An Introduction to Bankruptcy
Bankruptcy filing is a major decision that will have long-term financial effects. Here’s a rundown on what happens first:
- Understanding Bankruptcy. Through the legal process of bankruptcy, you can eliminate or restructure some or all of your debts under the protection of the federal bankruptcy court. Chapter 7 (liquidation) and Chapter 13 (repayment plan) are the most common types. While Chapter 7 allows you to eliminate most unsecured debts, Chapter 13 lets you restructure and repay your debts over three to five years.
- Bankruptcy Alternatives. Consider alternative options, such as talking with creditors, debt consolidation, or debt settlement, before deciding to file for bankruptcy. Explore these options with the assistance of an expert credit counselor or an attorney.
- Credit Counseling. Before declaring bankruptcy in Arizona, you must finish a credit counseling program from an accredited agency within 180 days.
- Means Test. You must pass the means test, which compares your income to Arizona’s median income, in order to file for Chapter 7 bankruptcy. You might need to file a Chapter 13 bankruptcy if your income is too high.
The bankruptcy process commences once you or your attorney have filed a petition with the bankruptcy court. This document contains detailed information about your finances, such as debts, income, assets, and a statement of your financial affairs.
Bankruptcy is a complex process, and each case is unique. You may wish to consult with a skilled bankruptcy attorney who can give legal guidance based on your particular situation. They may assist you in determining if bankruptcy is best for you, deciding the type of bankruptcy to file, ensuring your paperwork gets done correctly, and representing you in court.
Bankruptcy Filing Procedures
After taking a credit counseling course and filing a petition with the bankruptcy court, here are the other procedures to follow when filing for bankruptcy in Arizona:
- Automatic Stay. An automatic stay takes effect as soon as you file your bankruptcy petition. Most creditors are barred from pursuing collection operations against you under this provision, which can give instant relief from collection calls, wage garnishments, and pending lawsuits.
- Trustee Appointment and 341 Meeting. A bankruptcy trustee will be assigned to your case once you file for bankruptcy. You must send a copy of your most recent federal tax return as well as pay stubs to the trustee. The trustee will next call a creditors’ meeting, also known as a 341 meeting, where you will be questioned under oath about the state of your finances.
- Non-Exempt Assets. The trustee in a Chapter 7 bankruptcy has the authority to sell your non-exempt assets to pay off your creditors. To preserve some of your property, Arizona has its own set of exemptions. If you apply for Chapter 13, you may maintain your assets, but you must pay the value of those assets to your unsecured creditors as part of your repayment plan, a 341 meeting, where you will be questioned under oath about the state of your finances.
- Discharge. The bankruptcy court will discharge your eligible debts if your Chapter 7 petition is successful. This usually occurs a few months after filing for bankruptcy. The discharge in a Chapter 13 bankruptcy is normally awarded once you have completed the requirements of your repayment plan, which is usually three to five years after the plan is certified.
- Case Closure. After the discharge is granted, the bankruptcy case is closed. You no longer have any obligations to the bankruptcy court.
Bankruptcy Exemptions
Arizona law lets residents file for bankruptcy through state exemptions. It’s worth noting that Arizona law prohibits residents to use the federal set of bankruptcy exemptions. Instead, residents must use Arizona’s state exemptions. Furthermore, this is only applicable to people who have lived in Arizona for at least 730 days prior to filing for bankruptcy.
Here are some of the key bankruptcy exemptions in Arizona:
- Homestead Exemption. The homestead exemption preserves equity in your home or primary residence. You can exempt up to $150,000 of the equity of your house in Arizona.
- Motor Vehicle Exemption. Equity in one car can be excluded up to $6,000, or $12,000 if you have a physical disability.
- Personal Property Exemptions. You can exempt household furniture, appliances, and furnishings up to $6,000, $500 worth of clothing, and $2,000 worth of engagement and wedding rings. Make sure to check the full list of property exemptions.
- Tools of Trade Exemption. You can exempt up to $5,000 worth of tools, instruments, or books related to your profession.
- Retirement Accounts: The majority of tax-exempt retirement accounts are fully exempt in bankruptcy, such as 401(k)s, 403(b)s, profit-sharing and money purchase plans, SEP and SIMPLE IRAs, and defined benefit plans. Traditional and Roth IRAs are exempt up to the federal limit.
- Insurance Exemptions. Group life insurance policy or proceeds and disability benefits are exempt.
Bankruptcy laws can be complicated and have changed over time. The values and rules for exemptions may also vary, so it’s important to speak with an experienced bankruptcy attorney in Arizona for the most relevant information specific to your case.