Chapter 7 is a liquidating bankruptcy and is the most common type of bankruptcy filed. A Chapter 7 bankruptcy will allow you to eliminate unsecured debts such as credit cards, medical bills, signature and personal loans, payday loans, and certain tax debts over three years old. Debts such as spousal maintenance, child support, newer tax debts, court fines & restitution, and student loans are not discharged in a Chapter 7 bankruptcy.
Am I Eligible to File A Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is means-tested. This means that your gross household income must generally be less than the median income for a household of your size to qualify for a Chapter 7. The character of your debts may also factor into the analysis as well. For example, if the majority of your debt is business-related/non-consumer, you may qualify for a Chapter 7 regardless of your income.
Will I Lose All of My Property?
Many individuals are worried that they will lose their home or car by filing a bankruptcy. This is not true. If done correctly, you should be able to file a bankruptcy and keep your home, vehicles, and other types of personal property. Some of the different types of property protected in bankruptcy include:
Retirement & Pension accounts
Furniture, appliances & household goods
Certain life insurance policies
Tools & equipment used in your business or trade
A list of exemptions available under Arizona law can be found at the following link:
What Types of Property Will I Lose?
An individual filing a Chapter 7 will turn over non-exempt assets in exchange for a discharge of their debts. Non-exempt assets are those assets not protected by a statutory exemption.
Let's assume your only asset is a pickup truck worth $6,000 and that there is no lien or loan, meaning you own it outright. If you file a Chapter 7 bankruptcy in Arizona, you can claim the motor vehicle exemption of $6,000 and protect it. This means you will keep your pickup truck and still receive a discharge of your debts.
Now, let's change the fact pattern a bit and assume that behind the pickup truck is a trailer and a boat. Let's also assume that there is no lien or loan on either the trailer or the boat meaning you own them outright. The boat and trailer are considered non-exempt assets in Arizona. In a Chapter 7 case, you would turn over the boat and trailer to the Chapter 7 Trustee. The Trustee would then liquidate the boat and trailer and divide the sale proceeds between your unsecured creditors on a pro-rata basis.
What if your vehicle is worth $30,000 but you owe $24,000? This means you can exempt or protect the $6,000 of equity in the vehicle. You keep the vehicle as long as you keep the payments current and will not lose it if you file a bankruptcy. What if your vehicle is worth $20,000 but you owe $30,000? Then there is no equity to exempt or protect. You keep the vehicle as long as you keep the payments to the lender current. You could also surrender the upside-down vehicle in a Chapter 7 bankruptcy and relieve yourself of any liability for a deficiency balance.
Now, no Chapter 7 case is as simple as the examples above. They are simply meant to provide a basic overview of how Chapter 7 works. Many individuals have to turn over something in Chapter 7. For example, tax refunds for the tax year in which your bankruptcy is filed, are typically turned over in Chapter 7 in Arizona. Why? Because Arizona does not have an exemption for tax refunds. Let's assume you file for bankruptcy in September. Since September is essentially 3/4 of the way through the year, you would turnover approximately 3/4 of your tax refund for that particular tax year to your bankruptcy trustee.
Other assets that may have to be turned over are collectibles, stock and investments accounts that are not part of a qualified retirement account, fractional ownership interests in business, vacant land or investment properties, cash and other funds on hand at the time of filing, personal injury proceeds not received prior to filing, mineral and gas rights or other royalties. This is not an exhaustive list and you should speak with an experienced attorney prior to filing bankruptcy to determine what assets are exempt and what options are available to protect assets that might otherwise be considered non-exempt.
If you are feeling the burden of overwhelming debt and need a fresh start, call Treguboff Law, PLC today for a free consultation. Take control and get back on the road to financial freedom.