The Bankruptcy Code lets you keep certain “exempt”
property. These exemptions may apply to assets such as your home, vehicle,
household goods and furnishings and retirement accounts. The value of property
that can be claimed as exempt varies from state to state.
For example, in Arizona, you (or you and your spouse) can exempt
up to $150,000 in equity in your home. This is known as a “homestead exemption.”
You may also exempt up to $6,000 in the fair market value (FMV) in one vehicle;
$6,000 in the FMV of household furniture and appliances; up to $500 FMV in
clothing; and up to $2,000 FMV in engagement and wedding rings. Except for the
$150,000 homestead exemption, these exemptions are doubled if you are married.
Most retirement accounts are exempt from bankruptcy
in Arizona, including Individual Retirement Accounts (IRAs), ERISA qualified
benefits, and pensions. Life insurance policies are also generally exempt.
Other exempt assets generally include child support
and alimony that are necessary for the debtor’s support.
Bankruptcy: An Overview
In Arizona and all other states, an individual or business
can file for bankruptcy protection with the objective of
having their debts discharged.
Bankruptcy can be filed under various chapters of the U.S.
Bankruptcy Code. For individuals and couples, the most common forms of
bankruptcy are Chapter 7 (a liquidation or “straight bankruptcy”) and Chapter 13
A bankruptcy discharge releases you from personal liability
for certain types of debts. While the debts that are excepted from discharge
vary from chapter to chapter, here is a list of debts that are generally not
dischargeable in bankruptcy:
Taxes and tax liens
Alimony and child support (domestic support obligations)
Debts obtained through fraud, false pretenses or false
Debts you failed to schedule in time to allow creditors to
file proofs of claim
Debts for willful and malicious injury
Government fines or penalties
How Bankruptcy Works
In general, a Chapter 7 or Chapter 13 case begins with your
filing of a petition with the Bankruptcy Court. In addition to your petition,
you must file schedules of assets and liabilities, a schedule of current income
and expenditures, a statement of financial affairs, and a schedule of executory
contracts and unexpired leases.
If you are an individual debtor with primarily consumer
debts, you must file (a) a certificate of credit counseling; (b) evidence of
payment from employers, if any, received 60 days before filing; (c) a statement
of monthly net income and any anticipated increase in income or expenses after
filing; and (d) a record of any interest you have in federal or state qualified
education or tuition accounts.
Chapter 7 Is the Most Common Form of Bankruptcy
In a Chapter 7 bankruptcy, the bankruptcy trustee gathers
and sells your non-exempt assets and uses the proceeds to pay creditors. The
Bankruptcy Code lets you keep certain “exempt” property. These exemptions may
apply to assets such as your home, vehicle, household goods and furnishings and
Eligibility. One of the primary purposes of
bankruptcy is to discharge certain debts to give an individual debtor a “fresh
start”; when your bankruptcy is finalized, you are no longer responsible for
In a Chapter 7 case, a discharge is available only to
individual debtors. A partnership or corporation that files for Chapter 7
bankruptcy is dissolved.
Protection. Filing a petition under Chapter 7 stops
most collection actions against you and your property through the “automatic
stay.” As long as the automatic stay is in effect, creditors generally may not
initiate or continue lawsuits, wage garnishments, or even telephone calls
demanding payments. The bankruptcy clerk gives notice of your bankruptcy case to
all creditors whose names and addresses you provide.
Between 20 and 40 days after the petition is filed, the
case trustee will hold a meeting of creditors. You must attend the meeting and
answer questions regarding your financial affairs and property.
After a Chapter 7 bankruptcy is final, it stays on your
credit report for seven to 10 years from the date of filing the petition. The existence
of the bankruptcy on your credit record may make credit less available and/or
terms less favorable (although unpaid debt can have the same effect).
Chapter 13 Is a Better Choice for Many Debtors
Under Chapter 13 (also called a “wage earner’s plan”), you
propose a plan to pay your creditors over a three- to five-year period. During
that time the law forbids creditors from starting or continuing collection
While your Chapter 13 case is pending, you are not
permitted to obtain additional credit without the Bankruptcy Court’s permission.
Eligibility. Any individual, even if self-employed
or operating an unincorporated business, is eligible for Chapter 13 relief as
long as their debts fall under certain permitted limits that are periodically
adjusted. A corporation or
partnership may not be a Chapter 13 debtor.
Advantages. Chapter 13 offers individuals a number
of advantages over a Chapter 7 liquidation. Perhaps most significantly, Chapter
13 allows you an opportunity to save your home from foreclosure. By filing under
this chapter, you can stop foreclosure proceedings and cure delinquent mortgage
payments over time. You must continue to make the regular monthly mortgage
payments that come due during the Chapter 13 plan. A Chapter 13 acts like a
consolidation loan under which you make the plan payments to a Chapter 13
trustee who then distributes payments to creditors; you have no direct contact
with creditors while under Chapter 13 protection. Finally, a Chapter 13 may
allow you to strip off a completely unsecured second mortgage on your residence
or to “cram down” the amount owing on a vehicle or an investment property to its
fair market value.
Businesses Can File for Bankruptcy under Chapters 7 and
When a business is unable to service its debts, it can file
for protection under either Chapter 7 or Chapter 11.
In a Chapter 7 the business ceases operations. A
court-appointed trustee sells all of the business’s assets and distributes the
proceeds to its creditors. In a Chapter 11, the business owner remains in
control as a “debtor in possession,” subject to the oversight and jurisdiction
of the court; in certain cases, the bankruptcy trustee temporarily takes control
of the business.
A Chapter 11 business reorganization can be much more
complicated and is not discussed in detail here.