Should You File Bankruptcy Under Chapter 7 or Chapter 13?
First of all, qualifying for Chapter 7 requires means testing. The court process involves the sale of non-exempt property, if there is any, with the sale proceeds distributed to creditors according to their lawful priority. The debtor keeps exempt property and receives a discharge of unsecured non-priority debts. Chapter 7 petitions are almost always voluntary, filed by the debtors themselves. Rarely do creditors file an involuntary petition pushing the debtor into Chapter 7, but it could happen. Yes, we help clients through involuntary bankruptcy.
To qualify for Chapter 13, the debtor must be earning wages and have disposable income. As the debtor, you would be making monthly or bi-weekly payments in a plan to pay creditors over three or five years. A big advantage of Chapter 13 is the debtor’s right to keep both exempt and non-exempt property. The court enters a discharge order when the plan is completed. More about these two chapters later.
What Is Case Conversion?
Sometimes an ongoing Chapter 13 case is converted to Chapter 7 for cause. This is because something important changed after the Chapter 13 petition was filed. For instance, the petitioner became disabled, unemployed, or divorced. Case conversion from Chapter 7 to Chapter 13 is possible, too. Often it’s because the debtor hired into a better job and now has money to put toward a Chapter 13 plan. Don’t worry. Your attorney will handle the conversion process.
Hire a Competent Bankruptcy Lawyer
Succeeding in bankruptcy is difficult without attorney representation. That is why we encourage you to hire a competent lawyer with federal bankruptcy experience.
Going through Chapter 7’s Means Test or Chapter 13’s plan proceedings, interpreting applicable state and federal statutes, accurately completing detailed bankruptcy forms, complying with all requirements in the time allowed, these are challenging tasks. The Bankruptcy Code is complex and proceedings are full of pitfalls for the unwary. Don’t make matters worse by relying on bankruptcy myths and misconceptions.
Another person’s bankruptcy experience will not be the same as yours. One mistake could get your case dismissed. Dismissal with prejudice prevents refiling until the penalty time-bar is lifted. Although dismissal without prejudice over some technicality won’t involve a penalty, it does mean starting over. When you need immediate protection from bill collectors and creditors, further delay can worsen the situation and increase your distress.
Who Can File for Personal Bankruptcy in Arizona?
Personal bankruptcy is for individuals at least 18 years of age with mostly consumer debts. Consumer debts are obligations incurred primarily for personal, family, or household purposes. (For example, buying a fuel-efficient family car on installments.) 11 USC § 101(8). Personal bankruptcy is not for corporations, which is why these are also called “consumer bankruptcies.”
The right to seek debt relief through bankruptcy belongs to the individual. Married couples are not required to file jointly, but they can and often do. Depending upon the circumstances, there may be strategic reasons for filing jointly or separately. For instance, many property exemptions are doubled when spouses file jointly.
Each spouse has the right to request bankruptcy relief with or without the other spouse’s consent or agreement to join. One spouse may choose to file, but not the other. Another option is for each spouse to file a separate bankruptcy petition.
We know every client’s situation is unique. Therefore, it’s important to have a legal strategy that offers the best result given Arizona’s property exemptions and other laws.
Understanding Bankruptcy Eligibility
There are eligibility requirements with every bankruptcy. Means testing with Chapter 7 involves comparing the debtor’s income with the state median income for a family of the same size. The Chapter 13 petitioner cannot have unsecured debts above $419,275 or secured debts over $1,257,850 (amounts are periodically adjusted, most recently in 2019).
If ineligible for Chapter 7 relief, then the typical choice is a voluntary Chapter 13. There are also eligibility timelines for how often an individual can file bankruptcy. Despite a waiting period between discharges, exigent circumstances may justify filing sooner. Talk to a lawyer.
How to File an Emergency Bankruptcy
We handle emergency bankruptcy filings for our clients. Call us today at 602-562-5000 or send an email to firstname.lastname@example.org. Filing an emergency petition stops creditors. Don’t wait for a creditor to file a lawsuit or obtain a judgment. Don’t wait for your property to be repossessed or wages to be garnished. Don’t wait for the mortgage company to foreclose on your home. With an urgent situation, take action to protect your rights and interests.
An experienced bankruptcy lawyer works out a legal strategy with the client long before the petition, schedules, and statements get filed with the court. With an emergency bankruptcy filing to stop a lawsuit, schedules must be submitted within the next 14 days (unless the court grants more time). Time is of the essence with bankruptcy. A missed deadline could cause dismissal and you don’t want that.
Automatic Stay Provides Immediate Debt Relief
Your debt relief begins immediately with the automatic stay, or injunction. The stay goes into effect the instant your petition is filed with the Clerk of the U.S. Bankruptcy Court. This protects your interests and preserves the bankruptcy estate under the court’s jurisdiction. Violating the automatic stay can result in serious penalties. For example, a credit card company that wrongfully demands payment from you instead of filing a proof of claim can be sanctioned by the court.
The automatic stay is a powerful tool. No creditor can take action against you or your property. What if the bank plans to repossess your car? The bank has no option but to request court permission by filing a motion to set aside the automatic stay. Only if permission is granted can the bank repo your car. Creditor self-help is not allowed! As a consumer, you could also sue a bill collector for damages by proving a violation of the Fair Debt Collection Practices Act.
What Can Bankruptcy Do for You?
Bankruptcy protects you, the debtor, but it also ensures a fair distribution to creditors in the event there is one. If you cannot pay your bills as they become due, then you are insolvent – a bankruptcy discharge is the solution. Get a clear picture of what bankruptcy can do for you by requesting Scott David Stewart’s Arizona Personal Bankruptcy Handbook, The Truth About Keeping Assets and Clearing Away Debts. Contact us today so we can get this handbook to you.
Personal Bankruptcy Path to a Fresh Start
Now let’s take a closer look at the two paths to discharge.
Chapter 7 Liquidation
In filing a Chapter 7 liquidation bankruptcy, your property interests get lumped into the bankruptcy estate. After secured creditors are dealt with, the first thing to come out of the bankruptcy estate is your exempt property which you keep. The Chapter 7 trustee then sells, or liquidates, your remaining non-exempt property. The sale proceeds, less costs of administration, are divided among your creditors according to their priority.
Most Chapter 7s are “No Asset” cases that go directly to discharge. That’s because the trustee administering the case has determined – based upon the factual information in your petition, schedules, and statements – that you do not own any non-exempt assets worth selling. Therefore, there will be no distribution to creditors. With a Chapter 7 “Asset Case,” you still keep exempt property, but the trustee sells your non-exempt assets of value. The Chapter 7 discharge follows soon after.
Chapter 13 Wage Earner Reorganization
Chapter 13 is the ideal mechanism for those who own substantial non-exempt assets and want to keep them, such as a vacation home in Sedona or valuable art collection. The debtor in every Chapter 13 case plans regular payments to creditors over a period of three or five years. After the court confirms your plan, the trustee administering the case receives your payments and makes distributions to creditors. When your plan is complete, the court orders the Chapter 13 discharge.
The judge’s discharge order is a release of personal liability on all discharged debts – there is no legal duty to pay them. This is your fresh start. Discharged debts are permanently forgiven.
What Are Non-Dischargeable Debts?
Be mindful, not all debts can be discharged. The Bankruptcy Code gives special priority to domestic support obligations, certain recent taxes, criminal restitution and DUI fines, government penalties or fines, debts that went unreported on bankruptcy schedules, student loans, and a few others. There are exceptions to non-dischargeability, though, such as the undue hardship exception.
Even if you have a non-dischargeable debt, bankruptcy gives you breathing room. For example, a Chapter 13 plan will take into consideration your income, living expenses, and ability to pay. And by discharging old medical bills in Chapter 7, as a parent you will be in a much better position to keep up with child support. Always consult a lawyer about your specific situation, types of debts, and possible exceptions.
Mandatory Bankruptcy Programs
You must participate in two programs as part of your bankruptcy. The first is pre-petition Credit Counseling. This session must be completed within six months (180 days) before filing the petition or the case will be dismissed (there are exceptions, as with a deployed service member).
The second program is the post-petition Debtor Education Course. This course must be completed before the judge can order a discharge. Course information is available through the Clerk of the Bankruptcy Court. Only use an approved agency and file your certificates of completion with the court.
Divorce and Bankruptcy
Are you wondering, “What happens to me if my spouse is bankrupt?” or “Should I file for bankruptcy after divorce or before?” Divorce is not easy. When bankruptcy enters the picture – before, during, or after divorce – the situation requires careful planning with a bankruptcy lawyer who has family law experience.
Bankruptcy Followed By Divorce
For some spouses, the ideal time to file a Chapter 7 petition is before divorce proceedings are initiated. For example, a young working couple with no children and no need for family support orders may want to obtain a Chapter 7 discharge before filing for divorce.
If the divorce is filed soon after the bankruptcy discharge, then the parties’ debts, if any, should be minimal. Remaining debts and assets (including exempt property in bankruptcy) are divided in the property settlement. With the divorce decree, both parties are financially independent of each other.
Bankruptcy During Divorce
For other couples, the best time to file Chapter 7 is after the divorce is commenced, but before a property settlement is finalized by the family court. Once separated, most spouses experience a decrease in household income with no corresponding decrease in expenses to offset new living arrangements. And with minor children, those expenses can be substantial.
Divorce Followed By Bankruptcy
With debts already divided by divorce decree, either party can seek a discharge of through Chapter 7. Understand that a Domestic Support Obligation (DSO) in the form of child support or spousal maintenance is non-dischargeable. Although filing Chapter 7 will not give the obligor a way to escape a support order, bankruptcy may help with support arrearages.
Trust 602 Law Group to assist with every phase of your Chapter 7 or Chapter 13 case – before, during, or after divorce. We can help you get your life back on track.
You Can File Bankruptcy After Loan Consolidation
Did you consolidate debts into a single loan payment? You can still file for bankruptcy relief. Debt consolidation probably seemed like a reasonable non-bankruptcy alternative at the time. However, consolidation does not work for a lot of people – they are still swimming in debt. Many return to bankruptcy as a feasible option, but only after paying the debt relief company a big fee and suffering even more stress. Discuss the pros and cons of debt consolidation with a bankruptcy lawyer when you meet.
There’s one more thing we should talk about. You may have feelings of shame, guilt, or embarrassment about your financial situation when you really shouldn’t. Here’s why.
Is Bankruptcy Right for You?
Debt forgiveness through bankruptcy is founded in legal, moral, and biblical principles. The legal basis for bankruptcy is the U.S. Constitution, Article I, Section 8:
The Congress shall have Power … To establish … uniform Laws on the subject of Bankruptcies throughout the United States;
This constitutional basis for bankruptcy is rooted in the Old Testament:
At the end of every seventh year, cancel all debts. This is the procedure: Everyone who has lent money to a neighbor writes it off. You must not press your neighbor or his brother for payment: All-Debts-Are-Canceled — GOD says so.
Deuteronomy 15:1-2 MSG
The Book of Proverbs also advises us:
The poor are always ruled over by the rich, so don’t borrow and put yourself under their power.
Proverbs 22:7 MSG
Legalistically, when you borrow money you must pay it back as agreed. Morally, when you cannot repay the debt as agreed, you should be met with mercy. The creditor who forgives your debt is blessed by God for this merciful act. The process of debt forgiveness has been with us for a very long time. Erasing debts is the right thing to do when the borrower is unable to repay.
Are you ready to talk to a professional? Contact 602 Law Group. We never pressure anyone into bankruptcy. The decision is yours to make, but make it an informed one.
Before you go, check out our FAQs. Get direct answers to questions about state and federal exemptions, how long you have to reside in Arizona, where to file, how to complete the petition, and much more.