what is bankruptcy?
Essentially, “bankruptcy” is a legal declaration of an individual’s or an organization’s inability to pay its creditors. Debtors (“borrowers”) file bankruptcy in order to obtain protection from creditors by discharging all or part of their debts.
How or why an individual actually got into financial difficulty is really irrelevant. No one goes looking for financial trouble, and usually the factors leading up to a bankruptcy filing are far beyond the control of the individuals involved. Bankruptcy may result from a business failure, expenses related to a serious health matter, a divorce, a downturn in the economy, a job loss, or any of a number of other causes. The point is that filing bankruptcy is not a cause for shame or embarrassment, and it certainly is not a reflection on the character or abilities of the individuals involved.
Bankruptcy law has been around (in various forms) for centuries. America’s Founding Fathers considered it important enough to include in the U.S. Constitution. Today’s bankruptcy laws have been put in place to protect the rights of both borrowers and lenders, while at the same time preventing situations where individuals might spend the rest of their lives attempting to repay mountains of debt.
In short, bankruptcy is designed to provide you and your family with a fresh start without ignoring your obligation to make a reasonable effort to repay your creditors.
what are the types of bankruptcy?
While there are actually six types of bankruptcy under the Bankruptcy Code, most individuals and families filing bankruptcy will only be concerned with two of them:
The simplest form of bankruptcy, involves the liquidation (i.e., selling) of the individual’s assets (except those assets that are protected by law) in order to repay some or all of the debt. Chapter 7 is sometimes referred to as “straight bankruptcy.” In Arizona, protected assets, known as “exempt property,” include, with certain limitations, equity in a home, car, tools needed for work, and some personal effects. Here's a current list of bankruptcy exempt property in Arizona.
Chapter 13 Bankruptcy (also known as the "Wage Earner Plan")
Allows individual debtors who have regular sources of income to establish a plan to repay some or all of their debts over a period of three to five years. In many cases, Chapter 13 will allow individuals to keep more assets than they could in a Chapter 7. In other cases, Chapter 13 can reduce car payments and eliminate certain liens on homes.
Who can file bankruptcy?
Almost anyone can file for bankruptcy. People often talk about making too much money to file, or making too little to file, or that they don’t have enough debt, or that they have too much debt to file. As with most rumors, there is a little bit of truth in each of those statements, but only in limited circumstances, which makes statements like that very misleading.
What chapter is right for me?
Choosing the right chapter is a critical decision in the process and is something you and your attorney should discuss. Oftentimes people see Chapter 7 as the preferred way to go, and only look to Chapter 13 “if they have to.” Although it’s true that Chapter 13 requires a payment-plan to repay some debt, it is sometimes the best choice, even if you do “qualify” for Chapter 7—the reason being that Chapter 13 is very often more flexible and more powerful than Chapter 7.
If you're going through a divorce, we have information just for you when that relates to divorce & bankruptcy.
What is secured vs unsecured debt?
If you are considering filing for bankruptcy, it’s important to look at all of your debts and figure out which are secured debts and which are unsecured debts. Secured debts are linked to some type of collateral such as a house or car. Unsecured debts are not linked to any type of collateral, such as credit card debt.
Both kinds are "dischargeable" in bankruptcy, so why does it matter? It only matters in that, if you want to keep secured collateral (like your house and your car), then you will have to "keep" those debts too (although sometimes the amount owed can be reduced).
What types of debts can be discharged?
Almost all debts are discharged, but there are exceptions. The big ones being:
Can I keep my home? Car? Retirement account? Jewelry?
In the majority of cases, you get to keep everything that you want to keep, but there are exceptions.
The court determines what you can keep and what you cannot keep based on the value of the item. If the item is worth more than the applicable “exemption,” then you could lose that item in the bankruptcy case. The major exemptions, for most Arizona cases are:
Personal Property (these all double if married):
Complete List: Arizon Excemptions (PDF)
How long will a bankruptcy stay on my record?
Your bankruptcy filing is a public record, so it’s “out there” forever. But, does that really matter? Probably not. Usually when people ask this question, they really want to know how long it will show up on their credit report—currently the answer is 10 years. However, in our experience most creditors don’t seem to care about that after about 2 years. In fact, getting a new loan after bankruptcy is pretty easy for most people (for example, a lot of people get a car loan only a few weeks after filing).
Can creditors still contact me after I file for bankruptcy?
By law, creditors must stop contacting you immediately after filing for bankruptcy. If creditors continue to contact you after filing, the bankruptcy court can “sanction” them—which means the judge penalize them by ordering them to pay you some money.
Can Student Loans be discharged in bankruptcy?
The majority of people will not be able to discharge any student loan debt in Chapter 7 or 13 bankruptcy unless you can prove it would cause an undue hardship to you. The definition of “undue hardship” is ever-changing, but as it stands today, the burden is very, very high. Even though you probably cannot eliminate your student loan in bankruptcy, there are other options and sometimes bankruptcy can help to facilitate that process. Give us a call and we can talk about it.
Here's some additional information about Student Loan Bankruptcy
Will bankruptcy stop a foreclosure?
Bankruptcy may stop the immediate sale or foreclosure of your home.
In almost every situation, bankruptcy will stop a pending foreclosure, but depending on the circumstances, the foreclosure might start back up again in a month or two. Every case is a little different.
Will bankruptcy stop a wage garnishment?
Filing for bankruptcy will immediately stop the garnishment of your paycheck, unless the garnishment is for child support , alimony, spousal maintenance, or other domestic support obligation—in those cases the garnishment can continue depending on which chapter you file under, and whether the garnishment is for old past-due support payments or current payments.
Can taxes be discharged in bankruptcy?
You can discharge income tax debt under certain circumstances.
Yes, sometimes you can! This can be one of the most complicated areas of federal law, but taxes can be discharged if they meet certain criteria. If the taxes meet the following criteria, then there’s a good chance they can be discharged, but more analysis is needed:
Here's some additional information about Tax Debt Bankruptcy
Of course, it is critical that you have the right advice and the right resources BEFORE you file for bankruptcy in order to help you select the appropriate form of bankruptcy for your situation and to help you best protect your assets and enable your family to begin returning to financial well being.
Deciding if and when to file bankruptcy is one of the most challenging financial decisions that some people will face in a lifetime.
As a simple first step in addressing that question, take 2 minutes and fill out a simple questionnaire. (it's anonymous, we don't even ask for name or email)
No, thanks. I'll figure it out on my own