For anyone looking into bankruptcy as an option for taking control over their debts in Arizona, one of the first questions will be what happens to debt when the process concludes. You may be aware that it is possible to eliminate debt, through a Chapter 7 bankruptcy discharge. If you qualify, the amounts you owe creditors are wiped out. Though it will not eliminate debt, Chapter 13 is also an option. With this process, your debt is reorganized into a lower payment that you can afford.
In both types of bankruptcy cases, some debts in Arizona cannot be eliminated or reduced under US Bankruptcy Code rules. With others, it could be extremely challenging, even if it is possible. However, you can still benefit from considering bankruptcy options regardless of whether some debts cannot be discharged. Wiping out other debts could enable you to pay off those that are not eligible.
Determining whether you can eliminate all debts is important for deciding on bankruptcy, including which type to file if you qualify for both. With such critical decisions to make for your future, you can benefit from getting legal guidance from an experienced Arizona bankruptcy lawyer. Some general information on debt in Chapter 7 and Chapter 13 is also helpful.
Chapter 7 Bankruptcy Discharge in Arizona
This type of bankruptcy does wipe away qualifying debt, including credit cards, lines of credit, personal loans, and medical bills. These are unsecured debts because there is no collateral for the loan, unlike your mortgage which is a secured debt that applies your home as collateral. Chapter 7 is also called liquidation bankruptcy because the bankruptcy trustee can sell off certain assets to satisfy your debts. However, exempt assets cannot be sold, and many debtors do not have significant non-exempt property. Many will not lose any assets to liquidation.
Chapter 7 is only available to those to qualify based on income. The first inquiry is about your gross pay, compared to the state median income for Arizona. If your earnings are equal to or lower than this value, you are eligible to file for Chapter 7 and eliminate debt. The Means Test is a second factor that may enable you to qualify if your income is higher. The focus is on your disposable income, which is what you have remaining after paying basic living expenses and required obligations. When that amount is too low to pay creditors, you could pass the Means Test.
Reducing Debts in Arizona Under Chapter 13
The point of Chapter 13 is to reorganize and reduce your debt down to a monthly payment that you can handle based upon your disposable income. You will be paying at least a percentage of your debt, so it is not eliminated during the process. However, once you complete the Chapter 13 debt repayment plan, most of the remaining amounts are discharged.
There are eligibility rules for Chapter 13, and the amount of your debt is an important factor. The debt limitations set by bankruptcy rules are $1,395,875 for secured debt and $465,275 for unsecured debt. You are not eligible to file this type of bankruptcy if you exceed either of these amounts.
Another criteria to file Chapter 13 bankruptcy is that you must be an individual, as opposed to a business filer. Fortunately, this means people who operate a company as a sole proprietor could benefit themselves and their businesses. There is no separation from the debt, so you could eliminate all amounts owed by your company as well. Chapter 13 cannot be used for corporations, LLCs, and related business organizations.
Debts in Arizona You Cannot Resolve Through Bankruptcy
Despite the above descriptions of Chapter 7 and Chapter 13, there are certain debts you will not be able to eliminate in bankruptcy. They include:
- Child support;
- Damages you owe after being found at fault in a DUI car accident; and,
- Most federal, state, and local taxes.
In addition, there is a specific type of debt that is not dischargeable when it gets to a certain stage. Creditors or any aggrieved party could file a lawsuit against you for damages, and you are obligated to pay the judge amount. If you do not, the plaintiff can enforce the judgment by placing an encumbrance on the property. Usually, the process involves recording a copy of the court documents and a notice of lien against the real estate. A plaintiff could also lien bank accounts and other personal property. That party could also be the IRS, placing an income tax lien to get the amount you owe.
These are judgment liens that are considered perfect in the eyes of bankruptcy laws. You cannot eliminate them through Chapter 7 or Chapter 13.
Myths About Eliminating Debt in Arizona
When reviewing the types of debt you can discharge through bankruptcy, it is important to clear up some myths that could affect your decision-making. One involves student loan debt, with many people believing that it is never possible to eliminate student loans in Chapter 7. In truth, it is very rare that someone will qualify, but there are opportunities. You would have to prove that you would suffer undue hardship if you had to pay back the amount and that your circumstances are unlikely to change. Though it is a difficult burden, wiping out student loan debt is possible for some.
Another myth is that you cannot wipe out income tax debt through bankruptcy. The key is the date of the filing deadline, the date the return was filed, and how long since the assessment of the tax. Plus, you cannot engage in any fraud, tax evasion, or other misconduct to qualify.
There is also misinformation about what happens to your credit score after bankruptcy. Chapter 7 and Chapter 13 remain part of your record for 10 and 7 years, respectively. However, you can take advantage of many opportunities to build your credit. Alternatively, your credit rating would take a significant hit if you did not file bankruptcy when it is the right fit for your circumstances.
Benefits You Gain with Chapter 7 and Chapter 13
With both types of bankruptcy, you take advantage of legal protections and other benefits, such as:
- When you file your petition for Chapter 7 or Chapter 13, the court imposes an automatic stay on creditor activities. They cannot make any attempt to collect on the debt, including calls, filing a lawsuit, wage garnishments, foreclosure, and vehicle repossession. The harassing phone calls will also cease.
- You can protect property with bankruptcy, though your non-exempt assets are always subject to liquidation through Chapter 7. There is an extensive list of real estate and personal property that are considered exempt assets in Arizona for purposes of bankruptcy.
- There is a requirement to complete a credit counseling course within 180 days prior to filing for bankruptcy. You will also need to go through debt education before bankruptcy discharge. Through both these programs, you gain valuable information about how to prevent debt from becoming overwhelming in the future.
- Even if you cannot wipe out all debts in Arizona, you can eliminate a significant amount of the burden. You may then be able to pay the non-dischargeable debts.
Additional Bankruptcy Eligibility Rules
In addition to the criteria mentioned in Chapter 7 and Chapter 13, there are some rules you should know that affect either type of case. You cannot file for bankruptcy if you went through a Chapter 7 case in the last eight years or Chapter 13 in the last six years. You are also disqualified if a previous case was dismissed in the 180 days before trying to file a new petition if the reason for the dismissal was:
- Your violation of a court order;
- You requested a dismissal; or,
- You committed an act of fraud or otherwise abused bankruptcy laws;
Examples of fraud in bankruptcy are misstating the value of assets, hiding items, failing to report income, or making misrepresentations on court forms. It is also considered a fraudulent transaction to transfer property for free or less than fair market value so that you can protect it from being liquidated. The bankruptcy trustee has the power to undo the transaction and bring the asset back into the bankruptcy estate. This process is called a clawback, enabling the trustee to apply the asset to your debt.
Guidance with Bankruptcy Cases
It may be possible to eliminate all of your debts in Arizona, as long as you qualify and the debts themselves are eligible. However, it is critical to make the right decision for your circumstances with Chapter 7 and Chapter 13. An Arizona bankruptcy lawyer will counsel you and help you make informed choices about your financial future. It is also essential to have legal representation for:
- Gathering and organizing all financial paperwork;
- Assessing exemptions to take advantage of ways to protect property;
- Preparing and filing the bankruptcy petition for Chapter 7 or Chapter 13;
- Communicating with the bankruptcy trustee;
- Submitting your debt repayment plan, for a Chapter 13 case;
- Attending the 341 meeting of creditors; and,
- Getting approval for your Chapter 13 plan.
Consult with an Arizona Bankruptcy Attorney About Managing Debt
You may not be able to eliminate all debts in Arizona through Chapter 7 or Chapter 13 but keep in mind how wiping out qualifying debts affects those that remain. More of your earnings go into your pocket instead of toward late fees and interest, allowing you to pay amounts not discharged in bankruptcy. To learn more about how your debts will be treated in the process, please contact DebtBusters at (866) 223-4395 or via our website. We can schedule a free consultation at our offices in Scottsdale, AZ.
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