Bankruptcy in Tucson
Are You Eligible to File for Liquidation Bankruptcy?
Tucson families and business debtors may be eligible for Chapter 7 debt relief, otherwise known as a “liquidation” proceeding. The bankruptcy is commenced with the filing of a bankruptcy petition. A case trustee is appointed to administer the proceeding. A debtor’s “non-exempt” property is converted to cash (i.e. liquidated) and distributed to creditors according to particular statutory guidelines. In return, the debtor receives a “discharge” that absolves the debtor from future liability on particular types of debts.
While in bankruptcy, a debtor can exercise additional provisions to enhance the discharge, such as redeeming personal property and negotiating with secured lenders. The Chapter 7 bankruptcy concept is simple; however, exemption planning, petition preparation, and other aspects of the process can be much more complex. If you are considering filing for bankruptcy, do not hesitate to work with a Tucson bankruptcy attorney from the Law Offices of Matthew T. Foley, PLC.
Preparation for the bankruptcy process begins with a debt consultation. The purpose of this meeting is to explore bankruptcy, as well as, other possible debt relief options (See Options). If bankruptcy is the appropriate strategy, clients are given some general advice, such as to stay current on any secured assets they wish to keep, not to repay any family members prior to filing bankruptcy, not to transfer or sell assets without attorney oversight, and not to incur any new debts.
With the new changes to the bankruptcy code, debtors must now qualify for Chapter 7 debt relief. Generally, a debtor’s income must be beneath the median income and negative on their cash flow. If a debtor is above the median income, a “means test” is administered to determine a debtor’s eligibility for Chapter 7 debt relief (11 U.S.C. § 707(b)(1)). If a debtor is deemed mathematically ineligible, a debtor may rebut this “presumption” by demonstrating special circumstances. In some instances, a debtor can avoid the means testing requirement by showing that a preponderance of their debt is “business debt”, which is a carved out exception. The alternative to not qualifying is to file a Chapter 13 bankruptcy (reorganization).
If eligible and prior to filing, careful legal consideration goes into the pre-bankruptcy planning, otherwise known as “negative estate” planning. Through legal counsel, debtors are advised of their options, which includes spending down reserves on necessities, preemptively liquidating non-exempt assets, modest contributions towards retirement accounts, etc. Negative estate planning does not mean transferring assets for less than fair market value, hiding property, or otherwise committing conduct that has the sole effect of hindering creditors. Any type of negative estate planning should be done with a competent attorney that is familiar with guiding case law, Arizona’s fraudulent transfer laws, and the Federal Bankruptcy Code.
Another key aspect to pre-filing preparation is determining the appropriate file date. Early in the year, it is seldom advisable to file a case until after a tax refund has been received and wisely spent. Typically cases are filed prior to a debtor getting paid, since bank accounts must be spent down to the permissible exemption amounts. In addition, if a debtor has accounts receivable, commissions due, a personal injury claim, trust distributions, or is expecting an inheritance, it may be advisable to wait to file bankruptcy. Other considerations that may warrant waiting to file include “look back” periods on any pre-bankruptcy transfers (fraudulent transfers) and any payments made to family members or business partners (preferential payments).
Filing a Chapter 7 Bankruptcy
The case is commenced by filing the bankruptcy petition, completing a court approved credit counseling course (11 U.S.C. § 521), and reading and signing the bankruptcy disclosures. The court requires a $306 filing fee and the credit counseling class is approximately $25. The bankruptcy petition consists of “schedules” that fully detail a debtor’s real property, personal property, claimed exemptions, income, expenses, leases & contracts, statement of intentions, means test, and statement of financial affairs. When completed correctly, these schedules should be consistent, accurate, and truthful. (Fed. R. Bankr. P. 1007(b)).
Upon filing the case, a “bankruptcy estate” is created. The bankruptcy estate includes all exempt and non-exempt property, which is deliberately meant to be a very broad umbrella and includes legal, equitable, and possessory interests, and even some future interests ((11 U.S.C. § 541). The trustee can also reclaim property for the estate through “strong arm” powers, which include the ability to avoid unperfected liens, preferential payments, and fraudulent transfers (11 U.S.C. § 544-553). Some property, such as social security income, fit within a third category called “excludable” property. These assets are not property of the estate.
A bankruptcy attorney must be well versed in exemption law, which includes knowing what property can be excluded, what property is exempt, and what property is not protected. This can be a difficult task, as case law continues to change the interpretations of Arizona’s exemptions. In addition, some exemptions are found within the federal bankruptcy code and other exemptions are found spread throughout federal non-bankruptcy codes. If an attorney fails to claim the exemption, the property can be jeopardized. This is a common mistake made by inexperienced counsel.
The commencement of the case provides immediate protection to the debtor by providing an “automatic stay.” The stay is an injunction that prohibits creditors from collecting on a debt after the case has been filed. (11 U.S.C. § 362). The stay ends garnishments and prevents foreclosures and repossessions until the secured creditor ascertains court approval. The stay does not halt domestic support obligations (11 U.S.C. § 362(b)).
Upon filing the case, the case is administered by an assigned case trustee (11 U.S.C. §§ 701, 704). Tucson debtors are fortunate to have pleasant trustees. Currently, there are three trustees that administer Chapter 7 bankruptcies in Tucson and surrounding areas – Trudy Nowak, Gail Mills, and Stan Kartchner. The trustee’s responsibilities include reviewing requested documentation, conducting the § 341 Meeting of Creditors, researching assets, liquidating assets, and distributing estate funds to creditors that have submitted proofs of claim. After filing, a debtor will receive an introductory letter from their trustee that requests documentation, such as tax returns, bank statements, and paystubs. The debtor must also complete a trustee questionnaire. These documents must be returned to the trustee prior to the hearing date, where the debtor meets the trustee.
The hearing, which is called the “§ 341 Meeting of Creditors” is typically set 40 days after the filing date (11 U.S.C. § 341). At the actual hearing, the trustee will interview the debtor(s), confirm their identity, and ask if any creditors wish to be heard. The hearing tends to be quite brief and the trustee simply wants the debtor to state under penalty of perjury that the petition is accurate and truthful, as well as, that all debts and assets have been properly disclosed. With competent counsel, the hearing is quite uneventful and creditors very seldom appear.
If there are any issues with a bankruptcy, such as excess equity on a vehicle, preferential payments, fraudulent transfers, or other issues, the attorney will work directly with the trustee to settle these issues after the § 341 Meeting of Creditors date. Often the trustee will need supplemental paperwork to complete their review and the attorney will negotiate with the trustee to settle any trustee claims. With experienced counsel, most issues are visible prior to filing the case and the attorney can advise a client of possible concerns and their likely resolution after filing.
The Chapter 7 Discharge & Completion of Bankruptcy
The purpose of filing a bankruptcy is to secure a discharge. The debtor should receive their discharge approximately 90 days after the hearing date (Fed. R. Bankr. P. 4004(c)), which releases a debtor from personal liability for most debts and prohibits a creditor from taking any actions in furtherance of collecting on the debt (11 U.S.C. § 727). Dischargeable debts include credit cards, repossessions, deficiency actions, lawsuits, certain taxes, broken leases, breaches of contact, medical debt, and other unsecured debt. Also, a Chapter 7 discharge extinguishes a debtor’s personal liability (called “in personam” liability). The discharge does not void liens against secured property (called “in rem” liability). For example, a debtor is no longer personally responsible for a home equity line of credit, however, the lien is still enforceable against the home.
The scope of the Chapter 7 discharge should be discussed with an attorney, as some debts are “nondischargeable” such as student loans, domestic support obligations, reaffirmed loans, and recent tax debts. In which case, a debtor may want to file a Chapter 13 bankruptcy. In addition, creditors can file nondischargeability actions (called “adversarial complaints”) to object to debts for malicious injury, damage caused from drinking and driving, and criminal restitution (11 U.S.C. § 523(a)). However, if a creditor fails to assert their action in a timely fashion, some § 523 claims will be discharged (11 U.S.C. § 523(c); Fed. R. Bankr. P. 4007(c)).
Hiring a Tucson Attorney for Chapter 7 Bankruptcy
When it is time for you to move forward with your bankruptcy case, it is important that you retain the legal counsel of a trustworthy, experienced and personable attorney. At our firm, we are proud to have assisted clients in filing more than 4,000 bankruptcy cases and we may be able to help you as well. If you have questions or concerns regarding your particular situation and wish to speak with a Tucson bankruptcy attorney regarding your situation, do not hesitate to Contact the Law Offices of Matthew T. Foley, PLC right away. Our firm stands ready to provide you with outstanding representation and personalized service. Contact the firm today to get started!