Arizona Bankruptcy Lawyer Blog

It is important for a person with serious debt problems to understand that the choice to file for bankruptcy and the choice of bankruptcy chapter are personal. The choice to avoid bankruptcy and try to deal with debt directly is as well.

Except in the simplest of matters, that personal decision should only be made with the guidance of an experienced bankruptcy attorney.

The question is when should these decisions be made, after a short meeting with the attorney or after a thorough analysis is complete?

I think that many debtors are under the impression that a simple one hour consultation with an attorney (or often non attorney) is enough to allow them to make these decisions.

In fact, many calls to my office start with something like, "I spoke to an attorney (friend, paralegal etc.) and I am ready to file a chapter 7 bankruptcy". My initial thought is usually, "how are you so sure"?

At most, a short consultation can provide the debtor with the sense that bankruptcy may end up their only option in the long run. It may also provide some detailed information about how bankruptcy works and what problems may be encountered by the debtor.

However, the planning involved to prepare and file a well done bankruptcy case, the final decision as to which chapter makes the most sense, and the verification that there is not some better non bankruptcy alternative, cannot be made without a thorough review of hundreds of facts, timing issues, potential changes and other issues.

This analysis is often made more complicated by the inability of the debtor to provide complete information at the initial consultation and during the analysis process, changes in the debtor's situation, changes in the law, etc. etc.

I suggest that my clients, even in "simpler situations" hold off on their decision making until I have put together a case from "stem to stearn", and spent a few hours with them at an analysis meeting. This way the "stones" are all turned over, before decision making is done.

I find that this creates less surprise and a well planned case.

You should wait as well for your attorney to finalize his or her analysis before setting your heart on a solution. Even if you are sure that you are a chapter 7 candidate.

A chapter 13 bankruptcy requires that an "above median" debtor take a "means test" in order to determine how much that debtor must pay to unsecured creditors during the plan. This amount is called "disposable monthly income"

A key to obtaining a favorable i.e. low number is to be able to show the highest "budget" possible when taking this test.

In an attempt to do so, many bankruptcy filers throughout the U.S. have been showing as part of their budget the debt owed on cars they know will be surrendered, with some mixed results.

The question of whether this is possible has ended in the 9th circuit.

In American Express v. Smith, the Court of Appeals has ruled that subsections (b)(2) and (b)(3) of section 1325 of the bankruptcy code provide that if an expense is not reasonably necessary "for a debtor's and/or dependants' maintenance and support, it is not included in the calculation of disposable income"..."items that a debtor has surrendered or intends to surrender are not necessary for his or her support or maintenance."

In other words, if you know you are not going to keep the car for whatever reason, the amount you owe on it can't be used to determine the amount you can pay your unsecured creditors in a chapter 13 bankruptcy. i.e. you will end up paying more to unsecured creditors if surrendering the car.

If you have serious income tax debt, you have 5 ways to deal with it:

1. Challenge the Assessment

Challenge the amount of the tax by filing correct returns, amending returns, appealing the audit results, litigating the audit results etc.

2. Statute of Limitations Defense

The IRS has a limited period of time to collect debt. If they don't collect within this period, they are out of luck. Many taxpayers are able to use this to their advantage, especially in combination with non collectible status or installment agreement arrangements.

3. Installment Agreement/Non Collectible Status

The IRS must typically allow a taxpayer to set up a monthly payment on what is owed if the taxpayer will comply with a few requirements. The amount paid does not have to be enough to pay the tax debt off within the statute of limitations period. In fact, the amount paid monthly may be nothing. It all depends on the taxpayers ability to pay. This number is based on how much the government will agree that you need to live on, subtracted from your income. Assets are taken into account as well.

These programs are used to pay the debt in full over time, OR to get the taxpayer to the statute period mentioned above. In our office, they are also often used to buy time until the tax debt can be considered "dischargeable" or can be wiped away in bankruptcy.

Continue reading "Tax Motivated Bankruptcy in Arizona" »

Chapter 7 Bankruptcy is also known as a "straight" or "liquidation" bankruptcy. In a chapter 7, if the debtor qualifies to file based on his or her "inability" to pay debt, non exempt assets will be sold and given to creditors and most remaining debt then will be "wiped" away (discharged).

Chapter 13 Bankruptcy is also known as a "wage earner plan" or personal "reorganization". In a Chapter 13 bankruptcy, the debtor with a "regular" income, is able to keep non exempt assets and pay some portion of the debt over a 3 year to 5 year period. Sometimes the debt paid is a small amount and sometimes it is larger, depending on a number of different factors including the amounts of the debtor's income and budget, types and amounts of debts, and the debtor's non exempt asset value.

Certain debts that cannot be discharged in Chapter 7, can be discharged in Chapter 13.

Chapter 13 also provides a mechanism for individuals to prevent foreclosures and repossessions, while catching up on their secured debts.

Chapter 11 bankruptcy is a reorganization case as well, and is typically only used by a debtor who doesn't qualify for either a chapter 7 or chapter 13 bankruptcy or a business entity.

In Chapter 11, the debtor will typically retain possession of assets and continue to operate the business.

The debtor devises a plan of reorganization which, if accepted by creditors can bind both the debtor and the creditors to its terms. Plans commonly call for repayment out of future profits, or a sale of assets.

Paying for things you need is one of life's little dilemmas. Paying for legal help in Bankruptcy is one of life's larger dilemmas.

A bankruptcy client's common refrain is, "how do I pay for a bankruptcy attorney when I can't pay my bills?"

There are a number of ways to come up with the attorney fee, some are sensible, others are borderline ridiculous. Smashing your 10 year old child's piggy bank just isn't worth it in the long run.

One way to pay for a bankruptcy attorney that is often overlooked, and that will allow the case to be filed before the fee is fully paid, is to use a chapter 13 bankruptcy instead of a chapter 7 bankruptcy.

A few attorneys in Arizona will agree to take a small amount upfront and to then build the remainder of the attorney fee into the plan. It gets paid over time via monthly plan payments and it is interest fee.

I like to do this for cooperative clients, because it allows them the ability to get a case analyzed and filed now instead of later.

The upfront attorney fee can be as low as $350.00 depending on the individual facts of the case and the client's willingness to cooperate. A filing fee must be paid to the Court and a pre petition class must be taken as well prior to filing. The filing fee for a chapter 13 case is $274.00 and the pre petition class is typically $40.00 to $60.00.

If you have steady income, but are low on funds for an attorney, you should consider chapter 13 bankruptcy.

Every so often, I read a letter or receive a call from an attorney or creditor after the filing of a client's bankruptcy, that attempts to explain to me the need for my client to file a motion with the local court to obtain a ruling as to whether the automatic stay applies to a collection case against the debtor.

Doing so is unnecessary. (although providing notice to the local court and other parties may be in order to ensure they are aware of the filing).

The filing of the bankruptcy petition alone invokes the bankruptcy code's automatic stay and it applies to collection activity in and out of court. (See 11 U.S.C. Section 362 of the bankruptcy code).

The "stay" provision takes effect the moment the case is filed and the debtor and his or her property is under the protection of the bankruptcy court itself with a few minor exceptions.

If you are in a bankruptcy case, and a creditor is continuing it's collection activity with knowledge that you have filed, it has probably violated federal law.

Talk to your bankruptcy attorney or a bankruptcy attorney experienced with automatic stay litigation in bankruptcy, if you are having this problem.

A bankruptcy filing becomes a public record. This means that anyone can see what you have disclosed to the court.

Most of my clients seem to understand this when speaking to me initially.

What they don't always understand, is that everything about your present financial life and many things about your past financial life, must be disclosed to the Court under the penalty of perjury.

You cannot exclude certain assets or debts from this disclosure requirement.

If you owe your cousin 2500.00 for the work he did on your home, and he considers himself to be a creditor of yours, you must disclose to the court that he is a creditor and propose to treat him the same as other creditors in a similar position.

If you re paid your cousin the money within a certain period of time prior to filing, you must disclose it.

If you owe child support or are owed child support you must disclose it.

The trade off for the loss of privacy and perhaps for some, the shame of filing, is the "Fresh Start" or the removal of the obligation to pay on most debts.

The decision to make that trade, rests with the debtor.

Yes. Income tax debt can be wiped away in bankruptcy.

The catch? The following requirements:

Basic Requirements:

1. The taxes must have become due more then three years prior to the bk filing. This means that you should count forward 3 years from the date the return was actually due. (Think April 16th plus 3)

2. The original return must have been filed more than 2 years before the bankruptcy. 2003 return filed June of 2007? The two year date would end up in June of 2009. What constitutes an "original return" can be a complicated issue so if the IRS filed a "substitute" return before you filed your own return, make sure and tell this to your lawyer.

3. The IRS must have "assessed" the tax more than 240 days before the actual filing of the bankruptcy. Assessment means that they entered it in their system as due and owing.

4. No fraudulent tax return. This will kill the dischargeability.

5. No effort to evade the tax. This may as well.

Many of my clients have serious tax debt as a result of late filed returns. Despite other options (offer in compromise) bankruptcy often ends up being the best option overall.

Even if the tax debt is considered dischargeable one big caveat remains. The IRS lien.

The IRS will typically record a tax lien with the County in which you or your property "resides". If the property has value, the lien remains "attached" to it after the bk (chapter 7) or during the bk (chapter 13). In a chapter 7, the lien still has value after the case is over.

In a chapter 13, the value of the lien must be paid through the plan.

Often, the result in both cases is that the underlying tax debt is gone, but the lien is worth as much as the IRS was owed to begin with.

If you are getting ready to file for bankruptcy and have tax debt, make sure and have your attorney review the lien(s) and compare them to your asset values to avoid a surprise.

Some Chapter 13 Bankruptcy Examples

The following are a few basic examples of the benefits a chapter 13 have provided some actual clients.

CLIENT #1

Client Name: Mr. "Christian" Location: Arizona Chapter: 13

Debts:

189743.00 - Unsecured credit card, medical bill, failed business related debt

162,000 - Home mortgage debt

15,500 - Car loan

Minimum Payments outside of Bankruptcy to maintain debt load - monthly

3197.24 per month - mortgages and all living expenses

280.00 per month car

5500.00 per month - debt service on all remaining debt

After Chapter 13 - Payment and Budget Breakdown - monthly

3197.24 living expenses including mortgages

676.00 Chapter 13 plan payment

Total paid to unsecured creditors:

6444.23

Difference in Monthly Payments

8977.24 - before chapter 13 total needed to service all debt

3873.24 - total needed to service all debt after chapter 13 filed

5104 - savings per month

Debt Discharged at end of plan

$176685.00

Non Exempt Assets Protected

$9000.00 value

CLIENT #2

Client Name: Mr. and Mrs. "Jones" Location: Arizona Chapter: 13

Debts:

183,000.00 - Unsecured credit card, medical bill, business related debt

102,000 - Home mortgage debt

15,900 - Car loan

Minimum Payments outside of Bankruptcy to maintain debt load

3647.00 per month - mortgages and all living expenses

280.00 per month car

4500.00 per month - debt service on all remaining debt

After Chapter 13 - Payment and Budget Breakdown

3647.00 living expenses including mortgages

1850.00 Chapter 13 plan payment

Total paid to unsecured creditors:

78562.00

Difference in Monthly Payments

8427.00 - before chapter 13 total needed to service all debt

5497.00 - total needed to service all debt after chapter 13 filed

2930.00 - savings per month

Debt Discharged at end of plan

$104,676

CLIENT #3

Client Name: Ms. "Redfish" Location: Arizona Chapter: 13

Debts:

20,000.00 - Unsecured credit card, medical bills

13,027.00 - Car loan

Minimum Payments outside of Bankruptcy to maintain debt load

1707.00 per month - mortgages and all living expenses

160.00 per month car

890.00 per month - debt service on all remaining debt

After Chapter 13 - Payment and Budget Breakdown

1707.00 living expenses including mortgages

501.00 Chapter 13 plan payment

Total paid to unsecured creditors:

1201.91

Difference in Monthly Payments

2757.00 - before chapter 13 total needed to service all debt

2208.00 - total needed to service all debt after chapter 13 filed

549.00 - savings per month

Debt Discharged at end of plan

$17273.00

CLIENT #4

Client Name: Ms. "Trout" Location: Arizona Chapter: 13

Debts:

97,000.00 - Unsecured credit card, medical bills

Minimum Payments outside of Bankruptcy to maintain debt load

2546.00 per month - all living expenses including rent

4500.00 per month - debt service on all remaining debt

After Chapter 13 - Payment and Budget Breakdown

2546.00 living expenses including rent

190.00 Chapter 13 plan payment for 36 months

Total paid to unsecured creditors:

4056.00

Difference in Monthly Payments

7046.00 - before chapter 13 total needed to service all debt and pay living expenses

2736.00 - total needed to service all debt and pay living expenses after chapter 13 filed

4310.00 - savings per month

Debt Discharged at end of plan

$93113.00

Non Exempt Assets Protected

$2000.00

To speak about your options contact an attorney with chapter 13 bankruptcy experience.

I am not very funny. My sense of humor is dry, and according to my wife and kids, can't really be described as a "sense of humor" at all.

I dream on occasion that I am a comedian, and everyone is laughing hysterically at my jokes. Great dreams.

I do like funny things though, and I find many situations to be quite humorous. I also "chuckle" quite well.

What made me think of this?

On occasion I will meet with a potential client who causes me to chuckle...but a different kind of chuckle, an "uncomfortable" one.

When does this happen? Whenever a potential client tells me of an asset with value and then immediately recants or talks about "hiding" it.

An example (fictional of course):

Me: Do you own any thing else of value?

Potential Client: A watch

Me: Is it a nice watch? Does it talk or something?

Potential Client: Yeah...a "Breitling"

Me: So.. not a timex?

Potential Client: Oh No....."Breitling" you know...aviator watch. GQ magazine spreads.

Me: So worth maybe a few thousand on the street?

Potential Client: Maybe

Me: Probably need to get the value. If it's important to you, you may want to consider using chapter 13 bankruptcy to protect it.

Potential Client: Protect?.....(thinking for a second) Oh you mean the non exempt asset thing. But aren't I entitled to a watch in a chapter 7?

Me: Yes, up to a certain value.

Potential Client: What if I say to the Court....or I mean what if it isn't mine? You know what I mean right?

Me: (After uncomfortable chuckle done quite well).....no.

Potential Client: My neighbor says he filed a chapter 7 bankruptcy and no one asked him about his Rolex or his baby grand piano?

Me: One of the worst things you can do when asking a Court of Law to move your debts into the trash can of history, is to be less than honest about your assets.

Potential Client: Why?

Me: (After another uncomfortable chuckle) Jail time.

Potential client: About the piano.....

Being silly to try and make a point is fun. Going to jail because of a lie isn't.

I have noticed an increased determination on the part of the U.S. Trustee's office and the Court system in general to root out the dishonest bankruptcy filers.

If you are considering bankruptcy, and have assets with value that may not be exempt in bankruptcy, call an experienced bankruptcy attorney to see if there may be a way to honestly protect the asset despite filing.

If you file for bankruptcy, all collection activity by creditors must stop with a few exceptions. The part of the law governs this is called the "automatic stay".

So if a creditor is trying to collect from your or sue you based on a credit card, medical, breach of contract or other debt, they must stop all activity against you once you file.

They can't file a lawsuit, continue in a lawsuit, record a lien, report the debt to the credit reporting agency or seize property without permission from the court.

What happens if the creditor does continue with collection activity after notice of the bankruptcy has been received? They have likely violated the automatic stay rule and can be sued by the debtor. They may also have to pay damages and attorney fees.

I always suggest that if a creditor who is barred from collection by virtue of the bankruptcy filing continues to contact one of my clients, that the client or our office provide the creditor one more "notice" of the bankruptcy prior to suing. This notice usually goes out by phone and/or via a certified letter.

Most creditors "get the picture" and discontinue the contact.

Unfortunately, some continue. A lawsuit is then appropriate and often even necessary.

There are exceptions to the list of creditors who are completely barred from collection activity which will be discussed in further posts.

If you are in a bankruptcy and a creditor continues to contact you even after you are sure they know about the bankruptcy, you will want to speak to your attorney about whether a lawsuit is a good idea.

Debts owed to payday lenders can be wiped away in bankruptcy.

The real issue is not the fact that they are. It is that once the consumer reaches a point that a very high interest payday loan is necessary, there is usually a serious income and budget problem. A problem that if it hasn't already done so, will lead to other debt, repossessed car(s) and even foreclosure.

If you feel like a payday loan may become necessary, do everything you can to avoid it. Payday loans and credit cards, for that matter, should only be used in emergency situations.

If it is too late and you are in over your head, talk to an experienced bankruptcy attorney.

Congress continues to ponder a change to the bankruptcy code that would allow bankruptcy Judges to treat mortgages the way that car loans (older than 2.5 years) are currently treated in a chapter 13 bankruptcy.

If you have read some other entries on this blog, you understand that in Chapter 13, a plan is proposed that allows you to make a payment toward your unsecured debt that you theoretically can afford on a monthly basis.

The remainder of the debt is then discharged or wiped away. Many chapter 13 filers end up paying a small fraction of the overall unsecured debt as a result.

In that same chapter 13 proposal, 2.5. year old automobile secured claims are "stripped down" or "bifurcated" into two debts, one secured, one unsecured. The secured loan is crammed down to the value of the collateral, and the rest is transformed into an unsecured debt and treated as stated above.

First Mortgages are not treated this way. Second mortgages if wholly unsecured may stripped away and treated as an unsecured debt.

Now, if a home is worth $250,000.00 and the first mortgage amount is $350,000.00, the bankruptcy filer must continue to service the full $350,000.00 mortgage in installments just as they were prior to the bankruptcy in order to keep the property.

The change to the bankruptcy code that Congress is considering. would possibly treat this first mortgage somewhat like the 2.5 year old car loan.

Of course nothing is as simple as it seems.

It is likely that the change will contain roadblocks that will prevent many chapter 13 bankruptcy filers with upside down homes, to take advantage of it.

The bill may have unintended consequences as well. It could cause the cost of mortgage loans to rise for everyone else. This is an ongoing and interesting debate.

A fairly recent article about the amendment can be found here.

For Arizonans, who are upside down in their primary residence and who are also otherwise bankruptcy candidates, you can't do it now, but you may be able to in the near future. Keep an eye on the legislation.

If you are in Arizona and want to speak to me about your debt situation, please call 480 507 5985, and I will talk to you for free over the phone.

According to an Article posted February 3, 2009 at Bloomberg.com, personal bankruptcy filings climbed by 34% in January of 2009.

The American Bankruptcy Institute expects 1.4 million consumer bankruptcies to be filed this year up from 1.06 million in 2008.

Considering the numbers, Arizona Bankruptcy filings will likely grow close to the number of filings in 2005. Those considering bankruptcy right now in Arizona are not alone.

If you are considering bankruptcy, be aware that bankruptcy is not typically a simple process. The law, when considered in relation to an individual's set of facts, can create a myriad of pitfalls and options.

It is only with the help of an experienced bankruptcy attorney that these potential issues can be spotted and fully discussed.

If you are considering bankruptcy, I encourage you to read the articles in this blog, and then call to speak Michael S. Anderson at 480-507-5985 for free over the phone about your situation.

Chapter 13 Bankruptcy can be a useful legal tool for those in serious financial trouble. It allows the filer to do a number of things that he or she can't do in a chapter 7 bankruptcy. A number of it's potential benefits are listed elsewhere in the blog.

Despite all the good things you can find about chapter 13 bankruptcy, it does have it's shortcomings.

An important one?...it doesn't "discharge" or wipe away every type of debt.

All non-dischargeable debts are designated as such for public policy reasons, so if you have problem with one of them, call your congressional representative.

The following is the short list of the most common types, along with my comments, just for fun.

1. Unlisted Debt - Every debt needs to be disclosed in both a chapter 13 and chapter 7

2. Debts for death or personal injury caused during the driving of a car, "vessel", or aircraft, while intoxicated - Remember..."designated driver".

3. Debts for Spousal Maintenance or Child Support - Debts related to the property settlement agreement may be discharged in a chapter 13.

4. Certain Tax Debt - certain taxes are dischargeable. Surprise! Surprise!

5. Criminal Restitution or Fines Related to the Conviction of a Crime. This makes sense.

6. Student Loan Debt - Unless the Debtor qualifies for a "harship" exception...Good Luck.

7. Debts related to embezzlement or larceny - I don't have anything for this one.

8. Debt related to property damage as a result of "willful or malicious" conduct

9. Debts incurred during the plan that weren't included - It may be possible to pay a post filing debt through the plan.

10. Debts that are owed to a creditor who didn't get a notice of the Bankruptcy filing -

A chapter 13 trustee is the person that the United States Trustee (U.S. Department of Justice) appoints in each state/district to do the following:

1. Review the Chapter 13 Filer's proposed Chapter 13 Plan to ensure that it satisfies the requirements for a chapter 13 plan.

2. Collect payments from the Filer.

3. Distribute payment to the creditors as contained in a confirmed chapter 13 plan.

4. Administer the plan until the case is closed.

In Arizona, the Chapter 13 Trustee takes a very active role in making sure that the Filer is complying with the requirements of the Bankruptcy Code. This makes the requirement that the Filer cooperate with the Trustee in providing information even more important.

If you are in Arizona and have questions about Chapter 13 Bankruptcy and the role the Chapter 13 Trustee plays in the confirmation and success of a chapter 13 plan, contact Michael S. Anderson at 480-507-5985.

According to a recent USA today article, home foreclosures rose nationwide by 81% from 2007 and 225% from 2006.

Total repossessions were 850,000 up from 404,000 in 2007.

Arizona's numbers were among the leaders.

The question is whether proposed government fixes, including a proposed mortgage modification in bankruptcy bill, will stem the problem short term.

It appears that the market will have to reach a level that attracts buyers and money back into the system. This means more short term foreclosure activity.

For many it may be possible to modify the loan now, or use a chapter 13 to catch up the arrears and save the home from a foreclosure filing.

The goal of most bankruptcy cases, be they of the chapter 7 or chapter 13 variety, is reduction in debt. Reduction of debt occurs in a bankruptcy at the end of the successful case and is called a "discharge".

If a debt is "discharged" legally, the debtor's obligation to pay is ended.

In a chapter 13 bankruptcy there are two types of bankruptcy discharge.

1. A "completed plan discharge" which is granted to a debtor who has...completed the plan. Surprising to many as well, is that a chapter 13 plan does not require that all debt be repaid. More often than not, the chapter 13 debtor in Arizona, only ends up paying a small fraction of unsecured debt during the plan and the rest is...discharged.

and

2. A partial discharge. This type of discharge is granted to the debtor who does not complete the plan. What??? you ask. I can file a chapter 13 bankruptcy, not complete the plan and still obtain forgiveness of debt? Yes. If the debtor is unable to complete payments for reasons for which they "shouldn't be held responsible".

This type of discharge is more commonly called a "hardship" discharge. This hardship discharge gets rid of fewer types of debts than does the full discharge.

The bankruptcy automatic stay or simply the "stay" from here on out, is a Court Order that becomes effective on the date of the bankruptcy filing that protects the bankruptcy filer from most creditor activity.

The following is a brief breakdown of the benefits, exceptions and other interesting bits of information related to it.

Benefits

1. Collection contact must stop - Once the stay is in effect most lawsuits, calls, letters, etc. etc. must stop. Even from the IRS.
2. The stay doesn't require the debtor to "ask" the Judge for it. It is automatic.
3. The stay remains in place during the length of the chapter 13 plan
4. The stay halts foreclosure activity - allowing the debtor a chance to propose a plan to catch up arrears.
5. The stay stops vehicle repossession and may be able to help get a car back that has already been repo'd.
6. Liens cannot be filed after the stay becomes effective
7. Debts cannot be reported to the credit reporting agency
8. Levy and Garnishment of assets in accounts and paychecks must stop
9. The debt component of a criminal proceeding will be placed on hold
10. Tax liens can't be filed
11. Tax levy must stop
12. Co-Debtors are protected immediately from collection activity and may be permanently protected depending on how the debt is treated in the chapter 13 plan.

How Long the Stay Lasts

The stay will last until the court confirms the chapter 13 plan which replaces the stay as a protective order OR when the case is dismissed.

Continue reading "Chapter 13 Bankruptcy and the Automatic Stay for Arizona Debtors" »

The most basic definition of "chapter 13" is that it is that chapter in the Federal Bankruptcy Code that allows a debtor to pay back all or at least a part of his or her debts under the supervision of the Bankruptcy Court.

Of course, as with most legal matters, the question of what it is, can be much more complicated than where it is located in a book.

Let's start with the statement above then....restated:

When a debtor files a chapter 13 bankruptcy, he or she is proposing a plan to deal with his or her debts and assets in a manner that will allow the debtor to reorganize his or situation for the better. In order to do so, this plan must propose a number of things by law.

Typically the most important three are these:

1. Pay Debt - which debts will be paid during the plan by the debtor;
2. Protect or Surrender Non Exempt Assets - Which assets will be paid for, protected or surrendered and;
3. Discharge Debt - which debts will be wiped away at the end of the plan

These proposals are more fully explained as follows:

1. Pay Debt

a. The plan must propose to pay all "priority" debt as defined by the Bankruptcy Code. This includes debts like child support, spousal maintenance, and newer income tax debt.

b. The plan must propose to pay all arrears on the home the debtor wishes to keep. The "arrears" are the reason the home lender is threatening foreclosure. The debtor is behind.

c. The plan must propose to pay the car loan(s) over the course of the plan, through the plan i.e. directly to the bankruptcy trustee who pays the car lender.

d. The plan must pay some amount as a fee to the Chapter 13 bankruptcy trustee.

e. The plan must pay unsecured creditors the greater of the following to amounts divided over the length of the plan:

- The value of the Debtor's assets that aren't protected by State Law or the non exempt assets.
- The amount that the bankruptcy code's testing provisions determine that the debtor can afford to pay above his or her allowable living expenses, including the normal mortgage payment.

There are other debts, like student loans that are not necessarily priority debt, but that may not be "discharged" at the end of the plan OR paid in full during the plan. Strange, I know.

Continue reading "Chapter 13 Bankruptcy? An overview and example for the Arizona Debtor" »

Statistics from the U.S. Bankruptcy Court of Arizona show that there was a substantial jump in filings between 07 and 08. Statewide total filings were 10,570 in 2007 and 19,147 in 2008.

It is widely believed that filing numbers will continue to increase at least for the next few years.

While many of these filings are the result of consumer overspending, a number are also the result of failed businesses, lost jobs, tax debts, rental properties that have lost value and unexpected medical expenses.

For those with serious financial problems, a chapter 13 bankruptcy may be the best solution. Chapter 13 bankruptcy benefits are relatively unknown and are often misunderstood.

Some of these potential benefits are listed here with short explanations. If you live in Arizona, have serious debt problems, and have a steady income, you should speak to a bankruptcy attorney about any of the following that catch your eye.

1. Stop foreclosure and catch up mortgage arrears over time

Foreclosure rates in Arizona are climbing. Chapter 13 bankruptcy stops foreclosure and provides a mechanism for the filer to bring current any arrears over three to five years. The mortgage arrears are paid as part of a monthly payment to the chapter 13 trustee. As long as the chapter 13 plan proposed is viable and approved by the court, and the plan payments and normal house payments are made, nothing happens to the home.

2. "Strip down" mortgage

If the home's value is less than or equal to what is owed on the first mortgage, chapter 13 can be used to change the second, third etc. mortgage(s) into unsecured debt which don't necessarily have to be paid in full, thereby reducing the overall house payment. Legislation is being considered right now, that may allow certain filers to "strip" the home down to it's actual value, cramming down both mortgages. Continue visiting this blog to stay updated on this issue.

3. Protect non exempt property

A Chapter 13 plan makes it possible for the filer to keep property which would be lost in a chapter 7. Much of which average consumers own, is protected by statute and doesn't need to be protected in a chapter 13. You can review the current Arizona bankruptcy exemptions here.

For those items that aren't protected, the filer must be able to pay the value of the asset during the plan length period in monthly installments, or the asset could be surrendered for distribution to creditors much like in a chapter 7.

4. Co-Debtor Protection

11 U.S.C. Section 1301, may stop a creditor from going after the co-debtor on a consumer debt, during the plan period.

5. Selling Property

If an asset is vulnerable from creditor attack, a chapter 13 bankruptcy filing will provide the asset owner some breathing room. It stops the creditor and under 11 U.S.C Section 1303 provides the filer the right to sell property under section 363 of the code. This allows for the control of the sale of the asset. This control may result in a better sale price.

6. Stop the Repossession of a Car and "Cram" it down

Filing bankruptcy stops the repossession of a car and may even allow the filer to re obtain a car already repossessed. If the car is one the potential chapter 13 filer wishes to keep and it is worth much less than what is owed, the car may be "crammed" down as well. This means that the filer may be able to pay only the lesser value of the car not the total amount owed through the chapter 13 plan. Any remaining debt would be treated as unsecured debt, partially paid through plan and/or wiped away at the end of the plan IF the car was purchased more than 2.5 years before filing.

As a side note, the filer is also able to "cram down", non purchase money claims and purchase money claims that are older than 1 year. He or she can also potentially cram down a vehicle purchased for someone other then the filer as well.

7. Unsecured debt is frozen

Most chapter 13 plans propose to pay a percentage of what is owed to unsecured creditors. Not only do many of these plans "cram" down the amount paid in principal to unsecured creditors, they also stop the growth of interest and fees. Sometimes it is worth filing for that reason alone.

Some filers pay the chapter 13 trustee, attorney, secured debts for auto(s) they want to keep, arrears on home, priority child support arrears and priority taxes and discharge all else.

As an example, a recent chapter 13 client in our office was able to successfully propose to pay roughly $5000.00 of $150,000.00 in unsecured debt over the plan term, his car loan, trustee fees and most attorney fees and the remainder will be wiped away at the end of the plan.

I think that the fact that the filer is NOT necessarily paying back all of the unsecured non priority debt is one of the most misunderstood aspects of chapter 13 bankruptcy.

8. Chapter 13 is great for those with sincere desire to repay some of the debt

Many with debt problems cannot avoid bankruptcy despite the fact they don't want to file. For those with a steady income, and a desire to try and pay back some of what they owe, a chapter 13 bankruptcy is often the answer. It allows the filer to try to pay at least some of the debt. For many, it is seen as the honorable thing to do. A number of our clients through the years, have insisted on using chapter 13, even if they otherwise qualified for a chapter 7 bankruptcy.

9. The Chapter 13 case allows for more control of consumer claims

The filer of the chapter 13 can control all consumer claims in the case. He or she will have standing to file what are called adversary proceedings on all pre petition consumer claims like violations of the fair debt collections practices act that occurred prior to the filing date. He or she can litigate any violations of the automatic stay or discharge violations by the creditors including the misapplication of payments and improper fees by mortgage servicers. Most adversary proceedings provide for fee shifting statutes that require the creditor to pay the filer's legal fees when they lose.

Continue reading "Filing Chapter 13 Bankruptcy in Arizona - 23 Potential Benefits " »

Small business is the backbone of our economy. There are literally millions of small businesses in the United States and at any given time, a large percentage of them are failing.

Many Arizonans with small businesses have contacted me when faced with serious business related debt to ask whether a creditor(s) can sue them personally for debts incurred to create and maintain the business.

A small business owner's personal liability usually is determined by whether the debt has been personally guaranteed. I.E. did the business owner borrow the money in his or her own name, or did they personally promise to pay if the business couldn't. If so, a lawsuit and collection can follow.

The related question is whether the "structure" of the business provides any protection for the small business owner?

Sole Proprietorship - The most common business structure

If you are what is commonly known as a "sole proprietor", the business is you and you are the business. You have probably personally signed off on every loan, credit card debt, lease etc. If so, you can be sued personally and your personal assets are up for grabs.

General Partnership - provides no protection

Partners in this type of structure are personally liable for the debts of the partnership, all of it. Worse yet, ANY one partner can tie the entire partnership to a loan. If you are a partner in a general partnership in Arizona and the whole project goes "south", you may be in trouble and not even know how much.

Corporate entities and Limited Liability Companies

These types of entities protect your personal assets and income from the business creditors not personal creditors as described above. By statute, the shareholder or member of the LLC has limited personal liability.

I find that most small business owners who have organized the business as an LLC or Corporate entity, have also provided the various creditors, landlords etc. a personal guarantee in order to borrow the money or obtain the lease. If you have done this, then the business creditor can go after those assets and your income after suing you and obtaining a judgement.

So, if you are a sole proprietor, a general partner or have otherwise personally guaranteed debt or lost the protection of your corporate/llc umbrella, what do can you do to deal with the debt?

1. Debt Negotiation

Most creditors will consider reducing the amount they are paid and forgiving the rest. Even business creditors. I find that negotiating serious business debt doesn't work well unless the "debtor" has some present asset or cash with which to negotiate. There are other negatives as well. You can read about the pros and cons of negotiating debt in more detail by reading this entry, debt negotiation - pros and cons.

2. Bankruptcy

Any individual that owes debt as a result of a personal guarantee, general partnership debt, etc can file bankruptcy (Chapter 7, 13 and even 11 if necessary) in order to protect their exempt assets and future income.

The business as a separate entity may or may not need to file a bankruptcy. Corporation, LLCs and partnerships are legal entities and can only file a chapter 7 to liquidate and close shop or chapter 11 to "reorganize". No chapter 13 bankruptcy is available, and no "discharge" of the debt is available to the corporate entity.

Reorganizing under chapter 11 will only make sense if the business may become viable as a result. Chapter 7 liquidation may only be necessary for the corporate entity if a creditor is about to take a business asset that could be used to pay a personal priority debt, bankruptcy trustee involvement makes sense to help in winding down the business within the protective arms of the bankruptcy code, or if the bankruptcy filing would cause creditors to "close the file" and leave officers and shareholders alone.

If personal bankruptcy is the option, then typically the choice will be between a chapter 7 and a chapter 13.

In a chapter 7 bankruptcy the non exempt assets, or assets not protected by state law from collection by creditors are taken by the bankruptcy trustee, liquidated and paid out to creditors in varying priorities. Most debt is then wiped away.

In a chapter 13 bankruptcy, a payment plan is proposed. That plan calls for you to pay part or all, (usually a small part) to your creditors in monthly installments for a three to five year period. Typically, most non exempt assets are protected for liquidation as a result. Most other debt is then wiped away.

If the majority of your debt as a result of the failed business is "priority" debt, then the benefit of bankruptcy may be significantly reduced.

It is true. Debt can be"negotiated" allowing a debtor to pay less than what is owed to a creditor.

However, and contrary to what may be on it's way to popular opinion, there is no Federal or Arizona state law that forces a non tax related creditor to take less than what they are owed outside of the bankruptcy context.

Unfortunately, the belief that this may be true is being trumpeted by certain debt negotiation "professionals" on radio and TV.

This "pitch", as well as other "claims", may sound very appealing at first listen. To the honest debtor, with a sincere desire to pay back debt, these claims may sound like a godsend.

The key phrase to remember however is, "if it sounds to good to be true, it usually is".

For those with serious credit card, medical bill, or business related debt who are trying to avoid bankruptcy or who have been told they don't qualify for a chapter 7 and are trying to compare chapter 13 to negotiating debt, I am providing the following shortlist of debt negotiation pros and cons.

Debt Negotiation Pros

1. Debt is reduced - If you are able to negotiate successfully with the creditor, the amount you pay will be less than the amount you originally owe.

2. Budget - Putting together the funds to make reasonable offers to settle may require that you live on stricter budget than you may be used to. Good practice for avoiding debt in the future.

3. Simpler - Compared to filing a bankruptcy, saving money and settling with a creditor could be much simpler.

Debt Negotiation Cons

1. Creditor Calls

If you begin to make payments monthly to a "debt settlement professional" you will likely continue to get collection calls. There is no legal method that prevents an original creditor from contacting a debtor except the automatic stay relief of a bankruptcy petition in Arizona.

Just because someone promises that the original creditors won't call, doesn't mean they won't. Third party collectors are controlled by the Federal Fair Debt Collection Practices Act and can be stopped, by writing a short letter asking them to. You don't need to hire someone to do that.

2. Credit Report

Most debtors do not have the funds handy to settle the debt with. This means that they must stop paying creditors in order to save the money necessary to settle and to convince the creditor that they are a "hardship" case that should be considered for settlement. While the money is being saved, the credit score is dropping. Don't let anyone tell you otherwise.

3. Forgiven debt is taxable

Unless you fall under the IRS "insolvency" exception, you will have to treat the forgiven portion of the debt as income on your tax return. (Bankruptcy is the other exception).

4. No guarantee

If someone guarantees you a result, run...fast.

Continue reading "Avoiding Bankruptcy in Arizona and Negotiating the Debt - Pros and Cons" »

If you have credit card, medical bill debt, or other unsecured personal loans that are so large you can't pay them off in a reasonable amount of time, you will likely end up using one of the following options to deal with it.

1. Borrow your way out

In the recent past, most with serious unsecured debts would turn to their home in the form of a home equity line or second mortgage. This was a quick fix that usually provided a lower monthly payment to service the same amount of debt. The obvious problem now? Loans are more difficult to come by.

The other problem? The new lender will require that the home be pledged as security for the loan. Once that happens, the debt is here to stay. The borrower will eventually pay in full or lose the home. These loans are almost always of the higher rate and higher cost variety as well.

2. Non Bankruptcy Payment Plan - Consumer Credit Counseling

Many credit providers will work out a payment plan with you either directly or through a "credit counselor". These counselors or agencies gather your income and budget information, help you get organized, and propose a new payment arrangement to each creditor. The proposal typically consists of a reduction in the interest rate and a lower monthly payment. Problems do exist, especially where the debt is so high that no "payment plan" will ever catch you up.

For those with serious debt, the debt usually never goes away, the credit report continues to reflect late payments, and at some point a collector gets involved again.

If you are going to engage a credit counselor, make sure that 1. They are reputable 2. They are not doing something for you that you couldn't do yourself and 3. That the proposed plan is "doable" and will pay off the debt in full in a reasonable amount of time.

3. "Negotiate" your debt

Many unsecured credit card lenders will reduce the principal balance and accept a sum smaller then they are owed to "settle" the account. "A bird in the hand" as they say.

Once you have fallen behind on the debt, the creditor or collector has a "formula" that tells them how much they will accept to settle the account at any given time. If you are a bankruptcy candidate or if they believe that for some other reason they may end up getting less than they would like, they may adjust the amount downward.

The willingness on the part of these credit card companies has led to the growth of a horde of so called "professional" debt negotiators. You hear the ads on TV, Radio and if you listen to enough cable news, you start to hear them in your head.

Most of these companies include in their "pitches" things that aren't necessarily true. Things that lead you to believe that these credit card companies must allow you to settle your debt or that they have some secret that allows them to settle your debt for less than anyone else.

The truth however is a little different as follows:

A. You can probably do on your own what most "debt negotiation professionals" are able to do for you.

In order to have a shot at convincing the lender to settle for less than the standard, I find that you need to be a good candidate for bankruptcy and the creditor must believe that to be true, and you need to have the cash in your hand when you make the settlement offer.

If these two things aren't true, you are simply relying on the "good graces" of the creditor to determine the amount of settlement. That is all a "debt negotiation professional" does i.e. rely on good graces and a slick marketing campaign.

B. If you begin to make payments monthly to the "debt settlement professional" you will likely continue to get collection calls and you may even be sued before you come up with the funds to settle all the debts.

Monthly payments to the "debt negotation professional" does not stop the clock from ticking, nor does it stop the creditors litigation timeline. There is no secret word that the "professional" uses to magically stop the collection. Many people with serious debt learn this the hard way.

C. "Debt Settlement Professionals" are very expensive and you are vastly overpaying for what you get.

In essence, you are paying the company to set up an accounting system to collect and track your money. When they are paid the estimated amount for their fee and the estimated amount needed to settle, they make some phone calls. If you are sued in the meantime, they "earned their fee" for magically keeping the debt collector from suing you until then.

I have reviewed dozens of the contracts they use, and know that most people taken in by these operators pay a "set up" fee, a monthly fee and a percentage of either the total debt or the amount saved. For a debtor with $100,000 in credit card debt who settles the debt for 50%, or $50,000, the overall fee is usually $12,000 to $20,000.

Before you consider paying these types of fees, contact your local bankruptcy attorney. Ask him or her to put together a bankruptcy case if you are a good candidate for bankruptcy. Then ask them to use it and your funds as leverage to negotiate with your creditors on an hourly basis.

You will pay far less and likely get a much better result. One governed by Arizona State Ethics Rules for Attorneys.

D. Forgiven debt is taxable

Unless you fall under the "insolvency" exception, you will have to treat the forgiven portion of the debt as income on your tax return. Bankruptcy is the other exception.

E. While you are waiting to save the money to settle your credit score is being destroyed

Most creditors don't seem to be interested in settling unless you are late on your payments. Most people who engage the "professional debt negotiator" stop making payments and never start again. The plan falls apart, they still have the debt and the 10 months of late pays on the report. Thanks.

4. File for Bankruptcy

Filing for bankruptcy is usually the most comprehensive and effective method for dealing with serious debt. Bankruptcy can do the following:

A. Stops Debt Collection by virtue of the federally mandated "automatic stay"
B. Provides a means to save a home from foreclosure
C. Provides a means to save your car from repossession
D. Provides a potential means to reduce secured debt amounts
E. Discharges or wipes away most if not all of your consumer debt

Chapter 13 bankruptcy, allows you to pay what you can "afford" over a set amount of time to your creditors.

In almost every instance the amount paid in the chapter 13 is far less then a debt settlement negotiation will require you to pay.

There are downsides. Bankruptcy carries a stigma. It has become a bit more difficult to qualify to file, the workload to file has increased, it is a matter of public record and stays on the credit report for 10 years.

My clients go through a rigorous analysis process to determine which of the options described above is the best.

I am an attorney in Mesa Arizona who enjoys writing about debt issues and representing local small businesses and individuals who are having serious tax, business related or consumer debt problems.

Most of my clients have serious income tax, payroll tax, failed business, medical or credit card debt and are facing IRS levy, lawsuits and sleepless nights.

I am able to help by personally and thoroughly reviewing their financial history, educating them about their best options to deal with the debt, and then helping them do so via Chapter 13 bankruptcy, which is the firm's focus, chapter 7 bankruptcy, dealing with the IRS/Creditor directly, or a combination of bankruptcy and direct representation.

For most, there will be a solution if there is the will to cooperate.

My desire is that for those Arizonans with serious debt problems, this blog will be a place to visit as they learn about the law and their options.

I encourage readers to use the search bar, read my take on a question, or shoot me a question to get an answer potentially written about on the blog.

Once you have learned all you can, you can email or call me to talk further about your options.

If you are in trouble, I can help you find a solution.

Michael S. Anderson J.D.

The following are two lists. The first is a list of the most common reasons I encounter in representing clients with debt that force them to use a chapter 13 bankruptcy instead of chapter 7 bankruptcy. The second list are the most common reasons I see people choose to file chapter 13 bankruptcy as opposed to chapter 7.

Must File Chapter 13 Bankruptcy - Most Common Reasons
1. Filed a recent bankruptcy case. (8 years for from chapter 7 to chapter 7)
2. Fail to qualify for a chapter 7 bankruptcy - i.e. fail the means test, filing chapter 7 would otherwise be done in "bad faith"
3. Majority of debt may not be discharged in chapter 7 but may be in chapter 13

Choose Chapter 13 Bankruptcy Instead of Chapter 7 Bankruptcy - Most Common reasons
1. Need to protect "non exempt" assets
2. Simply want to control creditors via court supervised repayment plan
3. Need to Protect co-debtor(s) from collection
4. Keep the IRS at bay - obtain an overall better monthly payment than installment or oic
5. Reduce Principal on certain car loans
6. Strip away/treat as unsecured debt second mortgages on home that are "wholly" unsecured
7. Stop Foreclosure and pay arrears over time.
8. Stop repossession and pay for car through chapter 13 plan at actual value.
9. Usually less expensive to actually file case than chapter 7.
10. Want to make the effort to try and pay creditors back something if only a small percentage of debt
11. Divorce related debt problems

Typical Chapter 13 Bankruptcy Case Examples