Chapter 7 Bankruptcy in Arizona

Arizona debtors, both families and businesses, may be eligible for Chapter 7 Debt Relief, which is a “liquidation” proceeding.  Liquidation simply means non-exempt (or unprotected) property is sold and creditors receive a pro rata share of the resulting proceeds.   At Hastings and Hastings, our clients are carefully advised on options to protect their property, and most of our cases involve the loss of no property.

The bankruptcy process begins upon retaining an attorney and discussing alternative debt relief options.  Thereafter, clients are counseled with fundamental bankruptcy planning, often termed “negative estate planning”, and are given general advice 1) to stay current on the secured assets they wish to retain, 2) not to repay family members on any outstanding debts, 3) not to transfer or dispose of any property without attorney instructions, and 4) not to incur any new debt.  With planning a bankruptcy, our experienced attorneys carefully advise clients of the risk involved in losing particular property or interests, such as inheritances, personal injury claims, trust estates & distributions, tax returns, etc.  Our attorneys further advise clients on permissible options to keep property, and when necessary, we work with Trustees to resolve any property issues.

To qualify for a Chapter 7 Bankruptcy, a debtor’s income must be either 1) beneath the median income and negative on their cash flow, or 2) if a debtor’s income is above the median income, a “means test” is administered to determine if a debtor is still eligible for Chapter 7 debt relief (11 U.S.C. § 707(b)(1)).  If a debtor is deemed mathematically ineligible, a debtor may overcome this “presumption” with a showing of special circumstances.  If ineligible, a debtor may choose to file a Chapter 13 bankruptcy (reorganization).  Often, the difference between qualifying for a Chapter 7, versus a Chapter 13, pivots upon an attorney’s knowledge of permissible expenses and local case law interpretations.

Filing a Chapter 7 Bankruptcy in Arizona

If a debtor appears to qualify for Chapter 7 debt relief, the case is then strategically filed after considering any pre-bankruptcy transfers, anticipation of future debt, tax refund, timing to avoid presumption of abuse periods, etc.  The bankruptcy petition is filed with a $299 court filing fee.  The bankruptcy petition consists of “schedules” that include assets (real and personal property) and liabilities, income and expenses, statement of financial affairs (Fed. R. Bankr. P. 1007(b)).  Individual debtors that have primary consumer debt must have completed credit counseling within 180 days prior to the date in which the petition is filed (11 U.S.C. § 521), and each debtor must have read and signed the bankruptcy disclosures.  Within the petition, the debtor(s) signs the schedules under penalty of perjury that the information provided therein is true and correct.

Immediately upon filing the case, a Trustee is assigned and the § 341 Meeting of Creditors (also known as a 341 Hearing) is scheduled.  The Trustee reviews requested documentation, conducts the § 341 Meeting of Creditors, researches assets, and in the event there is available non-exempt assets, the Trustee takes the appropriate steps to sell them.  The case is eligible for discharge after 90 days.  Prior to the discharge, the attorney works to prepare reaffirmation agreements, responds to Trustee demands, and resolves any creditor objections.  If done correctly, the upfront legal work and the diligence in preparing an accurate petition limits the amount of work needed to be done after the case has been filed.  If the bankruptcy estate captures funds, creditors are then notified to submit a proof of claim, which will be evaluated by the Trustee and potentially paid upon.

The primary purpose of a Chapter 7 bankruptcy is to secure a “discharge”, which will end creditor harassment & collection efforts, and provide honest debtors with a fresh start.  Upon discharge, a debtor has no personal liability for discharged debt – typically including credit card debt, medical debt, repossession, garnishments, lawsuits, broken leases, and even some tax liabilities.  Student loans and domestic support obligations are non-dischargeable, with some rare exceptions.  Also, the discharge does not “avoid” a lien on property.  It only extinguishes the personal liability of the debtor.  In some instances, an attorney will want to take steps to void an existing lien.

The above process provides bankruptcy protection to both debtors and creditors.  This is accomplished through three fundamental bankruptcy safeguards.  First, the debtor is protected by the “automatic stay”, which acts as an injunction to prevent creditors from collecting on a debt after the debtor files their bankruptcy petition (11 U.S.C. § 362). The automatic stay stops garnishments and temporarily halts foreclosures and repossessions.  However, the automatic stay does not stop domestic support proceedings (11 U.S.C. § 362(b)).  Second, the “bankruptcy estate” is created upon commencement of the case and includes all of a debtor’s assets, including legal, equitable, and possessory interests, with several carved out exceptions ((11 U.S.C. § 541). This doctrine defines the property of the estate and limits its transferability.  Finally, the Chapter 7 Trustee has what are known as “strong arm” powers, which means the Trustee is treated as a statutory lien creditor, and has the ability to avoid preferential payments and fraudulent transfers ((11 U.S.C. § 544-553).  This power can add or recapture assets of the bankruptcy estate.

The ultimate goal of a Chapter 7 bankruptcy is to give a debtor protection and a fresh start, while making sure each creditor is treated fairly and equitably.  Call Hastings & Hastings today to help you determine if a Chapter 7 is the best solution for your situation.