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Bankruptcy FAQ

What is the purpose of the Chapter 7 Means Test?

What is the purpose of the Chapter 7 Means Test?

The Means Test, or Median Income Test, is an eligibility requirement for those who seek to file under Chapter 7 (liquidation) of the U.S. Bankruptcy Code. If a person’s income and household size is such that there is no presumption of abuse under the Means Test, then he or she may file for relief under Chapter 7 or under Chapter 13. In general, if the Means Test is not satisfied and there is a presumption of abuse, then the person may still file for bankruptcy protection under Chapter 13 if other filing requirements are met (but not under Chapter 7).

 

What are the debt limits for filing for bankruptcy under Chapter 13?

Any individual debtor can file for bankruptcy protection under Chapter 13, so long as his or her unsecured debts fall below $360,475; and his or her secured debts fall below $1,081,400.

 

Will filing bankruptcy stop my creditors from repossessing my property?

Yes, bankruptcy stops creditor repossessions. Filing a bankruptcy petition invokes the automatic stay which effectively stops all creditor debt collection efforts, whether the creditor is secured or unsecured. If you file for bankruptcy after your property has already been repossessed, then the automatic stay prevents the creditor from proceeding with a civil lawsuit for any balance owing on the underlying contract.

 

How does the Arizona homestead exemption help me?

If you own a home and file for bankruptcy, then you can claim up to $150,000 in the home’s equity as exempt under Arizona’s homestead exemption. For purposes of this substantial exemption, a home includes a house, condominium, cooperative, mobile home, or mobile home and the land upon which it sits. You cannot split the exemption over two or more properties. Therefore, if you own more than one residence, the homestead exemption will only attach to one of those properties. A.R.S. § 33-1101.

 

How will a Chapter 7 discharge eliminate my debts?

In a Chapter 7 bankruptcy, the discharge of debts is the goal of every individual who files. The individual debtor keeps all property claimed as exempt, while the discharged debts are wiped out! So when you receive the court’s discharge order, you will have no personal liability, no obligation, to repay any discharged debts – you will have a fresh financial start. Be mindful, though, that some debts are non-dischargeable, such as domestic support obligations (child support and maintenance, etc.), student loans, certain tax liabilities, and more.

 

Can I continue to operate my business if I file a Chapter 11 bankruptcy?

Yes. When you file for Chapter 11 debt relief under the U.S. Bankruptcy Code, you will become the debtor in possession (DIP). You will retain possession and control of your business’ assets during the bankruptcy reorganization and restructuring of debts. The DIP continues to operate the business while paying creditors under a court-confirmed plan. You would remain a DIP until the case is either dismissed or converted to a Chapter 7. (Although an infrequent occurrence, a case trustee could be appointed to administer the Chapter 11 bankruptcy estate.)

 

Will the court take away all of my property if I file for Chapter 7 bankruptcy?

No. Under Arizona’s exemptions laws, you will keep most or all of your property with a Chapter 7 liquidation bankruptcy. When each item of your property is properly exempted under Schedule C of the petition, then that property is not available to creditors and the court will not take it away from you. Should you and your spouse file jointly, then many of the personal property exemptions are doubled in value.

 

When should an individual file for bankruptcy under Chapter 13?

When the standardized Means Test is applied, the individual will either be eligible to choose between filing under Chapter 7 or Chapter 13, or will be eligible to file only under Chapter 13. There are advantages to each chapter filing, though. A Chapter 7 liquidation allows the petitioner to keep exempt property and is reasonably quick, taking only a few months to discharge. With a Chapter 13 individual debt adjustment, the petitioner may keep exempt and non-exempt assets. Monthly payments are made to the case trustee under a court-approved three to five year repayment plan. The Chapter 13 discharge order follows completion of the plan.

 

Do I have to lose my job before I can file bankruptcy?

No, you do not need to be jobless to file for bankruptcy. We are more concerned with your ability to pay your existing debts with the resources that you have. When your financial obligations exceed your actual ability to pay, then bankruptcy is an option for you to consider. The purpose of bankruptcy is to give you a fresh financial start. That may involve eliminating some debts through discharge, and restructuring others to more manageable levels.

 

Will filing Chapter 7 bankruptcy stop foreclosure of my home?

The automatic stay in bankruptcy will stop the foreclosure process. For the mortgage company to continue a foreclosure, it must file a Motion to Lift the Automatic Stay requesting the bankruptcy court’s permission to do so. This will give you time to discuss your options with your bankruptcy lawyer. If you desire to stay in your home and continue paying on the mortgage, then you may enter into a reaffirmation agreement with the mortgage lender. If you do not want to stay in the home, then you may surrender the property back to the lender. When you surrender the property, your personal liability on the underlying promissory note is discharged.

 

Can filing for bankruptcy help me eliminate my medical bills?

Yes, your medical debts are dischargeable in bankruptcy under both Chapter 7 and Chapter 13. Like credit card debts, your unsecured medical debts have no collateral attached to secure payment of the obligation.

 

Does my spouse have to join me in filing for bankruptcy?

filing bankruptcy

No, if you choose to file for bankruptcy in Phoenix, then your spouse is not required to file for bankruptcy along with you. The decision to file for bankruptcy is one for each individual, whether married or unmarried. However, more often than not both spouses do file a joint voluntary petition because: 1) so many of their debts are shared marital obligations, and 2) the court’s filing fee is the same for one spouse as it is for both.

 

Will bankruptcy get me out of paying child support and alimony to my former spouse?

No, you cannot use federal bankruptcy law to avoid your legal obligation to support your child or former spouse. Both alimony and child support are nondischargeable domestic support obligations (DSOs) in bankruptcy. You will list any DSOs you have on your bankruptcy petition, but those debts will not be discharged in Chapter 7, 11, or 13. Furthermore, child support and spousal maintenance enforcement actions in state courts are not stopped by the bankruptcy automatic stay.

 

Do I have to file under Chapter 7 as an individual petitioner?

No. You have several options when seeking relief from individual debts under the U.S. Bankruptcy Code:

 

How does a bankruptcy discharge help me with my finances?

The bankruptcy discharge disconnects you, the debtor, from your legal obligation to pay the debt. A creditor cannot sue you on a debt that was discharged in bankruptcy because you no longer have any personal liability. The Chapter 7 or Chapter 13 bankruptcy judge issues a discharge order which prohibits any collection efforts on the discharged debts – permanently. Generally, the discharge is limited to those obligations that were listed in your bankruptcy schedules. However, it is important to note that not all debts are dischargeable. Domestic support obligations, taxes, student loans, and debts resulting from driving while intoxicated are all examples of nondischargeable debts in bankruptcy.

 

How do I pay for bankruptcy when I am already broke?

There are court filing fees, two required courses, and attorneys’ fees involved with any bankruptcy. At the Pew Law Center, PLLC, we understand that paying for the entire bankruptcy at once may be too burdensome for you. So, we offer very reasonable, manageable payment plans as part of our pre-bankruptcy planning service. When your account is fully paid, we move forward with your bankruptcy filing.

These are the current bankruptcy court filing fees:

Will filing for bankruptcy ruin my credit score forever?

No, bankruptcy will not be a permanent mark on your credit score. Filing for bankruptcy will definitely appear on your credit report for up to 10 years, but any negative impacts will diminish over time. If you work toward improving your credit worthiness immediately after your bankruptcy discharge, then in two or three years you should see noticeable improvements to your credit score.

 

Will filing for bankruptcy stop my creditors from suing me?

Yes, filing for bankruptcy invokes the automatic stay which stops almost all creditor lawsuits. If a creditor’s civil lawsuit against you is pending, then it is terminated when the bankruptcy is filed. Any post-petition collection on a judgment by a judgment-creditor also violates the automatic stay, with one important exception. If the civil action involves a domestic support obligation (DSO), such as spousal maintenance or child support, then a family law court case to establish, modify, or collect the support may continue and the resulting support judgment and order is enforceable during and after the bankruptcy.

 

Will a reaffirmation agreement allow me to keep my vehicle?

Yes, a voluntary reaffirmation agreement negotiated between you and your lender would allow you to keep your vehicle after the bankruptcy. Such an agreement is entered into after the bankruptcy is filed and is only available to reaffirm secured debts (auto loans, home mortgages, RV loans, etc.). The debtor reaffirms the obligation and agrees to continue making payments to the lender on a debt that, without such an agreement, would otherwise be discharged.

Can the Home Affordable Modification Program apply to my bankruptcy?

The Home Affordable Modification Program (HAMP) helps homeowners who are struggling to pay their mortgages and is intended to save homes from foreclosure by permanently reducing mortgage payments. HAMP is available to qualifying consumer debtors, even those who have filed for bankruptcy protection under Chapter 7 or Chapter 13.

 

What are the steps involved in a Chapter 7 bankruptcy?

The process involved in a Chapter 7 bankruptcy can be broken down into 10 basic steps:

  1. The pre-bankruptcy gathering of personal financial information and documentation, and preparation of the petition with all required schedules.
  2. The credit counseling course that must be completed before the bankruptcy is filed.
  3. The means testing requirement to determine Chapter 7 eligibility.
  4. The actual filing of the voluntary petition with the court clerk and the automatic stay that goes into effect immediately thereupon.
  5. The filing of creditors’ proofs of claims to any distributable portion of the bankruptcy estate.
  6. The mandatory § 341 meeting of creditors and petitioner’s testimony under oath before the case trustee.
  7. The administration of the bankruptcy by the case trustee.
  8. The required financial education course that must be completed before the court’s discharge order is issued.
  9. The petitioner’s decision to enter into any voluntary reaffirmation agreements that obligate the person after the bankruptcy is concluded.
  10. The court’s issue of the discharge order which is followed by case closure.

How are adversary proceedings used in a Chapter 11 bankruptcy?

Filing a complaint to initiate an adversary proceeding is done to resolve some contested matter within the bankruptcy case. The debtor in possession may initiate an adversary proceeding to:

•  Recover assets belonging to the Chapter 11 estate.

•  Avoid a preference.

•  Avoid a lien against estate property.

•  Avoid a fraudulent transfer of assets.

•  Avoid a post-petition transfer that should not occur.

Creditors may also initiate adversary proceedings to:

•  Validate a lien.

•  Prioritize a lien.

•  Revoke a Chapter 11 plan confirmation order.

•  Determine the dischargeability of a debt.

•  Subordinate some other creditor’s claim.

•  Seek an injunction to either stop an event or require an event.

 

What is a single asset real estate debtor in a Chapter 11 reorganization bankruptcy?

Under 11 U.S.C. § 101(51B), a single asset real estate (SARE) debtor is one whose property satisfies all of the following conditions:

•  The real property is a single property or project.

•  The asset is not residential property with less than four units.

•  The real property generates substantially all of the debtor’s gross income.

•  The debtor is not a family farmer.

•  The debtor’s business is restricted to operating this single asset along with incidental activities.

Examples of SARE debtors may include home builders and property developers, and landlords of commercial property and residential property with more than four units.

 

Who can file for bankruptcy under Chapter 11?

The following types of debtors may file for bankruptcy protection and debt relief under Chapter 11 (reorganization) of the U.S. Bankruptcy Code:

•  People in business.

•  Partnerships.

•  Corporations.

•  Sole proprietorships.

•  Individuals.

How do I know which division will handle my Arizona bankruptcy?

The U.S. Bankruptcy Court for the District of Arizona has three separate divisions. Your county of residence will determine the division that handles your Arizona bankruptcy. The Phoenix Division includes Maricopa, Gila, Navajo, Apache, Coconino, Yavapai, and Gila Counties. The Tucson Division includes Pima, Pinal, Graham, Greenlee, Cochise, and Santa Cruz Counties. And the Yuma Division includes Yuma, La Paz, and Mohave Counties.

 

What is a single asset real estate debtor in a Chapter 11 reorganization bankruptcy?

Under 11 U.S.C. § 101(51B), a single asset real estate (SARE) debtor is one whose property satisfies all of the following conditions:

•  The real property is a single property or project.

•  The asset is not residential property with less than four units.

•  The real property generates substantially all of the debtor’s gross income.

•  The debtor is not a family farmer.

•  The debtor’s business is restricted to operating this single asset along with incidental activities.

Examples of SARE debtors may include home builders and property developers, and landlords of commercial property and residential property with more than four units.

 

Can I get tax relief by filing for bankruptcy?

Under certain conditions, yes. Back taxes meeting specific qualifications may be discharged in bankruptcy so, for many individuals, filing for bankruptcy may be the best approach to dealing with massive back taxes. When more recent taxes are involved and cannot be discharged, Chapter 13 bankruptcy can still help prevent the IRS from levying on a bank account or garnishing wages. Filing for bankruptcy stops the IRS from further collection efforts and gives the petitioner three to five years to pay off taxes under an affordable court-approved repayment plan.

Is there such a thing as an Arizona bankruptcy code?

No, there is no Arizona bankruptcy code. Bankruptcy is exclusively a matter of federal law. The U.S. Bankruptcy Code can be found in Title 11 of the U.S. Code (11 U.S.C. § 101 et seq.).

 

What is the cram-down power in a Chapter 11 bankruptcy?

In a Chapter 11 bankruptcy, a reorganization plan must be approved by a majority of the creditors. If one or more classes of creditors reject the debtor’s proposed plan, then the debtor may proceed under the cram-down provision of the U.S. Bankruptcy Code. A cram-down allows the bankruptcy court to confirm the debtor’s proposed plan over and above the objections of creditors. So long as the court determines that the debtor’s plan is both fair and equitable, and does not discriminate against the dissenting class of creditors, then the court may exercise its cram-down power and confirm the plan.

Can a Chapter 13 bankruptcy help me reduce my mortgage debt?

Yes. In addition to delaying any foreclosure action against the property, filing for bankruptcy under Chapter 13 can help reduce your mortgage debt in at least two ways:

•  The repayment plan can cure past defaults and reinstate your mortgage. Of course, you’ll have to stay current with your mortgage payments from the time of filing and going forward to prevent a new default.

•  A second mortgage (or third mortgage) can be permanently eliminated, or stripped off, so that only the first primary mortgage remains to be paid.

 

Can my attorney withdraw from my case?

Under certain circumstances, yes. Maintaining an effective attorney-client relationship is a team responsibility, so it is incumbent on the client to cooperate with his or her lawyer to resolve the legal matters presented in the case. An attorney may withdraw representation if the client violates any of the following ongoing responsibilities:

1. The client must be truthful and honest in all communications with the lawyer.

2. The client must cooperate with the lawyer throughout the case.

3. The client must appear at all legal proceedings involved in the case, including the First Meeting of Creditors.

4. The client must pay the lawyer’s fees as agreed in the retainer agreement. 

Will a bankruptcy trustee be appointed to my bankruptcy case?

Yes, as soon as your petition for bankruptcy is filed, a case trustee will be assigned. The trustee is charged with protecting the creditors’ interests in the bankruptcy estate and administering the bankruptcy case as required by the U.S. Bankruptcy Code.

Do SCRA protections for military service members apply to bankruptcy proceedings?

Yes. If you are a service member in our military, then you should be aware of the protections provided by the Servicemembers’ Civil Relief Act (SCRA). The SCRA provides the following protections in civil proceedings, including those pending in bankruptcy court:

1. Protection from the entry of default judgments when the debtor had notice of the action.

2. Stayed civil proceedings when the debtor had notice of the action.

3. Stayed execution on judgments, garnishments, and attachments.

 

What is cross-collateralization in a secured loan?

When a cross-collateralization clause is part of a secured lending agreement with a credit union, the lender may retain title to the property even after it is fully paid for, so long as there is another outstanding loan with the same credit union. The property secured by one loan crosses over to secure any other loan with the same lending institution.

 

Find out for yourself how our experienced bankruptcy legal professional can assist you. Call the Pew Law Center at (480) 745-1770 to schedule your free consultation.
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