Bankruptcy is a legal proceeding in which an individual or business may be able to discharge certain types of debt. All bankruptcy falls under federal law. A consumer bankruptcy is filed when an individual cannot pay back their debts incurred for personal needs. There are two types, Chapter 7 and Chapter 13.
Once the bankruptcy is complete, an individual is no longer liable for the debts discharged during the proceedings. The bankruptcy court issues an order releasing the individual from that debt. They then have a clean financial slate but a bankruptcy will remain on an individual’s credit report for up to 10 years.
A bankruptcy exemption permits a debtor to keep certain assets or property after the bankruptcy is filed. Bankruptcy exemptions are defined by statute. These exemptions cannot be seized or sold in order to satisfy the debts of the individual filing for bankruptcy.
Exemptions play important roles in both Chapter 7 and Chapter 13 bankruptcies. In a Chapter 7 bankruptcy, the exemptions assist in determining which property an individual will retain possession of after the bankruptcy discharge order is granted. Bankruptcy exempt properties are protected.
Chapter 13 bankruptcy exemptions assist an individual in determining how much they will have to pay their unsecured creditors. This can be the difference between getting a payment plan approved and not being approved for a Chapter 13 bankruptcy.
What is Chapter 7 Bankruptcy?
Chapter 7 Bankruptcy is also called a liquidation bankruptcy. It allows an individual to discharge all debts that can be legally discharged. To be eligible to file a Chapter 7 bankruptcy filing, an individual’s income must be equal to or below the median income in their state.
Every state has different income requirements. If the individual’s income exceeds the requirement, the court applies a “means test” based on the previous six months of income. If the individual has the means to repay their debts, they are not eligible to file for Chapter 7 bankruptcy.
Certain debts remain after a bankruptcy discharge, including:
- Required child support payments;
- Tax debt, of which some federal tax debt can be discharged if criteria are met;
- Debt created by fraud; and
- Student loan debt, unless a court determines there is undue hardship.
Once the bankruptcy process is finalized, creditors are no longer allowed to collect or attempt to collect on debts that were discharged.
What is Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy is known as the wage earner’s bankruptcy. It is a way for a debtor to restructure their debt and make affordable payments towards it. This option is usually exercised by those who have higher incomes and wish to keep their property. Certain debts may be eligible for discharge but others may require payment in full through a payment plan, usually taking three and five years.
A debtor is eligible for a Chapter 13 bankruptcy if they:
- Are an individual or married couple, including if they own an unincorporated business or are self-employed;
- Have total secured debts are equal to or less than $1,184,200;
- Have total secured debts are equal to or below $394,725;
- Have not had a bankruptcy petition dismissed within the last 180 days due to failure to comply with the court or failure to appear; and
- Receive credit counseling through an approved counselor within 180 days of filing their petition.
Bankruptcy requirements may change, so it is important to consult with an experienced bankruptcy attorney. Like a Chapter 7 bankruptcy, a Chapter 13 bankruptcy can affect your credit for up to ten years after filing. During the Chapter 13 bankruptcy payment plan process, the debtor must stick to a strict budget without lines of credit. Many debtors drop out of the payment plan.
Do All States Have the Same Bankruptcy Exemptions?
No, all states do not have the same bankruptcy exemptions. Federal laws permit each state to determine which of their assets a debtor may keep after filing for bankruptcy. Some states permit a debtor to choose between the federally-created exemptions or state-created exemptions. A state may also limit a debtor to only the state-created exemptions.
A debtor may only use exceptions from one state, either the federal or the state statute. Additionally, if a state provides more than one exemption system or statute, a debtor must choose the exemptions from only one statute.
What Are the Bankruptcy Exemptions in Arizona?
Residents of Arizona are not permitted to use the federal bankruptcy exemptions. They must file exemptions under Arizona state bankruptcy laws. Exemptions available in Arizona are discussed below. Some of the amounts may increase for married couples filing bankruptcy together.
Arizona bankruptcy exemptions include the following categories and restrictions:
- A homestead, or equity in a dwelling used as a residence:
- Up to $150,000;
- An unlimited area of property, including mobile homes; and
- If a homestead exemption is not claimed, a rent and/or security deposit of up to $2,000;
- Equity in an automobile:
- Up to $6,000 in value of one or more motor vehicles; and
- Up to $12,000 in value of one of more motor vehicles if the individual is disabled or elderly;
- Personal property:
- Food and provisions including fuel for up to 6 months;
- Household goods and/or furnishings, including electronics and appliances up to $6,000;
- Clothing and apparel up to $500;
- Music instruments up to $400;
- Horses, cows, poultry, and domestic pets up to $800;
- Engagement and/or wedding rings up to $2,000;
- Library materials including books, manuals, published materials, and/or personal documents up to $250;
- 1 watch up to $150;
- Any prosthesis, including a wheelchair; and
- 1 computer, 1 typewriter, 1 sewing machine, 1 bicycle, a family bible, a lot in any burial ground, and/or 1 shotgun, 1 rifle, or 1 pistol, up to a total of $1,000;
- 25% of any disposable income;
- $300 of bank deposits;
- Tools of the individual’s trade:
- Any tools of the trade up to $5,000;
- Farm equipment, machinery, and/or animals up to $2,500;
- Uniforms, arms, and/or accoutrements as required by law;
- Teaching or instructing materials for a teacher;
- Equipment for firefighting;
- Property damage or fire insurance claim benefits for any exempt property;
- Any payments to a beneficiary of a health, disability or accident insurance policy;
- The cash surrender value of life insurance held for more than 2 years;
- Life insurance proceeds up to $20,000;
- Any fraternal benefit society benefits;
- Retirement and pension:
- Benefits from ERISA-qualified retirement plans, which includes deferred compensation plans;
- IRAs and retirement accounts exempt under the Internal Revenue Code;
- State and/or public employee pensions plans and retirement benefits; and
- Federal employee retirement benefits;
- Public benefits:
- Unemployment benefits;
- Workers’ compensation;
- Welfare benefits;
- Social security benefits; and
- Veterans benefits;
- Child support and alimony:
- All monies paid pursuant to a court order;
- Other items and/or funds:
- Any interest in a college savings plan.
What Types of Legal Considerations are Involved with Arizona Bankruptcy Exemptions?
Bankruptcy can have lasting consequences and remain on an individual’s credit report for many years. It should be used as a last resort during times of extreme financial hardship. An individual should consider it carefully and consult with an attorney prior to filing.
It is also important to remember that when filing for bankruptcy, an individual’s property may be confiscated in order to satisfy debts. Although there are exemptions and individuals are permitted to keep certain properties or personal items, a large majority of their personal property will likely be used to satisfy their debts.
Do I Need an Arizona Bankruptcy Lawyer?
Bankruptcy is a very complicated process and can be confusing to those without expertise and/or experience. It is important to have an Arizona bankruptcy lawyer helping you along the way. There is a possibility that some of your debts may be discharged or forgiven. A bankruptcy attorney can ensure your rights are protected and help you obtain the best outcome for your case.
An attorney can assist you with all aspects of a bankruptcy case. They can review your case and assets and determine what may be available for exemptions. If necessary, they can also help you file the proper paperwork, make sure deadlines are met, and represent you during any court proceedings.