credit card
medical bill
personal loan
deficiency balances car repossessed
deficiency balances other personal property repossessed
deficiency balances on home foreclosure
certain tax debt
student loans for which the debtor can prove a "hardship"

The real question is, what debt is going to survive the debtor's attempt to discharge in the chapter 7 bankruptcy?

debt incurred to pay non dischargeable tax debt
court imposed fines
back child support and spousal maintenance
debts owed as part of a marital settlement or division of debt decree in divorce proceeding
loans owed to a pension plan
student loans
certain tax debt
debts for injuries or death related to drunk driving
debt incurred fraudulently

Some of these non dischargeable debts can be more successfully dealt with either discharged or paid via terms that are more friendly than outside bankruptcy in a chapter 13 bankruptcy case.

What if the borrower files for bankruptcy? A few important points:

1. The cosigner is considered a codebtor both inside and outside of bankruptcy.

2. The creditor can legally pursue the codebtor for payment even if a chapter 7 bankruptcy is filed. There is no automatic stay protection for the codebtor in a chapter 7 bankruptcy.

3. The creditor can only pursue a codebtor if the borrower files a chapter 13 bankruptcy case in certain circumstances, as follows:

a. The case is over and the debt wasn't paid in full during the plan.
b. The codebtor is the one who received the consideration for loan i.e. actually owns the car.
c. The loan isn't being paid back during the plan.
d. The creditor can convince the Judge that it's interests will be "irreparably harmed" by continuation of the codebtor stay.
e. If the debt arose in the ordinary course of business and is not a consumer debt.

If you are considering bankruptcy and have a codebtor, you should speak to your attorney about the effect the bankruptcy filing will have both on the codebtor's credit and requirement to pay the debt.

1. Car loans entered into more than 910 days prior to the filing of a chapter 13 bankruptcy.

2. Second mortgages on homes where the home value is less then the debt owed on the first mortgage.

A reduction or "cram down" as it is commonly known is not available to reduce the following loans in a chapter 13:

1. First Mortgages

2. If the creditor has a "purchase money security interest" in the property (money lent to buy the property in question:

a. loans for motor vehicles that were purchased for personal use within about 2.5 years of the filing date.

b. loans for any other property purchased within 1 year of the filing date.

For these items, the full amount of the debt has to be paid to the creditor through the plan in order to keep the property.

How each type of debt is treated, depends on the bankruptcy code and case law. Generally, a chapter 13 filer must have enough income to pay the following in full:

1. Living Expenses

The law assumes that you need a certain amount of money to pay for your "reasonable" living expenses. What is considered to be reasonable is litigated around the country each week. In Arizona, your reasonable living expenses typically includes: mortgage, food, utilities, insurances, out of pocket medical care costs, upkeep on home, hoa dues, property tax, child care, spousal maintenance, daycare, costs related to maintaining your small business, or related to your employment, gas and upkeep on car, laundry, mandatory withholdings at work, car lease and a few other items. These items are paid outside the plan of course.

2. Car Loan

Car payments are paid through the chapter 13 plan as part of the plan payment. The plan will often change the treatment of the car loan creditor. The law often allows for the debtor to pay less in principal and or interest and the length of the loan payout is either shortened or lengthened.

3. "Priority" Debt

Certain taxes, child support, spousal maintenance are the most common debts that must be paid in full through the plan.

4. Tax Lien

If a taxing entity has properly recorded a tax lien and the debtor has assets with value, the tax lien will have to be paid through the plan with interest.

5. Mortgage Arrears

If behind on a home loan, the amount that is owed will be paid as part of the plan payment and any foreclosure will be stopped while the payments are made.

6. Value of Non Exempt Assets

If the debtor has a asset that is not considered "protected" under state law, in order to create a viable chapter 13 plan, unsecured creditors must be paid it's value during the plan. If the debtor has an antique jukebox worth 10000.00, these creditors will need to be paid 10000.00 during the plan or give the jukebox up to the chapter 13 trustee for sale and distribution as in a chapter 7 bankruptcy.

The debtor must also pay unsecured creditors their "extra" income as determined by various and required budget and income calculations IF the resulting number is greater then the proposed amount to the unsecured creditors to protect the non exempt asset. Many debtors pay very little to the pool of unsecured creditors.

8. Fees

Attorney and Trustee fees paid through the plan.

A well developed and successful chapter 13 plan often results in:

1. full payoff of priority debt
2. full payoff of car loans and home arrears
3. a large reduction of debt paid to unsecured creditors
4. protection of assets that would have been lost in a chapter 7

1. Instead of paying the full loan amount, the debtor can pay the bank the value of the car over the length of the chapter 13 plan.

2. Instead of paying the original interest rate, the debtor can pay the bank the "prime plus rate" or the national prime rate plus a specific rate adjustment for risk of non payment. (hovers at around 4.5 to 5.0% now) See Till v. SCS Credit Corp 541 U.S. 465, 124 S. Ct. 1951, 158 L.Ed.2d 787 (2004). (Can the debtor cram down the interest rate on a car purchased within 910 days? topic for another entry)

3. The unsecured portion of the debt is treated as any other unsecured debt and shares in the funds set aside for unsecured creditors, an amount that may be very small.

The ability to file a chapter 13 bankruptcy and thereby change the treatment on a car loan, can be a major benefit to a debtor who has a steady income and an upside down vehicle.

The Court's language..."while section 525(b) does indeed prevent employers from discriminating against current employees based upon a bankruptcy filing, the unique wording of this section allows bankruptcy discrimination in the hiring process."

You can read Mr. Andresen's article here.

1. You should avoid borrowing money or withdrawing money from your IRA, 401k or ERISA qualified retirement plans to pay the debt. These funds should be safe in a bankruptcy case.

2. Don't borrow money on your home's equity to pay your bills.

3. If you owe friends, family, or business associates money, don't pay them back within one year before you file (unless less than 600.00). This is considered a "preference" and the money can be recovered form those close to you for distribution to all of your creditors in the bankruptcy case.

4. Don't put property into someone else's name or give an asset away. This type of transfer could be considered fraudulent and cause you to lose the discharge and the asset.

5. If you typically get a large tax refund, think about increasing net income monthly in order to get a smaller refund. It will be property of the bankruptcy estate. If the refund is the result of earned income tax credit, you may be able to request that it be paid in your paycheck.

6. Don't reduce the withholding so much that you end up with a large tax bill either.

7. Continue to make payment on cars and real estate you need to keep.

8. Lastly, get good advice from an experienced bankruptcy attorney sooner rather then later. The longer you wait to get advice, the narrower your choices will be.

In order to determine whether a presumption of abuse exists, the debtor's current monthly disposable income (as determined by the means test itself) is multiplied by 60. If that amount is is equal to or greater than the lesser of $10,000 or 25 percent of the debtor's non priority unsecured debt, the presumption of abuse exists.

Presumptively Abusive doesn't mean that the filer is a bad person...it just means that if the filer were allowed to stay in the chapter 7 bankruptcy and gain a discharge of debt, the law wouldn't be followed.

If the filing fails the means test, the filer will have to convert to or file in the first place a chapter 13 bankruptcy, and pay a specific amount based on a form of the same test to unsecured creditors over what is typically a 5 year period UNLESS the filer is able to successfully rebut the presumption of abuse.

This means test only applies to individuals not businesses, and only if the debt is primarily consumer debt, or debt incurred by the individual for personal, family or household reasons. If the debt is primarily non consumer i.e. for the purpose of earning a profit or involuntary like tax debt, the means test shouldn't apply.

The current version of the code section can be found at 11 U.S.C. sec. 525(b) and partially reads as follows:

"No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt."

The weak spot for employees, especially in "at will" employment states like Az. is that the employer can fire for other reasons including those related to a person's financial history.

If an employee were to sue an employer for a violation of this code section post bankruptcy, he or she would have to prove that the bankruptcy was the sole reason for the firing.

If you think you need to file for bankruptcy, but are concerned about this issue, not only do you need to keep good employment records but you also need to have an experienced attorney help you weigh out all the pros of filing vs all the negative potential consequences including job loss. The choice to file will ultimately be your own.

So a basic question: What does the law protect?

A good place to start is to read a basic list of Arizona bankruptcy exemptions. The U.S. Bankruptcy Court updates a list every so often and has done so as recently as May 2010. Read it here.

Some interesting points about this list:

1. Most major assets Arizona consumers own are exempt in a chapter 7 bankruptcy case.

- Homes - possibly 150000 in equity is exempt (equity =value minus the bank loan)
- Cars - 5000 in equity per person
- Most retirement plan/accounts

3. Some assets that aren't exempt can be liquidated and "spent" in certain ways to benefit the debtor prior to filing the chapter 7 bankruptcy. (Tread Carefully)

4. In a chapter 13 bankruptcy, you can voluntarily surrender non exempt assets or protect the value of non exempt assets by paying the value to unsecured creditors during the plan.

5. Arizona is an "opt-out" state. This means that it has chosen not to use federal bankruptcy exemptions. Arizonans can only use state exemptions and federal non bankruptcy statutes that may protect certain assets.

6. Arizona bankruptcy filers can only claim the Arizona exemptions if they were domiciled (lived) in Arizona for two years before filing. If they weren't, they must use the exemptions provided by the state where they were domiciled the longest during a period between 2 and 2.5 years prior to the filing date. Confusing...I know, and it gets more confusing if the state the law forces the debtor to use, doesn't allow non residents to use their exemptions, or if the exemption scheme is complex.