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Arizona Bankruptcy Exemptions and Law
In 1915, Supreme Court Justice James Clark McReynolds wrote that bankruptcy “relieve[s] the honest debtor from the weight of oppressive indebtedness and permit[s] him to start afresh free from obligations and responsibilities consequent upon business misfortunes." This brief summary captures the spirit of the Bankruptcy Code.
Property exemption, or property protection, is an important part of this fresh start. If you lost your property when filing bankruptcy, Chapter 7 or Chapter 13 would basically be a punishment. That result would be very unfair, especially since most people file bankruptcy because of medical bills, job loss, or a similar event.
So, the law is on your side when you file bankruptcy. However, the law is also very complex. You need a dedicated Arizona bankruptcy lawyer by your side throughout this process. An attorney knows how to maximize your property exemptions.
Arizona's property exemptions, which are discussed below, are not the only guarantee of a fresh start. Section 362 of the Bankruptcy Code plays an important role as well. When you file for bankruptcy, an automatic stay goes into place that immediately halts things like:
- Wage garnishment
- Lien placement
- Creditor harassment
Other features of Arizona bankruptcy law include the protected repayment period in a Chapter 13 and immediate debt discharge in a Chapter 7. If you file Chapter 13, you have up to five years to catch up on mortgage payments and take care of other delinquent secured debts. Chapter 7 eliminates most credit card, medical bill, and other unsecured debt in only a few months.
For the most part, these provisions of bankruptcy law are the same in other states. The federal Bankruptcy Code controls most of these items.
Property exemptions, on the other hand, are unique to Arizona. People who have lived in Arizona for at least 180 days may file bankruptcy locally and claim these exemptions. In a nutshell, creditors cannot seize and sell exempt property to pay debts. The law does not protect non-exempt property in this way.
The difference between exempt and nonexempt property is not always clear. Assume Joe owns a small bass boat that is several years old. The boat floats pretty well, but it needs some work. Technically, the boat is probably non-exempt property. However, because its financial value is so low, the trustee (person who oversees bankruptcy cases for judges) might be unable to seize it. A seizure might not be in the best interests of the creditors. The cost of fixing up the boat might exceed the sales price.
Some states allow debtors to choose between state exemptions and the ones laid out in the Bankruptcy Code. Arizona is an opt-out state, which means this option is unavailable. Fortunately, the Grand Canyon State has some of the broadest bankruptcy exemptions in the country, which are explained in the following paragraphs.
Motor Vehicle Exemption
Most Arizonans may protect up to $6,000 in vehicle equity. Disabled individuals may protect up to $12,000 in vehicle equity. This exemption can only be used on one car or truck. You cannot apply it to multiple vehicles.
In general, most owners have practically no equity in new vehicles. These loans are amortized. So, for the first three or four years, almost all payments go to interest. Used vehicles usually have considerable equity but almost no value. That's especially true if they need work.
The aforementioned best interest of creditors rule often comes into play here. Your son or daughter's ten-year-old Honda might technically be nonexempt. But its low value precludes seizure.
Arizonans can exempt up to $150,000 in home equity. These loans are also amortized. So, unless you have lived in the same house for at least ten years, your equity is almost always beneath this amount.
A home's as-is cash value, which must be listed on Schedule A, is usually much lower than its fair market value. This difference could affect the exemption.
Assume Kamala owns a $200,000 home free and clear. Her home needs foundation and other work. As a result, a home investor offers to buy it for $40,000 cash. So, for bankruptcy purposes, her home is only worth $40,000. The bankruptcy trustee cannot seize it. A sale would not fetch enough money to cover the $150,000 equity exemption.
Other favorable loopholes, such as a tenancy of the entirety, might be available as well. If Kamala designates her husband Doug as a tenant of the entirety, creditors cannot seize her home, regardless of the equity amount. Only an experienced Arizona bankruptcy lawyer should handle matters like this one.
Public and Private Pensions, Retirement Accounts, and Financial Benefits
IRAs, 401(k)s, and other similar accounts are exempt in Arizona. This exemption also applies to items like 529 college savings accounts. This exemption is very important. If creditors are just able to seize one asset, they usually go for the cash in a retirement account.
Government pensions, like teacher retirement benefits, are also exempt, as are Social Security, VA disability, unemployment, and most other government benefits.
This exemption has some pitfalls. Some people move money into retirement accounts shortly before they file to take advantage of the exemption. This movement might be illegal. Other people keep government benefits, which are exempt, in the same account with wage income, which is usually nonexempt. Such commingling makes it difficult to apply this exemption.
Single filers may exempt up to $6,000 of clothing, appliances, electronics, furniture, and other personal property. This exemption is $12,000 for married filers. Most of these items have almost no “garage sale" value. So, these exemption limits are normally not a problem.
This personal property exemption also protects up to 75% of your current wages or thirty times the minimum wage, whichever is less.
Justice McReynolds' declaration that honest yet unfortunate debtors are eligible for bankruptcy is not quite accurate. Debtors must meet some additional qualifications.
Chapter 7 Qualifications
The means test is the major qualification for Chapter 7 debtors. You are eligible for this form of bankruptcy if your annual household income is below the average level. This figure changes every few months. Usually, a family of four in Arizona must earn less than $85,000 to qualify for Chapter 7.
If you do not qualify for Chapter 7, other options are usually available, such as Chapter 13 bankruptcy and non-filer debt negotiation. Sometimes, the threat of filing Chapter 7 is better than actually filing.
Chapter 13 Requirements
A debt ceiling applies in Chapter 13 cases. You cannot have more than about $1.3 million in secured debts and $400,000 in unsecured debts. These totals include the combination of current and past-due obligations. So, if you recently bought a large mansion, even if you are current on the payments, you might be ineligible to file Chapter 13.
There is also an income/expense requirement. Chapter 13 debtors must have sufficient disposable income to make a monthly debt consolidation payment. The size of this payment varies significantly. However, it's usually about as big as a mortgage or rent payment.
Connect With an Experienced Bankruptcy Attorney
To protect your family's most important possessions from creditor seizure and obtain financial peace of mind, contact an Arizona bankruptcy lawyer today.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.