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BANKRUPTCY exemptions

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 (personal reorganization).

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

  • Student loans

  • Alimony and child support (domestic support obligations)

  • Debts obtained through fraud, false pretenses or false representation

  • 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 retirement accounts.

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 discharged debts.

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 efforts.

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 11

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.