On October 17, 2005, the federal bankruptcy code was drastically changed and a myth was created that “bankruptcy is dead”.  However, the changes to the bankruptcy code only created more requirements for filing bankruptcy and made the system more complicated.  For example, individuals must now attend a credit counseling class prior to filing a bankruptcy case and they must attend a financial management class after they have filed for bankruptcy.  These classes may be completed via the Internet or by phone.  In addition, the amount of income that individuals earn in the six months prior to filing bankruptcy determines what type of bankruptcy case they can file.  Individuals may always file for bankruptcy relief, it just depends what type of bankruptcy case they qualify for under the new guidelines.  Filing a Chapter 7 bankruptcy is more limited than before the changes, but individuals may still file a Chapter 13 if they do not meet the requirements of a Chapter 7.  In addition, the changes to the bankruptcy code increased the amount of documentation relating to financial affairs that individuals must provide to their attorneys and the bankruptcy trustees. Bankruptcy is not dead, just more complicated.

Bankruptcy is a way to get a fresh start.  It is governed by federal law that allows individuals or businesses to liquidate their assets or reorganize their financial affairs so that they get a clean financial slate.  People file bankruptcy because they can no longer pay their debts.  This usually occurs when someone has lost a job, has been ill and unable to work, or had a business fail.  Sometimes people must file for bankruptcy when the economy changes such that individuals can no longer pay their mortgages and cannot sell their property.  The U.S. Congress has recognized that when individuals can no longer pay their debts there needs to be a way to give individuals a “fresh start”.  No one plans to file bankruptcy, but the option is available when it is necessary.  There is no shame in using the federal laws designed to assist individuals in these unfortunate circumstances.

Individuals who file for bankruptcy relief get to breathe again.  Foreclosure, lawsuits, calls from creditors, garnishments and any other collection activity against the individual will end or be “stayed”.  Harassment ends and creditors may no longer contact the individual who has filed for bankruptcy.  Upon filing a bankruptcy case, the bankruptcy court imposes what is called an “automatic stay” which prohibits creditors from taking any further action against the debtor without express permission of the bankruptcy court.  The stay is automatic and creditors that violate it may be sanctioned by the bankruptcy court.

At the time of filing a Chapter 7 or Chapter 13 bankruptcy, the individual will be appointed a “trustee” that will administer the bankruptcy estate.  The “bankruptcy estate” is all the property that an individual owns at the time of filing.  The trustee will require that individuals provide documentation of their financial situation to prove the accuracy of their statements regarding their financial affairs.

“Exemptions” are a list the real and personal property that individuals may keep no matter what type of bankruptcy they are filing.  Exemptions are governed by Arizona state law.  If an individual has not lived in Arizona for 2 years prior to filing for bankruptcy, the amounts and exemptions may be governed by another state’s laws.  An attorney can advise as to what exemptions would be available in a particular bankruptcy case.

Generally, for all states, individuals may keep (exempt) assets such as their residence, automobile, furnishings, clothing and tools of the trade up to a certain amount.  For example, in Arizona individuals may exempt their residence from the bankruptcy if they have less than $350,000 in equity in the property as long as they remain current on their mortgage payments.  In addition, in Arizona individuals may keep $1,000,000 in traditional and Roth IRAs and $12,000 in household furnishings.  Individuals may also exempt one vehicle if they have less than $15,000 in equity on the vehicle after paying any lienholders.  This does not mean that individuals may not keep an additional vehicle, but the second vehicle will not be exempt.