Click here for Part I of Arizona Property Law basics & Bankruptcy Chapter 7
Question: How long is a Chapter 7 bankruptcy going to stay on my credit report?
Answer: Chapter 7 stays on your credit for 10 years. Chapter 13 stays on your credit for 7 years. Within two to four years, your credit could get up into the 600’s. It just depends on what you do. The best thing you can do is re-affirm your car. When you re-affirm your car, you keep making your payments, and that builds up your credit. You build up your credit the same way you did before, making timely payments to your creditors. People always get credit card offers after, the BK discharge, because the creditors know that the new debt cannot be discharged for quite some time. You can’t do another bankruptcy for 8 years. So they always give you credit cards and try to put you right back where they had you in the first place. You just have to build your credit back slowly. It just depends on the things you do afterwards (there are also credit repair companies), but it will be on your credit for 10 years, but you are able to rebuild it in two to four years. All your debts will say Subject to Chapter 7 Discharge. All the credit bureaus are different. They report things differently. It is going to be a process so you have to just work at it. Think of it like this, bankruptcy knocks you down as low as you can go, but from there you have nowhere to go but up. Whereas when you have bad credit, you can always go a little lower.
How low can you credit go? That is another question. Can a BK filing take you down to about 500? It is possible, but again it is all based on the FICO (Fair Isaac Scoring system) and you are dealing with 3rd party credit reporting bureaus - which there are the 3 major ones (Experian, Equifax, and Trans Union), and they all score differently. A bankruptcy Attorney has no control over your credit score.
Question: Is my retirement protected?
Answer: Anything qualified under a risk 401K’s IRA’s are exempt assets. 401K’s, IRA’s, Roth IRA’s, pensions, alimony, child support, and any family law type of thing – it’s all protected. A good way to think of any of this is if it’s tax qualified, it is going to be protected. So 403B’s or 457’s, anything IRS calls retirement is going to be exempt from any collection attempt from a creditor outside of bankruptcy and the bankruptcy itself. So, you can have a million dollars in your 401K and it is protected. You can still do a Chapter 7.
There are some special provisions when it gets up that high in an IRA, but it would be rare for a debtor filing BK chapter 7 to have a million dollars in their IRA. Contributions to any retirement plan are subject to being sucked out if they have been made 120 days within filing the BK petition. So within four months of filing, if you rolled over $5,000 into an IRA (you did a 401K roll-over to an IRA), and you didn’t wait that four months, then that could be sucked out from the bankruptcy. There are a lot of provisions in Arizona for insurance policies and annuities. They are generally protected if they have been owned by the debtor for two years and they name a dependent as beneficiary. The Arizona Statute defines the beneficiary as someone who is dependent on you for more than half their income. So, you have to own the policy for more than two years and name a dependent as beneficiary. So your life insurance policies with cash value would be protected same as with annuities. So can you keep all that stuff.
Question: What about things that are being financed?
Answer: Basically you can keep anything that is financed. That’s fine. As long as you are current on payments, but they are not going to let you have boats, cars, and stuff like that. You can’t go into the Chapter 7 and say I’m upside down. Meaning, you can’t go to the bankruptcy court and say I’m negative every month because I have a $2,000 speedboat payment and jet ski. That’s not going to fly.
A good way to think about it is if you are financing a jet ski payment, can you keep it in a Chapter 7? Sure, as long as you are current. But you look at it like this, if I’m negative for $1,000, and my jet ski payment is $200, I’m still going to be negative $800. Now if the jet ski is making me negative, it’s probably going to get an objection on it. So that really depends too. In general, you can keep anything that is financed, like a time share, same principle.
Now, it’s up to us as your bankruptcy attorney to answer the objection in regard to property being exempt. For example, for a homestead exemption you have to have the intent to reside there to get the exemption. So, let's say you have a paid-in-full $50,000 house, (which is the exemption amount), but you don’t live in it. You have renters in there and you live in a financed house. You are not going to keep that. You have to live there for that. Sometimes a Trustee will object in those situations too where you are not going to be able to claim a home as exempt when you are not living there. That’s sometimes where you will get objections, but most of the exemption laws are clear.
A competent bankruptcy attorney is not going to make the mistake of missing an exemption and losing that money for you. The exemptions are all listed out, and remember they all double with a married couple. For a few examples, the tools of the trade exemption is $2,500, which is $5,000 for a married couple. Household goods and appliances, the exemption is $4,000 a piece; Man and wife $8,000. Wedding rings $1,000 a piece; Man and wife $2,000. Each person gets a $500 for a firearm; Man and wife gets two. The only thing basically that never doubles is the homestead exemption. Everything else doubles. If you have a non-filing spouse, you still can use the exemptions. Your spouse does not need to file in order to use the double exemptions for a husband and wife.
Question: Do I have to file BK with my spouse?
Answer: One, you are not doing a bankruptcy without your spouse being affected. They are certainly going to know about it. There's really no way around that.
Two, if you have been married longer than two years, your spouse needs to do the bankruptcy. Arizona is a community property state. Any debt acquired after marriage, I don’t care if the credit cards were in the one spouse’s name, it doesn’t matter. It is all community property. What happens in that situation where a spouse does not file? For whatever reason, people sometimes just don’t want to do it. They want to preserve that spouse’s credit and that’s fine. That is a valid reason, but anything you co-signed together and they pull the credit, it is going to show that account was subject to Chapter 7 discharge. So your credit bureaus are going to know that your co-signer did a bankruptcy.
The thing is that if you have a non-filer spouse and the discharge is given, it is given to the debtor and it is given to the community. The community gets a discharge as well. The creditors can come after the non-filing spouse, and the non-filing spouse has to hire a lawyer and has to argue community discharge. It is a valid winning argument, but you have to hire a lawyer to defend it. Whereas if it was a bankruptcy, you hold up your discharge and say “hey see you later.” It’s an absolute defense. There is no liability. So, if you have a couple that's been married for 10-15 years let's say, sure, you can decide not to file jointly, but there is the risk that they will come after you one day and you will have to deal with it. That’s not what you retained us for.
The bottom line is yes you should probably do it. If you have been married longer than two years, you absolutely need to do it. You would never file a Chapter 13 with a non-filing spouse, because one, both the incomes have to be taken into consideration and if you are the non-filing spouse you have to live within your budget constraints. It would be stupid of you to not do it.
Question: What is the automatic stay in Bankruptcy?
Answer: The moment the BK petition is filed the Automatic Stay is created which is essentially a freeze on any collection attempts, no billing statements, no phone calls, no nothing. If a creditor willfully violates the automatic Stay they can be held liable for damages. The BK court will send the BK notice to all of your creditors, and they will be ordered to stop collecting, etc. If you have special creditors likely to act (like a foreclosure sale about to occur) you will want to immediately notify the trustee and beneficiary and loan servicer that BK has been filed, and give them the case number. That should halt the sale, but you can always go down to the Courthouse where the sale is to be held just to be safe. Once a property is sold it can be tough to set-aside the foreclosure sale especially if there was a bona fide purchaser for value.
So, if a Bankruptcy petition is filed on let's say, Thursday, and the creditor gets notice of it and they come the next day to try and pick up the vehicle. They have violated the Stay. It’s absolute. The car has to go back. There is absolutely no collection attempts after the Stay is in effect. There are punitive damages allowed in the bankruptcy code for creditors that willfully violate the Stay. That means you won’t get billing statements for your car. You won’t get mortgage statements. You won’t get any of that until the debt is re-affirmed. Even for the purpose of pursuing a loan modification after a bankruptcy case has been filed, the lender/servicer still needs permission to contact the client regarding loan mods because they are not even allowed to pursue these types of negotiation. In fact, many creditors won’t even take a phone call from you if you are in the process of bankruptcy.
The Stay lasts until the case is closed and discharged. From there, in fact always, no one can come, even after they have closed your case, no creditor is allowed ever to come back after that debt. The discharge relieves your personal liability on that debt.
In a Chapter 7, the Stay doesn’t apply to a co-debtors. If two people co-signed on a loan, one is doing a bankruptcy and the other one is not, the creditor can contact the other person (not in BK) all day long. There is not a co-debtors Stay. Now in Chapter 13, there is a co-debtors Stay. This means that even the person not doing the Chapter 13 can get protected from any collection attempts. So, that is one of the differences between a Chapter 7 and Chapter 13.
By and large, you can expect that most creditors adhere to the automatic stay (credit card companies, car finance companies, collection agencies, etc.).
I would say that accidents happen and that you may have to giive everybody one chance. If a creditor calls you after you have filed Bk, keep in mind the notice may not have reached the creditor's bankruptcy department. It might have been an innocent mistake. So, if this happens, we can call them up to give them your case number and inform them that a Chapter 7 bankruptcy case has been filed. Usually creditors won’t call after that.
As mentioned above, secured creditors can always seek to file a motion for relief from stay and seek to lift the automatic stay (secured creditors have those rights).
Question: What exactly is a Bankruptcy Trustee and what do they do?
Answer: Basically the Trustee - There is a U.S. Trustee and there is one in Arizona. The U.S. Trustee works for the Department of Justice. They are independent contractors andcurrently in Maricopa County there are 13 or 14 Chapter 7 Bankruptcy Trustees. They are appointed by the U.S. Trustee after a thorough qualification process. The Trustee simply administers the estate. Upon filing a bankruptcy an estate is created. It is a separate entity. The Trustee is in charge of looking out for the estate, because it is the estate that pays the creditors. The Trustee is basically the person that administers that. So if there is an asset to be seized, then the Trustee seizes it, liquidates it, and distributes it among the supervision of the bankruptcy code to the creditors.
Typically the Trustees work in a commission-based system wherein if they recover an asset, they get paid a percentage of what they liquidated for. It is an expense of running the bankruptcy. I don’t know whether it is 20% or whatever. So if they seize a $100,000 car, they get 20%, so they would get $20,000. The reason it is set up like that is tocreate an incentive for Trustees to hunt down assets. That is why sometimes when someone asks, “am I going to lose this?” Well, it depends. Think of the analogy like this, you are walking down the street and you see a penny, do you pick it up? Well, maybe and maybe not. What happens if it is a quarter or a dollar? Five dollars or ten dollars? Eventually, you are going to pick it up whatever it is. A Trustee is the same way.
If someone says, getting back to the auto exemption, I got the exemption for $5,000 and the car is worth $7,000, is the Trustee going to want the $2,000 difference? Well, maybe and maybe not because they have their expenses and paperwork. It comes down to the simple question of whether they are going to make money on it? If there is a $2,000 spread, but they have to get the car, take it to auction, pay an auctioneer fee … what is going to be coming to them. That determines if there is a very complex claim that the Trustee wants … it just comes down to how much work are they going to put in. The Trustee’s job is to not only to hunt down and liquidate assets, but to look over a Means Test calculation. The U.S. Trustee has 10 days after a bankruptcy petition is filed to object and then 30 days thereafter for a Motion to Dismiss for presumption of abuse if they feel a debtor should be a Chapter 13 rather than a chapter 7. But the main thing is basically the Trustee is there to gather assets that you shouldn’t have that are not protected as exempt under the bankruptcy code.
Question: How does re-affirmation work following a Chapter 7 bankruptcy discharge?
Answer: Reaffirmation is a contract; it is a promise to pay. They are special in bankruptcy in that it doesn’t require new consideration because it is essentially a contract to do something that you have already promised that you should do. It is special in bankruptcy in that it is still a valid contract.
We have talked about how you don’t have to reaffirm your home. In 2005, the BAPCPA, which was a series of amendments to the Code that got passed, really changed the reaffirmation process because it required reaffirmation agreements to be signed on cars. There use to be something called a “ride-through” where you do your bankruptcy on a car you financed. OK. Your financed car and you are upside down, which most people are when they are financing a car. In a “ride-through” you could just continue making your payments and be current and you could keep your car. Then a year later if you needed to walk, then you could simply surrender your car. The car gets surrendered and it is still included in your bankruptcy (no personal liability).
In 2005, BAPCPA changed that and got rid of that “ride-through” provision. You now have to reaffirm the debt on the car or else even if you are current down the road, they are going to take it. Now, they don’t have to take it. A lot of people are happy to just get the payments, a lot of lenders, but eventually they probably will.
The reaffirmation has to be filed within 45 days of your Meeting with Creditors (the 341 Meeting). It is signed by the attorney, creditor, and debtor. Sometimes you will get better rates and certain lenders will sweeten the pot to reaffirm the debt. Again the whole thing is … what is important in bankruptcy, and this ties in with the other topic, can I keep my car? It is the equity in things always. It is what is paid in full. In Arizona, the auto exemption is $5,000. That means if you have a paid-in-full car that is worth $5,000, it is protected. A man and wife get $5,000 and $5,000, or they can combine it for $10,000 on one. So it is either $5,000 and $5,000 or $10,000 on one. What you can’t do is have three cars and throw $10,000 on them.
So if someone says, can I keep my car? Well, is it paid in full? If so, how much is the car worth? If you have one car and it is worth less than $5,000, then the answer is YES you can keep your car. If it is worth $7,000, well what happens is you are responsible for the difference in equity. That is where the bankruptcy attorney can negotiate with the Trustee some kind of settlement if the Trustee takes an interest in it.
Now if you are financing a car, it is possible to have equity in it. It’s unlikely, but you know if you had a car that was worth $10,000, and there was a $2,000 lien on it – and then you got your $5,000 exemption. You still have some equity in it because you take the $5,000 plus the lien, that’s going to be less than the market value. So there is still equity in it. So, that is what you have to figure out. What is the car worth? If the care is financed and it is upside-down, the answer is yes, if you are current on the payments, you can keep the car. Whether it is a car, a motorcycle, a dirt bike, anything that is being financed belongs to the creditor, the person who extended the credit. So in a bankruptcy, as long as the payments are current, you are going to be able to take the car. Semi-trucks do not fall in the auto exemption. You can take scooters or motorcycles or anything like that.
If you are disabled, instead of a $5,000 for an individual, you get $10,000. So in a situation where you have a married couple where both of them are with disabled plates, then you essentially get $10,000 a piece. So if one spouse was disabled you get $10,000, the other spouse gets $5,000. So you can do $10,000 and $5,000, or you can do $15,000 on one. Disabled means basically you have a disabled plate with DMV.
Question: What happens with non-exempt assets that you want to keep?
Answer: OK, the big thing is what happens when the case has been filed and you had an non-exempt asset. So let's say you file the Chapter 7 bankruptcy petition, and you have a dirt bike worth $300. It is your son’s dirt bike and he rides it faithfully. You have had it for years. You say it is worth $300. What happens?
The case has already been filed, so you can’t sell it. It is part of the bankruptcy estate. You can’t sell any of your property. All of your property is part of the bankruptcy estate upon filing. So what happens then? Trustee maybe looks at it, 1997 Kawasaki - $300. I don’t care about it. I’m on to bigger and better things out there in bankruptcy land. Or, he says, I want my auctioneer to take a picture of it and send it to me. Or, I want my auctioneer to come and appraise it. So, say it comes back as $300. I want it. You have an option. You can give the Trustee the value for it and then you keep it. He doesn’t want the dirt bike, he wants the cash. So if the dirt bike is appraised at $300, he says I’m going to take it from you. What’s up you say? Well fine, here’s the $300, I want to keep my dirt bike. You know you can keep whatever you want, exempt or non-exempt. You just have to pay for it.
The difficulty is when you filed the bankruptcy. Remember you are filing with only $150 to $300 cash. So you can’t carry cash through the bankruptcy. So if you had $5,000 in your bank account that you need to spend down and you have an over exempt vehicle, there is no way you can bring that money through the bankruptcy to pay for your non-exempt vehicle. So it is like you are basically paying for the non-exempt vehicle after filing with your post petition earnings or family members are helping you out, or you can take a 401K loan after … you can take out a loan from an exempt asset, like a 401K and use that money to pay off the Trustee. So again, you can sell whatever you want.
So what we might end up telling you if you are in a situation like this is, look man, if you want to be sure that you don’t lose the dirt bike or you don’t want to get screwed on it, sell it. Sell it and spend the $300 on food, clothing, whatever or else we file it and the Trustee may takes an interest. Or, if you have it and the Trustee takes an interest, liquidate it, or they may come to us and say your client has a $300 dirt bike, make me an offer. In that case, fine, we inform the Trustee that basically they are going to have to pay 10% to the auctioneer, how about $250 and my Client keeps the bike. Fine, Done. Sold at $250.
So most of it with a Trustee is just negotiation and they don’t want your stuff, seriously, they want the money. They don’t want the mobile home. They don’t want the car. That is a lot of paperwork. They would rather just get the cash, because that is quick and it is dirty. So if they can just get cash, it's better for them than having to sell your personal belongings. Sometimes they have to hire counsel. They have separate counsel. So it is a case by case, piece by piece process.
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