Chapter 13 Bankruptcy in Arizona

A Chapter 13 Bankruptcy is used by Arizona families to reorganize their financial affairs under a repayment plan that must be completed within three to five years.  To be eligible for Chapter 13 relief, a consumer must have regular income, via wages or self-employment, and have unsecured debts less than $360,475 and secured debts less than $1,081,400. 11 U.S.C. § 109(e).  If an Arizona family exceeds these debt amounts, they must consider reducing their debts, such as through a settlement, or they may have to consider a Chapter 11 bankruptcy.  Experienced Arizona bankruptcy attorneys know several legal ways to reduce debt amounts if necessary.  An Arizona corporation or partnership may not file for Chapter 13 debt relief.  Finally, to be eligible, a debtor must complete approved credit counseling with 180 days prior to filing. 11 U.S.C. § 109.

The filing of an Arizona Chapter 13 case creates the bankruptcy estate and “automatic stays” (meaning halts) most collection efforts by creditors. 11 U.S.C. § 362.  The stay prevents creditors from placing harassing phone calls, pursuing lawsuits, wage garnishments, foreclosing, repossessing, or even sending letters without first filing a motion to “lift the stay” (removing the protection).  The Chapter 13 bankruptcy protects co-debtors as well with consumer debt obligations. § 1301(a).  “Consumer Debts” are defined as debts incurred by an individual primarily for a personal, family, or household purpose. 11 U.S.C. § 101(8).

A Chapter 13 Bankruptcy offers several distinct advantages over a Chapter 7 Bankruptcy.  First and foremost, a debtor can protect a home from foreclosure by filing the bankruptcy and including terms to reimburse the lender for any delinquent amount.  In addition, if the home has a second mortgage, often the second mortgage can be eliminated through the bankruptcy process.  To “strip” the second mortgage through a lien avoidance, the home has to be worth less than the amount owed on the first mortgage, thereby leaving any secondary mortgage completely unsecured. Value is determined via a residential appraisal.

Another advantage is that a car that has been owned for more than 910 days can be “crammed down”, which means it can be paid off at what it is worth versus what is owed on it.  Also, if a car has been recently repossessed, but the title has not yet reverted back to the lender, the lender must return the car to the debtor(s).  Furthermore, in the Chapter 13 bankruptcy process, secured debt payments can be rescheduled to extend them over the life of the plan, which can lower car payments (this cannot be done with a mortgage for a primary residence).  Finally, interest rates on secured debts can be renegotiated, or rather reset to Prime plus a one point margin. Again, this lowers the payments on secured debts that typical would carry a much higher interest rate.

Filing a Chapter 13 Bankruptcy in Arizona

Upon determination of eligibility, a petition is filed with the court that includes schedules of assets and liabilities, current income and expenses, executor contracts and leases, and a statement of financial affairs. Fed. R. Bankr. P. 1007(b).  The petition includes all creditors, amounts owed thereto, all income from all sources, and all real and personal property owned by the debtor.  In addition, the debtor must also file a certificate of completion of the credit counseling, 60 days worth of paycheck stubs, and provide the Trustee with copies of tax returns. 11 U.S.C. § 521.  The petition is also filed with a $274 filing fee.

A repayment plan is proposed by the debtor’s attorney, which adheres to the requirements of the U.S. Bankruptcy Code, as well as conforming to local rules and Trustee preferences.  For example, cases filed in Maricopa County are prepared differently than cased filed in Pinal County.  If the debtor(s) are above the median income, the plan is generally either 100% repayment or five years in length.  If less than the median income, the plan can be 3 – 5 years, depending upon numerous factors, such as if the debtor wants a lower payment over a longer period of time.

Once filed, a “standing Trustee” is appointed by the United States Trustee under 28 U.S.C. §586(b) and serves as the Trustee of the debtor’s estate throughout the duration of the plan and terminating upon fulfillment of the debtor’s repayment obligations under the plan.  The Chapter 13 Trustee evaluates the petition and plan, while serving as the disbursing agent by collecting payments from the debtor and distributing them to creditors pursuant to the plan’s instruction. 11 U.S.C. § 1302(b).  This plan must be approved by the debtor, debtor’s counsel, the standing Trustee, and any objection creditors, and then confirmed by the U.S. Bankruptcy Court.

After filing the case, a debtor is to begin plan payments within 30 days of filing, as outlined in the plan. 11 U.S.C. § 1326(a)(1). Creditors are notified by the bankruptcy court and unsecured creditors must file their proof of claim with the court within 90 days of the first date scheduled for the § 341 Meeting of Creditors. Fed. R. Bankr. P. 3002(c).  Government creditors have 180 days from the petition filing date to file a proof of claim. 11 U.S.C. § 502(b)(9).

The debtor(s) meet the Trustee at the §341 Meeting of Creditors which is scheduled approximately 40 days out from the date of filing. Fed. R. Bankr. P. 2003(a).  There are three Chapter 13 Trustees in Arizona. Ed Maney and Russell Brown handle cases in Maricopa County with all hearings being held at the Federal Court Building in Phoenix.  Cases arising out of Pinal County are assigned to Diane Kern, and hearings are held in either Casa Grande or Tucson.  The hearings are held in a hearing room, not a courtroom and the bankruptcy judge does not attend these hearings. 11 U.S.C. § 341(c).  These Trustees also are assigned to other locations throughout the state.

During the hearing, the debtor(s) are required to show the Trustee proof of their identity and social security number, typically done so with a driver’s license and social security card.  Debtors are then sworn in under oath and asked several questions regarding how long they’ve lived in Arizona, whether they’ve begun making plan payments, if they’ve reviewed the schedules filed on their behalf and whether these documents are accurate and correct to the best of the debtor’s knowledge.  

After the hearing, Arizona Trustees will send a Trustee recommendation letter to the debtor and to the debtor’s attorney.  This letter will outline the Trustee’s requirements to approving the plan, which will include mostly standard language and some provisions that will be unique to that case.  The debtor’s attorney reconciles these provisions and a stipulated order of confirmation is signed by the attorney, debtor, Trustee, and any objecting creditors.  Once the stipulation is filed with the Court and approved, the plan has been “confirmed.”  The debtor then follows the provisions of this confirmed plan until completion.  The plan can be modified thereafter if necessary, such as if the debtor’s income decreases.

At Hastings & Hastings, we strongly recommend that a debtor should not attempt to file a Chapter 13 Bankruptcy without counsel.  Call us today to help you determine if Chapter 13 is the right choice for your situation.