Clint W. Smith, P. C.

What Is Bankruptcy?

Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.

What Can Bankruptcy Do for Me?

Bankruptcy may make it possible for you to:

• Eliminate the legal obligation to pay most or all of your debts. This is called a “discharge” of debts. It is designed to give you a fresh financial start.
• Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)
• Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
• Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
• Restore or prevent termination of utility service.
• Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.

What Bankruptcy Cannot Do

Bankruptcy cannot, however, cure every financial problem. Nor is it the right step for every individual. In bankruptcy, it is usually not possible to:

• Eliminate certain rights of “secured” creditors. A “secured” creditor has taken a mortgage or other lien on property as collateral for the loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money if your property is taken. Nevertheless, you generally cannot keep the collateral unless you continue to pay the debt.
• Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, certain other debts related to divorce, most student loans, court restitution orders, criminal fines, and some taxes.
• Protect co-signers on your debts. When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the co-signer may still have to repay all or part of the loan.
• Discharge debts that arise after bankruptcy has been filed.

What Different Types of Bankruptcy Cases Should I Consider?

There are four types of bankruptcy cases provided under the law:

• Chapter 7 is known as “straight” bankruptcy or “liquidation.” It requires a debtor to give up property, which exceeds certain limits called “exemptions,” so the property can be sold to pay creditors.
• Chapter 11, known as “reorganization,” is used by businesses and a few individual debtors whose debts are very large. Our office does file Chapter 11.
• Chapter 12 is reserved for family farmers and fishermen. Our office does not file Chapter 12.
• Chapter 13 is called “debt adjustment.” It requires a debtor to file a plan to pay debts (or parts of debts) from current income.

Most people filing bankruptcy will want to file under either chapter 7 or chapter 13. Either type of case may be filed individually or by a married couple filing jointly. OUR OFFICE ONLY FILES CHAPTER 13 OR CHAPTER 7 CASES. If your income is above the median income for a family the size of your household in your state, you may have to file a chapter 13 case. A higher-income consumer must fill out “means test” forms requiring detailed information about income and expenses. If, under standards in the law, the consumer is found to have a certain amount left over that could be paid to unsecured creditors, the bankruptcy court may decide that the consumer cannot file a chapter 7 case, unless there are special extenuating circumstances.

What Does It Cost to File for Bankruptcy?

The Bankruptcy Court filing fees are $299 to file for bankruptcy under chapter 7 and $274 to file for bankruptcy under chapter 13, whether for one person or a married couple. The court may allow you to pay this filing fee in installments if you cannot pay all at once. If you are unable to pay the filing fee in installments, you may request that the court waive the filing fee. If you hire an attorney you will also have to pay the agreed attorney's fees.

What Must I Do Before Filing Bankruptcy?

You must receive budget and credit counseling from an approved credit counseling agency within 180 days before your bankruptcy case is filed. The agency will review possible options available to you in credit counseling and assist you in reviewing your budget. Different agencies provide the counseling in-person, by telephone, or over the Internet. If you decide to file bankruptcy, you will need all the forms and copies of documents requested from our office, and you will need to obtain a certificate from a credit counseling agency stating that you received the counseling. Always be very careful when choosing the agency required for counseling. Some agencies are not certified in Arizona. If you decide to go ahead with bankruptcy, you should be very careful in choosing an agency for the required counseling. It is extremely difficult to sort out the good counseling agencies from the bad ones. Many agencies are legitimate, but many are simply rip-offs. Being an “approved” agency for bankruptcy counseling is no guarantee that the agency is good. It is also important to understand that even good agencies won't be able to help you much if you're already too deep in financial trouble. Some of the approved agencies offer debt management plans (also called DMPs). This is a plan to repay some or all of your debts in which you send the counseling agency a monthly payment that it then distributes to your creditors. Debt management plans can be helpful for some consumers. For others, they are a terrible idea. The problem is that many counseling agencies will pressure you into a debt management plan as a way of avoiding bankruptcy whether it makes sense for you or not. It is important to keep in mind these important points:

• Bankruptcy is not necessarily to be avoided at all costs. In many cases, bankruptcy may actually be the best choice for you.
• If you sign up for a debt management plan that you can't afford, you may end up in bankruptcy anyway (and a copy of the plan must also be filed in your bankruptcy case).
• There are approved agencies for bankruptcy counseling that do not offer debt management plans.

It is usually a good idea for you to meet with an attorney before you receive the required credit counseling. Unlike a credit counselor, who cannot give legal advice, an attorney can provide counseling on whether bankruptcy is the best option. If bankruptcy is not the right answer for you, a good attorney will offer a range of other suggestions. The attorney can also provide you with a list of approved credit counseling agencies, or you can check the website for the United States Trustee Program office at www.usdoj.gov/ust.

What Property Can I Keep?

In a chapter 7 case, you can keep all property which the law says is “exempt” from the claims of creditors. In Arizona, we use exemptions under state law. These exemptions include:

• $150,000 in equity in your home;
• $5,000 in equity in your vehicle;
• $4,000 in household goods;
• $2,500 in things you need for your job (tools, etc.);
• $150.00 of cash on hand or in a bank account. PLEASE NOTE THAT ON THE DATE OF FILING A CHAPTER 7, IF YOU HAVE MORE THAN $150.00 IN YOUR BANK ACCOUNTS ON THAT FILING DATE, YOU WILL HAVE TO PAY BACK THE TRUSTEE ANY AMOUNT OVER $150.00. THERE IS NO EXCEPTION TO THIS RULE. IF YOU HAVE CHECKS THAT HAVE NOT CLEARED ON THE DATE OF FILING, YOU NEED TO LET YOUR ATTORNEY KNOW THIS. YOUR CASE SHOULD NOT BE FILED UNTIL THOSE CHECKS HAVE CLEARED. IF YOU HAVE A DIRECT DEPOSIT PAYCHECK THAT WILL BE GOING INTO YOUR ACCOUNT ON THE DATE OF FILING, YOU SHOULD NOT FILE ON THAT DATE.
• All of your retirement money (except for funds contributed within 120 days prior to filing for bankruptcy);
• Your right to receive certain benefits such as Social Security, unemployment compensation, veteran's benefits, public assistance, and pensions—regardless of the amount. The amounts of the exemptions (except for the home) are doubled when a married couple files together. In determining whether property is exempt, you must keep a few things in mind. The value of property is not the amount you paid for it, but what it is worth now. Especially for furniture and cars, this may be a lot less than what you paid or what it would cost to buy a replacement. You also only need to look at your equity in property. This means that you count your exemptions against the full value minus any money that you owe on mortgages or liens. For example, if you own a $50,000 house with a $40,000 mortgage, you count your exemptions against the $10,000, which is your equity if you sell it. While your exemptions allow you to keep property even in a chapter 7 case, your exemptions do not make any difference to the right of a mortgage holder or car loan creditor to take the property to cover the debt if you are behind. In a chapter 13 case, you can keep all of your property if your plan meets the requirements of the bankruptcy law. In most cases you will have to pay the mortgages or liens as you would if you didn't file bankruptcy.

What Will Happen to My Home and Car If I File Bankruptcy?

In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt. Even if your property is not fully exempt, you will be able to keep it, if you pay its nonexempt value to creditors in chapter 13. However, some of your creditors may have a “security interest” in your home, automobile or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If you don't make your payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case. There are several ways that you can keep collateral or mortgaged property after you file bankruptcy. You can agree to keep making your payments on the debt until it is paid in full. Or you can pay the creditor the amount that the property you want to keep is worth. In some cases involving fraud or other improper conduct by the creditor, you may be able to challenge the debt. If you put up your household goods as collateral for a loan (other than a loan to purchase the goods), you can usually keep your property without making anymore payments on that debt.

Can I Own Anything After Bankruptcy?

Yes! Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true. You can keep your exempt property and anything you obtain after the bankruptcy is filed. However, if you receive an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt.

Will Bankruptcy Wipe Out All My Debts?

Yes, with some exceptions. Bankruptcy will not normally wipe out:

1. money owed for child support or alimony, fines, and some taxes;
2. debts not listed on your bankruptcy petition;
3. loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;
4. debts resulting from “willful and malicious” harm;
5. most student loans, except if the court decides that payment would be an undue hardship;
6. mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by the creditor).

Will I Have to Go to Court?

Yes, you will have to go to a proceeding called the “meeting of creditors” to meet with the bankruptcy trustee and any creditor who chooses to come. Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and your financial situation. Occasionally, if complications arise, or if you choose to dispute a debt, you may have to appear before a judge at a hearing. If you need to go to court, you will receive notice of the court date and time from the court and/or from our office.

What Else Must I Do to Complete My Case?

After your case is filed, you must complete an approved course in personal finances. This course will take approximately two hours to complete. Our office can give you a list of organizations that provide approved courses. If you file a chapter 13 case, you should ask your attorney when you should take the course.

Will Bankruptcy Affect My Credit?

There is no clear answer to this question. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse. The fact that you've filed a bankruptcy can appear on your credit record for ten years. But because bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit.

What Else Should I Know?

Utility services—Public utilities, such as the electric company, cannot refuse or cut off service because you have filed for bankruptcy. However, the utility can require a deposit for future service and you do have to pay bills, which arise after bankruptcy is filed.

Discrimination—An employer or government agency cannot discriminate against you because you have filed for bankruptcy.

Driver's license—If you lost your license solely because you couldn't pay court-ordered damages caused in an accident, bankruptcy will allow you to get your license back.

Co-signers—If someone has co-signed a loan with you and you file for bankruptcy, the co-signer may have to pay your debt. If you file a chapter 13, you may be able to protect co-signers, depending upon the terms of your chapter 13 plan. When first meeting a bankruptcy attorney, you should be prepared to answer the following questions:

• What types of debt are causing you the most trouble?
• What are your significant assets?
• How did your debts arise and are they secured?
• Is any action about to occur to foreclose or repossess property or to shut off utility service?
• What are your goals in filing the case?

Can I File Bankruptcy Without an Attorney?

Although it may be possible for some people to file a bankruptcy case without an attorney, it is not a step to be taken lightly. The process is difficult and you may lose property or other rights if you do not know the law. It takes patience and careful preparation. Chapter 7 (straight bankruptcy) cases are easier. Very few people have been able to successfully file chapter 13 (debt adjustment) cases on their own.

Remember: The law often changes. Each case is different. This website is meant to give you general information and not to give you specific legal advice.