Gilbert Arizona Attorney, Lawrence B. Slater

 The main reason people file for Bankruptcy is to discharge their debts. If a debt is discharged, you don't have to pay it any more.  We usually try to discharge debts on credit cards; deficiency claims from repossession of vehicles or other property; medical bills; unsecured loans; liability for second mortgages on residences; HOA debts from prior to filing; and many other kinds of debts. We can review your debts and can usually tell you which debts would be discharged in a bankruptcy. 

 Debts that cannot be discharged usually include debts from Divorce Decrees; student loans, most taxes, claims based on Fraud, criminal restitution, and many other claims. Charges to credit cards incurred within 90 days of filing Bankruptcy usually cannot be discharged. We can review your debts and can usually tell you which cannot be discharged.

 SECURED DEBTS

 Although you can discharge debts secured by property, you may lose the property if you don't pay the debt! If you want to keep your house or car, you need to pay the debt, even though it can be discharged. You need to discuss with the attorney whether you want to "reaffirm" these debts so you can keep the property.

 DEBTS ON YOUR HOUSE

  You need to keep in mind that there are two components to a debt on a house, the debt (promissory note, or loan or debt); and the lien (mortgage or deed of trust). The borrower owes the loan or debt and has personal liability to pay it back. If the borrower defaults and doesn't pay, the lender can sue on the debt. The lien is different; it is a claim against the property, it is not a claim of personal liability against the borrower.  If the loan is not paid, and is defaulted, the lender can foreclose on the house, and sell it, with the proceeds to be applied to the loan balance.

 Arizona has an "anti-deficiency" law, which covers first mortgages on residences. If the lender forecloses, and there is a deficiency on the first mortgage, meaning the sales price did not cover the loan balance, the borrower is not personally liable for the unpaid balance! But the borrower is personally liable for a deficiency for the second mortgage (unless it was borrowed to purchase the residence).

 If there is a foreclosure and a deficiency on the second mortgage, the lender can sue on the debt, or forgive the debt. If the debt is forgiven, the lender can give a 1099 IRS form and trigger a tax liability for the amount forgiven.

 A bankruptcy should discharge the personal liability on the second mortgage, and once discharged, it should not trigger a potential tax debt, because the lender should not be able to forgive a debt that is no longer owed!

 If you have questions on any of these issues, or want to know how they apply to your situation, you should discuss it with the attorney.

 DISCHARGE OF INCOME TAXES

 It is possible to discharge income taxes for an individual if it has been more than three (3) years since the tax return was due to be filed; more than two (2) years since the return was actually filed; and more than 240 days since the tax was assessed. So, by April 15, 2010, it may be possible to discharge income taxes for 2006 and earlier years. This exception to discharge does NOT apply to liablility for witholding taxes and other kinds of taxes; and it does NOT protect you if the IRS took a lien on your assets.

 DISCHARGE ORDER

 About 5 months after you file the bankruptcy, the Court mails out your discharge order. It is an injunction that prevents all discharged creditors from pursuing you any further (they can't sue; move a lawsuit further; obtain a judgment; enforce a judgment; garnish wages; etc.

 The Discharge Order also releases the Automatic Stay. This means that creditors who were NOT discharged can move forward to enforce their claims. Secured creditors, like creditors with claims on your car or house, can move forward if they have rights of repossession or foreclosure.

 REBUILDING CREDIT

 Your credit will be damaged by filing for Bankruptcy, in addition to any foreclosures or repossessions, and unpaid accounts with creditors. After filing, you will want to take steps to rebuild your credit. This may take a few years, but it will progress more quickly if you consider our advice on rebuilding credit.

 If you file for Bankruptcy, you can keep all property that fits within the "exemptions," based on the "equity" in the property, and considering the "fair market value" of the property. For married couples, each spouse can claim their own exemptions (but the couple can only claim one homestead). The exemptions cover many types of property, including equity in a residence; cars; furnishings; retirement; and many other assets. For more details on property exemptions, see our page on Property in Bankruptcy.

  The Debtor needs to review the list of assets and values with the attorney. Sometimes, assets can be sold or converted from non-exempt to exempt property. (Sometimes not, so be sure to check with the attorney!).

 The Debtor needs to be sure there is no more than $150 in the bank on the day of filing.

 Tax refunds are not exempt.

 Even if property is exempt, but if it is subject to a loan, you probably have to pay the loan to keep the property. This usually applies to residences, cars and other property.

 For many more details, see our page on Property in Bankruptcy.

 When a Bankruptcy case if filed, the Court automatically issues a Stay order. This order prevents all creditors from moving forward with their claims against you. They cannot repossess your car or foreclose on your home while the Stay is in effect. If they filed a lawsuit, they cannot move it toward a judgment. If they have a judgment, they cannot garnish your wages. All the creditors have to back off while the Stay is in effect!

 Some creditors are entitled to file to Lift the Stay order by filing a motion with the court. This usually applies to creditors with secured claims, so they can foreclose on your house or repossess your vehicle if you are not making the payments. This process takes at least a month or two, and there could be defenses. You need to ask the attorney about this.

 If the Stay is not lifted, it becomes a final and permanent order for creditors to stop pursuing you for their claims when the Discharge order is entered at the end of your case (about 5 months after you file).

 Chapter 13 is usually filed to force a payment plan on creditors.

 Many people think Chapter 13 is filed so they can pay off their unsecured creditors off, but this is not usually the case. If you have claims that are Nondischargeable, such as most taxes, child support, spousal maintenance, criminal fines, and other nondischargeable debts, you can force the creditor to take payments for up to 5 years.

 If you are threatened with contempt in Divorce Court for unpaid support or maintenance, you can force a payment plan. If you are threatened with collections and garnishments from IRS, you can force a payment plan.  If you are threatened with foreclosure of a house and need time to catch up the payments, you can force a payment plan on the arrearages (but you will need to make the regular monthly payments)!

 It is also possible under certain circumstances to discharge a second mortgage on your house in Chapter 13, if there is NO EQUITY in the house to cover the mortgage (in other words, if the balance on the first mortgage is greater than the value of the residence).

 There are a number of additional rules on Chapter 13 that you should discuss with the attorney.

 We review your financial situation, including assets, debts, income, expenses, dischargeabilty of debts, whether to keep assets secured by debts, and many other issues. We send you an internet link so you can upload all this information into our computer program over the internet. We draft a Petition and Statements and Schedules for your review and approval. You have to take the online credit counseling class and email the Certificate to our office before we file. You need to print and sign your copy of the court papers. When we are all ready, we file the papers with the court by uploading them over the internet. This starts your case and results in issuance of the Automatic Stay.

 You need to disclose many things in the court papers, including all your assets and debts; your income and expenses; property sold over the past year; any lawsuits; any payments made to creditors within 90 days of filing; and many other things.

 After filing, you have a meeting with the Trustee about 35 days later.

 You have to take a second credit counseling class over the internet after the meeting with the Trustee, and again email the certificate to the attorney.

 Creditors usually have a deadline to object to your Bankruptcy within 3 months of the date of filing.

 The Discharge is usually granted about 5 months after filing, if everything is in order.

 Even after the Discharge, the Trustee usually wants to see the tax return, when it is filed, for the year in which you filed Bankruptcy.

 A Trustee will be appointed for your case.  There are about a dozen Trustees available. When your case is filed, the next on the list will be appointed as your Trustee.

 You need to be prepared to send the documents requested by the Trustee; to meet the Trustee, about 35 days after filing the Bankruptcy, and to answer basic questions.

 For many more details on all these points, see our page on Bankruptcy Trustee.