Arizona Chapter 13 Bankruptcy

What is Chapter 13 Bankruptcy?

Chapter 13 Bankruptcy is also known as a “reorganization”, because it allows for the repayment of debt over a three to five year period. Payments are based upon your disposable income, which is the income left over after you pay your necessary monthly expenses.

Chapter 13 can be a powerful tool in many circumstances. For example, a person may file Chapter 13 on the eve of a foreclosure and save their house by making small catch-up payments. In addition, it can protect assets that may not be protected under Chapter 7.

Unlike Chapter 7, everyone is eligible to file Chapter 13. Because you are repaying part of your debt, one advantage of filing this type of bankruptcy is that it appears on your credit report for a shorter period of time than a Chapter 7.

Read more about why to choose a Chapter 13 over a Chapter 7 in this blog post by Arizona Bankruptcy Attorney Haines Meyer – 5 reasons to file chapter 13 instead of 7.

Jump to a topic:

What Debts Can I Eliminate?
How Does Bankruptcy Protect Me?
What Property Can I Keep?
Should I File for Bankruptcy?
How do I Qualify for Chapter 13 Bankruptcy?
Do I Need an Attorney to File for Bankruptcy?
What is the Bankruptcy Process from Start to Finish and How Long Does it Take?
How does a Chapter 13 Bankruptcy Plan Work?
How do I Rebuild Once My Bankruptcy Is Over?

1) What Debts can I eliminate?

Unsecured Debt versus Secured Debt
Unsecured debts are debts that aren’t secured by collateral, or lien. Most forms of unsecured debt will be eliminated in chapter 13 bankruptcy, although in most cases, you will pay for a certain percentage of that debt via your chapter 13 payment plan.

Unsecured debts include…

• Credit cards
• Department store credit cards
• Payday loans
• Medical bills
• Some tax debt
• Utility bills
• Some personal loans
• Some signature loans
• Parking tickets

Debts that are protected by collateral or lien are secured debts. If you default on a secured debt, then the bank is allowed to take back the asset that was used as collateral. A mortgage is an example of a secured debt. A secured debt is typically eliminated in a bankruptcy, but if you want to keep the asset that was collateral for the debt, you must continue to make the payments after bankruptcy.

Lien avoidance 
When a lien is recorded against your property, such as a lien on a home due to taxes owed to the IRS, it sometimes can be eliminated through chapter 13 bankruptcy via a process called “lien avoidance.” Only certain liens can be avoided in bankruptcy. It is best to consult with an experienced bankruptcy attorney to see if your lien would qualify to be avoided through bankruptcy.

Second Mortgage 
A second mortgage on your home can be eliminated in bankruptcy through a process called “stripping.” Your second mortgage can be stripped only when the current value of your home is less than what you owe on your first mortgage.

For example, let’s say you own a home currently worth $100,000 and you have two mortgages. The first mortgage is for $125,000 and the second is for $50,000. Because the first mortgage is greater than the actual value of your home, the entire $50,000 second mortgage can be stripped. In this scenario, when your bankruptcy is filed, the second mortgage would be completely eliminated. However, in the same scenario, if your first mortgage was for only $75,000, the second mortgage could not be eliminated because the first mortgage is less than the value of the home.

Certain Debts Cannot be Eliminated in Bankruptcy 
Some types of debt are given greater protection by the bankruptcy laws and cannot be eliminated in a chapter 13 bankruptcy. Some of the more common examples of these debts are…

• Most student loans
• Spousal maintenance (alimony)
• Child support
• Court fees
• Penalties, restitution, and fines imposed by a government agency
• Recent taxes (federal, state, and local)
• Some debts owed to other governmental agencies such as the Social Security Administration, Department of Justice, and Medicare
• Debts that were the result of fraud by the debtor
• Debts from accidents involving alcohol offenses such as DUI

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2) How Does Bankruptcy Protect Me?

As soon as you file for bankruptcy, the automatic stay takes effect. The automatic stay is a legal protection that immediately stops most actions against your property, and all lawsuits filed against you. The automatic stay stops immediately…

• Creditor calls
• Wage garnishments
• Foreclosures
• Evictions
• Utility disconnections

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3) What Property Can I Keep?

Exempt Property 
Unlike a chapter 7 bankruptcy, a chapter 13 bankruptcy allows you to keep all property whether it is exempt or not, as long as the chapter 13 plan (which deals with payment amounts, property values, claims by creditors etc.) is approved by the bankruptcy trustee. Property exemptions still play an important role in chapter 13 bankruptcy, because exemptions partially determine how much of your debt you will have to pay back to unsecured creditors through your payment plan. The more of your property that is exempt, the better it is for lowering your payments to creditors through the plan.

State law typically determines what property is exempt in bankruptcy. In Arizona, some exempt property includes…

• Your primary residence
• Your vehicles ($15,600 in value for single individual, $31,200 for married couple)
• Personal property such as
  • Furniture
  • Clothing
  • Appliances
  • Books
  • Some jewelry/ watches
  • Limited quantities of guns, bicycles, musical instruments
  • Most pets
• Money in a bank account ($5,200 for an individual, $10,400 for a married couple)
• Some insurance policies
• Pensions and retirement accounts
• Tools and equipment used for your business

How to Keep Secured Property

Debts that are secured by a lien or collateral are secured debts. In chapter 13 bankruptcy, you can typically keep all of your secured debts, as long as you continue to make the payments on time, either through your chapter 13 plan or outside of it.

What is a Chapter 13 Cramdown and How Does it Help Me?

A cramdown is available only in a chapter 13 bankruptcy.  It allows you to reduce the amount owed on a vehicle or a second home/investment home (not your primary residence) to the actual value of the property, rather than what is actually owed on the loan/mortgage.

For example, you may owe $15,000 on a vehicle that is now only worth $10,000.  As part of your bankruptcy payment plan, you can make a proposal to the lender that you will only pay the actual $10,000 value of the vehicle through the plan.  If this is approved, you will eliminate the remaining $5,000 of debt. The eliminated debt is still treated as an unsecured debt, but depending on your chapter 13 plan, you are likely paying for only a fraction of the unsecured debt you owe, so you will pay little if anything on the $5,000 debt.

This can also be done on the mortgage for a second home/investment home.  A court will typically require that the mortgage is paid off completely by the end of the bankruptcy. This means you will likely be paying off an entire mortgage in a five year period.  This may make your monthly plan payments extremely high, but it is worthwhile in some circumstances.
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4) Should I File for Bankruptcy?

Chapter 13 bankruptcy protection has helped countless individuals get out of debt and have a fresh start. However, it is a difficult decision and not the right choice for everyone. Also, everyone’s situation is different, so it is a good idea to discuss bankruptcy with an experienced bankruptcy attorney before choosing whether or not to file. Some important factors to consider include…

• You owe a lot on credit cards, medical bills, or other debts that would be discharged in bankruptcy
• After you pay for your everyday living expenses, you have insufficient income to realistically pay off creditors
• You have little to no assets that you would lose if you filed for bankruptcy
• You have damaged credit and want to being again with a clean slate
• You can handle having to make a monthly plan payment and respect all restrictions and requests for paperwork and documentation by your trustee for several years

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5) How do I Qualify for Chapter 13 Bankruptcy?

Unlike chapter 7 bankruptcy, with its many restrictions on things like household income, virtually anyone qualifies for chapter 13 bankruptcy. The restrictions on a chapter 13 bankruptcy are minimal.
This does not mean that chapter 13 bankruptcy is always the better choice if you qualify for both. However, if chapter 13 is a better option for you, or if you simply do not qualify for chapter 7, then there is a good chance you will qualify.

The restrictions on a chapter 13 bankruptcy are…

• You have to have enough disposable income to afford a payment plan
• Your income tax filings must be up to date
• You can’t have too much debt (currently the restriction is over one million dollars in debt)
• You have not received a bankruptcy discharge in a chapter 7 case that was filed less than 4 years ago or a chapter 13 case that was filed less than 2 years ago

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6) Do I Need an Attorney to File for Bankruptcy?

Is it a Good Idea to File My Own Case?
Legally you do not need an attorney to file for bankruptcy. However, we strongly discourage filing without one. But don’t take our word for it. Here is a quote from the United States Bankruptcy Court…

“While individuals can file a bankruptcy case without an attorney or “pro se,” it is extremely difficult to do it successfully.”

It is very important that a bankruptcy case be filed and handled correctly. The rules are very technical, and a misstep may affect a debtor’s rights. For example, a debtor whose case is dismissed for failure to file a required document, such as a credit counseling certificate, may lose the right to file another case or lose protections in a later case, including the benefit of the automatic stay. Bankruptcy has long-term financial and legal consequences – hiring a competent attorney is strongly recommended.”
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7) What is the Bankruptcy Process from Start to Finish and How Long Does it Take?

1. Your Case is Filed with the Court
There is no definite time frame for how long it will take to file your case. Typically, after meeting with your attorney, you will have forms to fill out and paperwork to gather. You might have some pre-bankruptcy planning to do, such as selling assets, or spending cash in a bank account. So it is up to you how long this all takes.

After you do your part, it is up to the law firm you have hired to file the case with the court. This involves filing a tremendous amount of specific forms and documents that are required by the federal bankruptcy court in accordance with both federal and state statutes.

The particular law firm you hire also affects how long the process takes. Virtually all firms operate the same way. They require several meetings between you and an attorney, and after those meetings are completed, they require significant time to prepare the documents for filing.

Unlike other firms, at Meyer Law we have a unique process called Bankruptcy in a Day. As long as you have the right documents available, such as bank statements, pay stubs, and copies of taxes, you can meet with us at Meyer Law for just one meeting, and your case will be filed the same day.

2. Credit Counseling and Debtor Education Courses 
As part of the bankruptcy process, you are required to take two classes. These can be completed online and are offered by many agencies that are certified to do so. In total, they take a few hours to complete. After each class is completed, you earn a certificate proving that you have completed the class. This must be filed with your bankruptcy case, or your case will be rejected by the court.

The credit counseling class must be completed before your case is filed. It is an informational class covering topics such as creating a budget and some pointers on financial planning. The certificate from this class must be included with the rest of your bankruptcy paperwork when your case is filed.

The debtor education course must be completed shortly after your case is filed. This course deals with how to proceed with your financial life after the fresh start created by your bankruptcy. Topics include the wise use of credit, budgeting, and money management.

3. Who is the Bankruptcy Trustee and What Does He Do? 
A bankruptcy trustee is a private individual, typically an attorney, who has several duties in administering your case. The trustee is randomly selected from a panel of trustees when your case is filed. The trustee is not an advocate for you or for the court, thus his or her role is to remain neutral throughout the process. The trustee is in a powerful position because he or she has the authority to sell any of your assets that aren’t protected in the bankruptcy. The proceeds from the sale are then given to your creditors. The trustee’s duties include…

• Review of documents filed with the court to check for accuracy and look for fraud
• Review of payment plant to ensure it is fair to your creditors
• Conduct the meeting of creditors (link to meeting of creditors #5 below)
• Object to claims by creditors that the trustee determines are improper
• Administer the payment plan including receiving your payments and distributing the money to creditors

4. Time to Begin Making Payments
Although your plan is not officially approved by the trustee as of this point, it is time to start making your monthly payments. The amount of your first payment and when it is due will already have been determined by you and your attorney, so mark your calendar accordingly. If your plan is never approved, your trustee will return all of your payments, minus any administrative costs involved.

5. What is the Meeting of Creditors? 
Every bankruptcy case has a Meeting of Creditors. Yours will be scheduled about a month after your case is filed. You are required to appear at this meeting along with your attorney, and you will be answering questions under oath. Your answers will be recorded for the record. Your trustee will preside over the meeting and will be the one asking you the questions. There are standard questions the court requires him or her to ask in every case, and he or she will typically start with these first.

Your trustee may ask further questions that are specific to your case. This usually happens if there is something that is unclear in your paperwork, or if the trustee feels you have assets that are not protected, and he or she needs details about the assets to determine their value.

Creditors can also appear at your meeting. This is very unusual and typically only occurs in special circumstances. It is very unlikely you will ever see any of your creditors at the meeting. In the rare case a creditor does appear at a meeting, it is usually to object to an aspect of your chapter 13 plan. If this does occur, you may have to file a modified chapter 13 plan with the court after the meeting.

There is no need to worry about your meeting of creditors. It is not meant to be a trial or a test. It is simply a meeting for the purpose of fact-finding where the trustee will be asking you straightforward questions that will not be difficult to answer. The typical trustee meeting questions will go like this…

• Your Trustee will read you an oath while you raise your right hand and you will agree to the oath when he or she is done.
• The trustee will ask for your current phone number and address.
• “Did you meet with your attorney to discuss your financial situation?”
• “Did your attorney explain that there are different chapters of bankruptcy such as Chapter 7 and Chapter 13?”
• “Have you read all of your statements and schedules?”
• “Have you listed all of your assets?”
• “Have you listed all of your debts?”
• “Have you received an inheritance or will you receive an inheritance in the next six months?”
• “Do you have a personal injury claim or any other claim for money damages pending at this time?”

6. Enduring your Chapter 13 Plan 
This is where the difficult part begins. The typical chapter 13 plan lasts five years. You must make your monthly payments on time and submit yearly expense and income statements that usually include your taxes. This is why the majority of chapter 13 cases get dismissed before they are completed. The number one cause is failure to keep up with the payments.

7. The Last Step: Your Discharge 
Your five years are over. You have made all of your monthly payments and submitted all of your yearly documentation. You have made it to the end and to your ultimate goal, which is to receive your bankruptcy discharge. You can look at this as the conclusion of your case, which usually takes place three to four months after your last plan payment was made. For more information read (link to what is a discharge blog)

8) How does a Chapter 13 Bankruptcy Plan Work?

You and your attorney will develop a chapter 13 bankruptcy plan before filing your case. The plan will be based on many factors, such as your income, assets, amount of debt, and type of debt. These calculations will determine your monthly payment.  Your monthly payment will have to paid in full and on time for the duration of your bankruptcy case, or you will risk it being dismissed.

Typically some of your monthly payment will go to your trustee, your attorney, administrative expenses, and payments on secured assets.  Additionally, you will usually be paying off a percentage of your unsecured debt.

The bankruptcy trustee will ultimately have to approve your plan, including the monthly payments.  Creditors can also object to your plan.  As a result, the amount of your monthly payment may change between the time you and your attorney first submit the plan to the trustee, and the time when it is actually approved.

The trustee will require you to submit income and expense statements once a year for every year you are in the plan. The trustee will often require copies of your state and federal taxes once per year as well.

When circumstances change during a payment plan, your payments can change as well. For instance, if you have a reduction in income, your disposable income usually goes down along with it.  You can ask for a decrease in plan payments, or even a temporary, one month suspension of your plan payments.

Although chapter 13 bankruptcy does have many restrictions, you can still purchase normal goods and services during the payment plan without having to report it to your attorney or trustee.

If you need to make a major purchase, like replacing a vehicle, you should contact your attorney.  You are allowed to buy a vehicle as a replacement for a current one, but there are some hoops to jump through. Contact your attorney before making any major purchases, and he or she will be able to help you through the process of getting it approved by the trustee.
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9) How do I Rebuild Once My Bankruptcy Is Over?

Rebuilding Your Credit 
Immediately after your bankruptcy, some simple steps can be taken to start rebuilding your credit.
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