Bankruptcy & Protecting Your Property

When filing bankruptcy, all property must be listed in the bankruptcy petition, including homes, cars, bank accounts, coin collections, guns, property held in trust, etc.  Upon filing the case, these assets become property of the bankruptcy estate and are protected by the automatic stay.  Though assets are included in the bankruptcy as required by law, debtors always have the option to keep these assets, with the caveat that they can afford them.  In addition, these assets are often given preferential treatment through the bankruptcy process.  At Hastings & Hastings, we provide clients with the options of keeping, surrendering, or modifying their interests in such property.    Below is a brief description of how particular property is handled during bankruptcy.

Your Home(s)

When filing bankruptcy, a debtor’s home is scheduled in the bankruptcy petition, as is the underlying mortgage, tax lien(s), and/or homeowner’s association fee.  If the home has equity, Arizona’s Homestead Exemption protects up to $150,000 of this equity.  In a Chapter 7 bankruptcy, a debtor must stay current on the mortgage(s) during and after bankruptcy if they wish to keep the home.  However, this same obligation to remain current exists whether or not a debtor files bankruptcy.

If the debtor is unable to remain current, or is pursuing a loan modification, the ability to keep the home will depend upon the lender’s willingness to work with the debtor.  Again, this scenario exists whether or not a Chapter 7 bankruptcy is filed, especially as homeowners struggle with lenders to get permanent loan modifications.    Currently, most lenders appear to be working with debtors during the bankruptcy process, and even encourage loan modifications.  Further, the Homes Affordability Modification Program (“HAMP”) requires participating lenders to disregard bankruptcy as grounds for denying a modification.  However, each lender and each loan scenario is different and debtors are best served by speaking with an attorney before pursing bankruptcy and a loan modification simultaneously.

If a lender is unwilling to work with a debtor, homeowners can consider filing a Chapter 13, which will protect the home and stop foreclosure.  Chapter 7 clients can even convert their case to a Chapter 13, if necessary, to protect the home.  In a Chapter 13 bankruptcy, the debtor(s) can keep their home as long as they can resume making their scheduled payments and make up the loan arrears through Chapter 13 plan payments.  Here, the underlying consideration is whether the debtor can afford to fund the Chapter 13 plan.

Uniquely, a Chapter 13 allows some homeowners to strip their second mortgages when the mortgage is wholly unsecured.  Chapter 7 debtors can also seek to avoid their second mortgage if they’ve been sued personally by their second mortgage.  These scenarios involve a detailed legal process to pursue lien avoidances and debtors should always seek legal counsel.  Finally, unlike the other property discussed below, real property does not require a reaffirmation agreement.

Your Car(s)

Debtors can keep their cars through bankruptcy with the general caveat that they must be able to afford them.  Similar to a home, in a Chapter 7 bankruptcy the debtor(s) must stay current on the vehicle loan.  Arizona exemptions allow each debtor to have $5,000 equity in their vehicle, unless handicapped, which allows a $10,000 exemption for vehicle equity.  If a vehicle has excess equity, a debtor can perfect a lien against the equity prior to filing or can negotiate a settlement with the Trustee after the bankruptcy has been filed.

Upon filing bankruptcy, the lender provides a “reaffirmation agreement”, which restates the loan terms in a post-bankruptcy contract.  The advantages of signing the reaffirmation agreement is that the car loan should be reported on a debtor’s credit after filing bankruptcy and some lenders will even offer more favorable terms to entice the debtor to keep the vehicle.  The disadvantage of entering into a reaffirmation agreement is that the new debt is non-dischargeable.

Chapter 7 debtors also have the option to “redeem” their vehicles, which means the debtor’s attorney can file a motion to seek a court order allowing the debtor to pay off the vehicle at what it’s worth, versus what is owed on it.  In some scenarios, this can be tremendously beneficial.

In a Chapter 13 bankruptcy, the vehicle(s) is paid off through the 3 – 5 year plan.  If the car has been owned for more than 910 days, the vehicle is paid off at what it is worth, versus what is owed against the vehicle.  The interest rate used to pay off the loan is typically prime plus a one point margin.

Other Personal Property

Debtors tend to keep most or all of their property through the bankruptcy process.  Most Chapter 7 debtors seem to have modest possessions, which are protected under Arizona’s exemptions.  This includes household furnishings of up to $8,000 for a married couple.  In addition, debtors can be advised to liquidate some assets prior to filing bankruptcy and the resulting funds can be used to cover “necessities.”

If personal property is financed, creditors will often issue reaffirmation agreements on the financed merchandise, such as with computers, jewelry, furniture, etc.  Typically, these documents are not signed and the debts are discharged in the bankruptcy.  However, the creditor seldom actually pursues the collateral.

Bank Accounts & Wages

Bankruptcy protects bank accounts and wages.  This is important, because a judgment creditor can and will garnish wages and levy bank accounts.  Prior to filing bankruptcy, a creditor can satisfy a judgment by levying bank account balances and garnish up to 25% of a debtor’s gross wages.  The collection process can take a minimum of several months, and upon learning of a lawsuit, debtors should immediately speak with a bankruptcy attorney.

Debtors should also be wary of holding money in any bank to whom the debtor owes money, especially if dealing with credit unions.  All credit unions and most banks have the ability to offset bank account balances against delinquent credit lines.  In addition, the bank or credit union will time the offset to seize the balance just after a paycheck or other large deposit is made.  To avoid issues with creditors, debtors should proactively speak with a debt attorney prior to delinquency issues.