While there are four types of bankruptcies that affect consumers under the Bankruptcy Code, a Chapter 7 Bankruptcy is by far the most popular form of bankruptcy and the one that most people have heard of before. A Chapter 7 bankruptcy is a straight liquidation of a debtor’s debt. The Bankruptcy Court is concerned with three issues: the Debtor’s income, the Debtor’s assets, and the Debtor’s liabilities.
The most important of those three issues is a Debtor’s income. The Court is looking to make sure that the Debtor is someone who should be eligible to file a Chapter 7 bankruptcy in Arizona or should they be filing a Chapter 13 repayment plan or not file bankruptcy at all. In looking at a person’s income the Bankruptcy Court conducts a means test of the debtor’s income. This test is designed to make sure that the individuals who make more than the medium income in Arizona are not allowed to take advantage of the benefits of a Chapter 7 bankruptcy.
The means test looks at your income from the past six months. It uses this income to develop a six month average that is then used to forecast what the next six months should be. This number is then compared to the medium income in Arizona to determine if the person is eligible for a Chapter 7 bankruptcy. If the number is below the median income then the case is presumed not abuse and the person is eligible for a Chapter 7. If the number is above the median income the person is presumed abusive and not eligible for a Chapter 7 unless they can rebut the presumption of the abuse.
What this means in non-legalese is that the person must now prove through various forms of deductions to that income number that they should still be eligible for a Chapter 7. Things like taxes, insurance, union dues, medical bills, and educational expenses are deducted from the income amount. If the new number is now below the median income the person is eligible for a Chapter 7. If not they can file a Chapter 13 or look toward another avenue for help like debt negotiation.
If a person is eligible for a Chapter 7 the next major issue is that persons assets. In a Chapter 7 bankruptcy, the Department of Justice appoints a Trustee to manage the person’s case. It is the Trustee’s job to guide your case along the bankruptcy process. They are required to review a person’s asset to determine if there is anything that should be liquidated or sold and then split amongst your creditors.
A person’s assets are divided into two categories exempt assets and non-exempt assets. Exempt assets are protected up to a certain point and include things that most people use on a daily basis like clothing, furniture or a car. Non-exempt assets are not protected and can be seized and sold by the Trustee and then split amongst your creditors. These types of assets include things like boats, motorcycles, stocks, bonds or comic book collections.
Most people’s assets are protected under Arizona law.
Finally, a person’s liabilities are why they file for bankruptcy protection. Whether it is being too far upside down on their home, like most people in Arizona are now, a large amount of credit card debt or medical bills, a Chapter 7 bankruptcy can help resolve these problems.
Unsecured debt like credit card debt, medical bills, collection accounts and deficiency balances from repossession or foreclosures can all be eliminated in a Chapter 7 bankruptcy as long as that debt was not incurred with fraud or the debt was incurred in bad faith.
Secured Debt like mortgages and car loans can either be surrendered or reaffirmed. If a secured debt is surrendered you are no longer responsible for that debt. The secured property will be returned to the lender. If you reaffirm the secured debt you obligate yourself to all the original terms. Should you default on that loan the lender can repossess or foreclose and possibly sue you for the deficiency.
Certain debts like taxes, child support, alimony, student loans, criminal fines and restitution cannot be eliminated in most circumstances.
A Chapter 7 bankruptcy in Arizona can help provide someone with a fresh start where they are no longer worried about answering the phone or the door.