Arizona residents with debt problems often turn to bankruptcy for a solution. Bankruptcy is not the best debt remedy for everyone. Some people can get back on track by careful budgeting and by negotiating with lenders to reduce or extend payments.
When debt is out of control, however, bankruptcy may be the best way to restore a debtor’s financial stability while easing the burden of worry.
Bankruptcy can be a wise decision when a debtor is faced with an unexpected financial crisis, such as the loss of employment or crushing medical expenses.
Bankruptcy is often the most efficient way to deal with unsecured debt, such as credit card and medical bills, when a debtor has no reasonable hope of paying those bills in the foreseeable future.
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Bankruptcy also contributes to emotional well-being by eliminating debt or by allowing a debtor to catch up on missed payments. Individuals who are hounded by debt collectors gain peace of mind by filing bankruptcy, thanks to a court order that prevents creditors from continuing their collection efforts.
The Arizona bankruptcy lawyers at Pew Law Center help debtors choose between two kinds of bankruptcy relief. A chapter 7 bankruptcy wipes out all debt and gives debtors a fresh start.
A chapter 13 bankruptcy is a court-supervised debt repayment plan that allows debtors to catch up on missed mortgage payments and car loan payments, while wiping out unsecured debt after repaying what the debtor can afford.
What Is Chapter 7 Debt Liquidation?
A chapter 7 bankruptcy erases all debts except for the nondischargeable debts discussed below. The primary advantage of a chapter 7 bankruptcy is that most debt is completely wiped out.
The disadvantage of a chapter 7 bankruptcy is that the debtor will usually lose property that has been pledged to secure a loan. The two kinds of secured debt that concern most people who consider a chapter 7 bankruptcy are:
- Mortgage debt — a home loan that is secured by a mortgage on the property that the debtor purchased with the loan proceeds.
- Car loan debt — a lender holds a lien on the car that was purchased with the proceeds of a car loan.
After filing a chapter 7 bankruptcy, the lender will usually be allowed to foreclose the mortgage or to repossess the car. The lender will need to obtain the Bankruptcy Court’s permission first, so filing bankruptcy buys a bit of time.
Saving Secured Property in a Chapter 7 Bankruptcy
In some cases, a debtor who files a chapter 7 bankruptcy may be in a position to reaffirm the loan by promising to pay it notwithstanding the bankruptcy.
That requires the lender’s consent and the Bankruptcy Court’s approval. An Arizona bankruptcy lawyer at Pew Law Center can help debtors understand whether it makes sense to reaffirm a loan.
If your car is worth less than your car loan balance, you may also be able to keep the car by paying the car’s current value to your lender. Pew Law Center’s bankruptcy lawyers can help you decide whether that strategy is right for you.
Exempt Property in a Chapter 7 Bankruptcy
All property that is not declared exempt from execution by Arizona law becomes the property of the bankruptcy estate after a chapter 7 petition is filed. The bankruptcy trustee may sell that property to pay creditors.
Debtors may therefore lose valuable property by filing a chapter 7 bankruptcy, even if that property was not used to secure a loan. However, some of the Arizona exemptions are reasonably generous and most people who file a chapter 7 bankruptcy do not lose anything.
The Arizona homestead exemption allows homeowners to keep $150,000 of their home value (or to keep their home if it is not mortgaged and is worth $150,000 or less).
Debtors can also keep a car with a value of $6,000 (or $12,000 if married debtors are filing a joint petition) and certain other property, such as furniture and clothing of ordinary value.
Eligibility for Chapter 7 Bankruptcy
Not everyone is eligible for a chapter 7 bankruptcy. Debtors who earn more than half of the state’s median income need to engage in a computation to determine their eligibility.
An Arizona bankruptcy attorney at the Pew Law Center can help debtors understand whether they qualify for a chapter 7 bankruptcy.
As a general rule, debtors who make less than half of the state’s median income are eligible to file a chapter 7 bankruptcy. Debtors who recently lost their jobs, however, may need to wait a short time before they quality.
What Is Chapter 13 Debt Repayment Plan?
A chapter 13 bankruptcy allows debtors to repay some or all of their debts under court supervision. A typical chapter 13 plan lasts three to five years. During that time, the debtor continues to make current payments on secured debts, such as mortgage and car loan payments.
Through the chapter 13 plan, the debtor catches up on delinquent secured loan payments. At the end of the plan, the debtor has no unsecured debt and is current on secured loan payments.
How Chapter 13 Works
A chapter 13 debtor begins by making a monthly budget that is sufficient to meet living expenses and current payments on secured debts. Income in excess of the monthly budget is paid to the bankruptcy trustee, who uses it to pay creditors.
The trustee first pays delinquent debts (i.e., past-due payments) owed to secured creditors. If there is any money left after secured creditors are paid, the trustee pays that money to unsecured creditors.
At the end of the plan, all delinquencies owed to secured creditors should be paid. Any unsecured debts that have not been paid in full are discharged. In many cases, unsecured creditors receive only a small percentage of the total debt.
Eligibility for Chapter 13 Bankruptcy
To be eligible for a chapter 13 bankruptcy, the debtor needs to have a regular source of income. Wages and social security payments are examples of regular income.
For a chapter 13 plan to succeed, the debtor will need to have sufficient income to continue making regular payments on secured debts, to pay household expenses, and to catch up on delinquent payments over a period of 3 to 5 years.
Benefits of Chapter 13 Bankruptcy
Even when debtors are in financial trouble, they can often keep their property while achieving financial stability with the help of a chapter 13 bankruptcy.
Debtors often find themselves overwhelmed by the need to make minimum payments on credit cards while trying to pay their ongoing expenses.
With a chapter 13 plan, debtors are relieved of the burden of paying their credit card companies and other unsecured creditors.
That frees up money that can be used to make their regular payments to secured creditors while catching up on delinquent payments.
While the plan is in effect, banks and other lenders cannot foreclose, repossess, or sue the debtor to collect any money owed. Unlike a chapter 7 bankruptcy, the bankruptcy trustee does not take control of the debtor’s property.
Debtors therefore do not lose property that is not protected by Arizona’s exemptions.
Choosing Between Chapter 7 and Chapter 13
A chapter 7 bankruptcy is often the best choice for debtors who:
- Do not own real estate
- Own no property that they cannot declare as exempt
- Do not have a car loan, or the car is worth less than the loan balance
- Have lost their jobs or have a low income
- Owned an unincorporated business that failed and cannot afford to pay their business-related debt
A chapter 13 bankruptcy may be the best choice for debtors who:
- Have a higher income
- Have mortgage debt and other secured debts
- Own significant nonexempt property
- Want to minimize the impact of a bankruptcy on their ability to obtain future credit
An Arizona bankruptcy lawyer at the Pew Law Center can help debtors determine whether they are eligible for a chapter 7 or chapter 13 bankruptcy, and to choose between them if they are eligible for both.
What Is An Automatic Stay?
Whenever a debtor files either a chapter 7 or a chapter 13 bankruptcy, the court enters an “automatic stay” at the moment the bankruptcy is filed. The automatic stay orders creditors to cease taking any action to collect debts that are listed in the bankruptcy filing.
The automatic stay prevents creditors and debt collectors from:
- Garnishing wages
- Filing debt collection lawsuits
- Filing mortgage foreclosure lawsuits
- Repossessing vehicles
- Sending collection letters
- Calling debtors about their unpaid debts
If the debtor filed a chapter 7 bankruptcy, a secured creditor may be able to obtain the Bankruptcy Court’s permission to resume collection efforts, but the debtor will gain some breathing room as a result of the automatic stay.
For example, if a foreclosure sale was about to occur before the chapter 7 bankruptcy was filed, the automatic stay may give the debtor time to find a new place to live before the creditor obtains permission to reschedule the foreclosure sale.
When a debtor files a chapter 13 bankruptcy, secured creditors cannot usually persuade the court to lift the automatic stay as long as the debtor continues making current payments to that creditor and makes the regular payments to the trustee that are required by the plan.
What Are Nondischargeable Debts?
Some debts cannot be discharged in a bankruptcy. The existence of those debts does not prevent a debtor from filing bankruptcy, but the debtor will still owe those debts when the bankruptcy is finished.
The most common nondischargeable debts are:
- Student loans
- Child support payments
- Alimony payments
- Most tax debts
While those debts cannot be discharged, they can be included in a chapter 13 plan. That allows debtors to avoid lawsuits and other efforts to collect those debts.
If the debts are not paid by the end of the chapter 13 plan, the debtor will still owe the remaining balance of nondischargeable debts, but it may be possible to file another chapter 13 plan later to stop new collection efforts.
Impact of Bankruptcy on Credit Ratings
Bankruptcies appear on credit reports for up to 10 years. How a bankruptcy will affect the ability to obtain future credit is up to lenders to decide.
Some lenders may feel that a debtor who filed bankruptcy is a good credit risk because a debtor who files a chapter 7 bankruptcy must wait 8 years before seeking another chapter 7 discharge.
Some lenders view a chapter 13 bankruptcy as evidence that a debtor made a good faith effort to pay debt after experiencing a financial hardship.
The sad reality is that, by the time a debtor is considering bankruptcy, the debtor’s credit rating is usually poor. Most people do not consider bankruptcy until they have missed several payments or are on the verge of a foreclosure.
Whether a bankruptcy will make it easier or harder to obtain credit is often difficult to predict. In most cases, debtors should be worrying more about restoring their financial stability than worrying about a credit rating that is already poor.
Before Filing Bankruptcy
Debtors are required to obtain credit counseling before filing either a chapter 7 or a chapter 13 bankruptcy. Credit counseling is intended to help debtors understand available alternatives for dealing with debt and to learn how to budget their income.
Unfortunately, budgeting will not always avoid a financial crisis and bankruptcy is sometimes the only viable answer to serious debt problems.
The bankruptcy lawyers at Pew Law Center help Arizona residents find credit counseling centers. We also advise clients about their options for obtaining debt relief, including chapter 7 and chapter 13 bankruptcies.
Those in need of bankruptcy assistance can call (480) 745-1770 or fill out the contact form on this page to reach our compassionate legal professionals for a free consultation.
Call today to receive an in-depth, confidential review of your situation from compassionate professionals who have helped more than 10,000 locals.