in Chapter 7 and Chapter 13 are mortgages and auto loans.
When the bankruptcy laws for Chapter 7 and Chapter 13 permit you to wipe out the amount you owe a creditor, it is termed a dischargeable debt. Contrary to some misconceptions, not all debt is dischargeable. However, you might be surprised to learn a few types you can eliminate.
If you are married, your joint and individual debt will be an issue in a bankruptcy case. The details vary based on whether spouses file together or one goes through bankruptcy.

Chapter 7 Bankruptcy Overview

Though both types of bankruptcy enable you to wipe out qualifying debt, it is Chapter 7 that is familiarly known as discharge bankruptcy. This is because you can eliminate what you owe to creditors as long as you meet the eligibility criteria.

You qualify for Chapter 7 automatically if your earnings are less than the state median income.
If your income is higher, you may still be eligible if your income meets the Means Test. This test considers your monthly bills, potentially reducing your earnings to enable you to qualify for Chapter 7.

The key caveat is that your assets are subject to liquidation in Chapter 7. The bankruptcy trustee can sell your real estate and personal property to satisfy your debt to creditors. In an actual case, it is possible that you will not lose any assets because the trustee may opt not to sell. Some items will not bring sufficient funds to pay creditors, or the process will be counterproductive. In addition, you can employ strategies to protect your property through exemptions.

Applying Exemptions in Chapter 7 Cases

The bankruptcy process was never meant to leave a filer destitute and without resources to live and work. Therefore, the rules allow you to use exemptions to protect your assets. In some US states, you can choose whether you would like the state or federal bankruptcy exemptions for your case. However, Arizona law requires you to employ only state exemptions. The only exception is where you moved to the state less than two years ago, in which case you may qualify to apply the laws from your previous home state.

One of the most important is the homestead exemption that allows you to safeguard your equity in your home up to $150,000. The amount is protected for up to 18 months after the sale, so you do not have to be concerned about the bankruptcy trustee taking control of the funds. Some of the other crucial bankruptcy exemptions under Arizona law include:

$6,000 for your vehicle;
Household furniture and personal belongings up to a total value of $6,000;
A bank account balance not to exceed $300;
The entire value of your retirement funds for plans administered under ERISA; and,
Many more.

Chapter 13 Bankruptcy Laws

The final outcome of a case under Chapter 13 is also the discharge of qualifying debt, but you arrive at this result differently. For one, there is no liquidation of your assets with this type of bankruptcy. Instead, you pay back creditors by entering into a debt repayment plan. During the process, your debts are combined and reorganized into a single monthly payment. Once you complete the terms within 3 to 5 years, your debts are wiped out.

Your debt repayment plan will be an amount you can afford based on your salary, which brings up the key eligibility rule for Chapter 13: You must have a job as a reliable source of income to make payments under the plan. Because of how the rules work, some individuals are forced into Chapter 13 because they do not qualify under Chapter 7. However, it is also important to realize that you have a choice with respect to Chapter 13. You could opt for this type of bankruptcy if you have considerable assets that you do not want to put at risk of liquidation.

Special Considerations on Discharging Debt and Bankruptcy Rules

Chapter 7 and Chapter 13 offer a clean slate for many debtors, but you should remember that not all debts can be wiped out. They are non-dischargeable in all bankruptcy cases, so you will remain obligated to pay them during the proceedings and after all other debts have been eliminated. It is not possible to eliminate the following:

Alimony payments pursuant to divorce;
Child support payments ordered through a divorce or paternity case;
Many types of taxes;
Court judgments from personal injury lawsuits, where the case was a DUI accident caused by you; and,
Student loans, unless you request an adversary proceeding and go through a separate litigation process.

Because of the nature of the debt, you are also not permitted to eliminate secured loans through the bankruptcy process. This is because a lender has another option regarding the collateral securing the loan, namely, selling the item and retaining the amount due on the loan. Still, there are benefits for your mortgage with bankruptcy. In Chapter 13, you can roll your arrearages into your debt repayment plan. As long as you continue to pay the regular balance during your case, you pay a percentage of these amounts through the plan. When the case is over, the mortgage remains, but the arrearages are discharged.

Timeline of a Bankruptcy Case

The actual process of a bankruptcy case starts even before filing the petition since you must first determine whether Chapter 7 or Chapter 13 is most beneficial for your situation. An Arizona bankruptcy lawyer will explain the pros and cons, answer questions, and guide you in making important decisions about your future. Your attorney will also take care of essential tasks during the timeline of your case, including:

Assembling and reviewing your financial documents, such as papers on your assets, income, and debts;
Assisting you in developing the Chapter 13 debt repayment plan, which you must submit and begin paying early in the process;
Preparing the bankruptcy petition and all necessary schedules;
Representing you at the meeting of creditors, a mandatory hearing where you will be asked questions about your finances; and,
Finalizing your Chapter 7 or Chapter 13 case, and obtaining the final discharge order.

Do’s and Don’ts Before Filing for Bankruptcy

Chapter 7 and Chapter 13 deliver significant benefits after the case ends, when you emerge from the process debt-free and can take advantage of new financial opportunities. Still, there are some important points you need to know before you file for bankruptcy. For instance:

DO ensure you take the credit counseling course, which is required within six months before filing.
DON’T open any new credit accounts or take out any new loans.
DO continue to pay your mortgage if you want to keep your home. Though you can avoid foreclosure initially through the automatic stay in bankruptcy, the lender can ask for it to be lifted.
DON’T attempt to sell items or give them away for less than fair market value. The bankruptcy trustee can reverse the transaction.
DO consult with an Arizona bankruptcy attorney for advice and assistance.

Tackle Your Debt with Help from an Arizona Bankruptcy Lawyer

An important consideration is what debts can be discharged in bankruptcy, but there are many other factors you need to know when looking at your options. Our team at DebtBusters has in-depth knowledge of bankruptcy laws, so we can advise you on eliminating debt through Chapter 7 and Chapter 13. Please get in touch with us today at (866) 223-4395 or go online to set up a free consultation at our offices in Scottsdale, AZ. An Arizona bankruptcy attorney will review your situation and tell you more about discharging debt.

What Debts Can Be Discharged in a Arizona Bankruptcy?