In 2009 and 2010, Arizona had the second highest rates of foreclosure in the country, with more than 300,000 foreclosures over those two years. Being buried in debt is difficult, but receiving the notice of foreclosure might feel like the nail in the coffin. However, it doesn’t have to be that way.

Although there are no guarantees, filing for bankruptcy during a foreclosure is a great way to halt and even save your home from foreclosure. Here are important facts to know about bankruptcies and foreclosures.

The Definition of Foreclosure

The official definition of foreclosure is the process in which an owner’s right to property is discontinued because of late or no payments. A foreclosure takes a while to finish, which gives an owner the chance to find alternatives. Depending on your situation, bankruptcy might be a viable option.

Chapter 7 Bankruptcy and Foreclosures

Chapter 7 bankruptcy is a good option to save your house if you don’t have a lot equity in it. Equity is the difference between how much money your home is worth and how much you owe on it. According to Arizona statutes, if you don’t have more than $150,000 in equity on your house, it is protected under the homestead exemption.

For example, if the market value of your home is $400,000 and you owe $300,000 on the house, there’s $100,000 in equity, which is below the exemption amount. This essentially means your house will be considered exempt property if a trustee is assigned to take and sell properties.

Although the court will usually grant an “automatic stay,” which temporarily prevents creditors and your lender from pursuing debt, you should still pay your mortgage to ensure saving your house.

Nevertheless, if your house is $400,000, but you only owe $150,000, there is $250,000 in equity. Since it’s above the exemption amount, a trustee can take your home and sell it to pay your debts after the stay is lifted.

When Chapter 13 Bankruptcy Is Better

When your house isn’t protected under the homestead exemption, Chapter 13 is the better option if you qualify. Filing for Chapter 13 doesn’t mean your debt is forgiven and your house is safe, however. The results vary for each individual, but a trustee establishes a repayment plan that allows you to repay debt and catch up on mortgage payments over a few years.

The only way this works is if you have a steady income and you’re confident you can make every payment until your debt is paid off. If not, you’ll most likely lose your home.

Chapter 13 might also be a better option if you have a 2nd and 3rd mortgage on your house. The Chapter 13 court could “strip off” and recategorize your other mortgages as unsecured debt if you don’t have enough equity to secure other mortgages.

Remember, not all people qualify for Chapter 13, since you need to be in a position to propose and complete a thorough repayment plan, but if you do qualify, it’s a great way to save your house from foreclosure.

Technically there is no limit to the number of times you can file bankruptcy.  However, most people file bankruptcy in order to receive a discharge.  The bankruptcy discharge wipes out your debts and provides a fresh start.  Nevertheless, some people benefit from bankruptcy without receiving a discharge.  One common example of this is when you file Chapter 13 bankruptcy in order to save your home.  Although you may not be able to eliminate your debts without a discharge, you will be able to get caught up on your mortgage through your Chapter 13 plan. 

The following rules discuss whether you are eligible to receive a discharge in your Chapter 7 or Chapter 13 bankruptcy. 

You cannot receive a discharge in a Chapter 7 case if you received a discharge in:

(a) A Chapter 7 bankruptcy filed within the last 8 years, or,

(11 U.S.C. 727(a)(8))

(b) A Chapter 13 bankruptcy filed within the last 6 years. 

(11 U.S.C. 727(a)(9))

You cannot obtain a discharge in a Chapter 13 case if you:

(a)  Received a discharge in a Chapter 7 case filed within the past 4 years, or,

(11 U.S.C. 1328(f)(1))

(b)  Received a discharge in a Chapter 13 case filed within the last 2 years.

(11 U.S.C. 1328(f)(2))

If you have filed bankruptcy in the past you should consult with an experienced bankruptcy attorney in Tucson to discuss whether you are eligible to file Chapter 7 or Chapter 13 bankruptcy again.  Our Tucson bankruptcy lawyers are available around the clock to answer any questions you may have regarding filing bankruptcy more than once.

However, the Chapter 7 bankruptcy trustee in your case may take the rental income you receive during the life of your bankruptcy, usually around 6-7 months.  Therefore, you may be left in the very difficult position of having to pay the mortgage on the rental property without receiving rental income from your tenants.  Clients who are faced with this situation are often forced to surrender their rental property in Chapter 7 bankruptcy.

If your rental property has equity, Chapter 13 bankruptcy allows you the option of the keeping it as long as you pay to your unsecured creditors the value of the equity in the property over the life the plan.  For example, if your rental property has $15,000 equity, the plan has to propose to pay $15,000 to your unsecured creditors over the life of the plan.  Furthermore, you may be eligible for a cramdown under Chapter 13.  A cramdown means that if you owe more money on the property than it is worth, the bankruptcy court can reduce the amount you owe on the mortgage to the fair market value of the property.  The cramdown will in turn lower your monthly mortgage payment and the total principal on the loan.  The Chapter 13 cramdown is allowed on secured debts other than your primary residence. 

There is one caveat to keeping your rental property in Chapter 13 bankruptcy.  In some instances keeping the rental property can cost you money.  If the rental property has a negative cash flow, that is the costs outweigh the income brought in, the trustee may object to your plan on the basis that the money you’re spending on the property should be distributed to your unsecured creditors.  You may be resolve this objection by paying the amount you are losing on the property to your unsecured creditors in your plan, but most of the time it makes more sense to just surrender it.

If you have a rental property and would like to keep it, you should consult with an experienced Tucson bankruptcy attorney in determining whether Chapter 7 or Chapter 13 bankruptcy is your best option.  The affordable Tucson bankruptcy lawyers of Ariano & Reppucci are available around the clock to answer any questions you may regarding keeping your rental property in bankruptcy.

However, you are not required to list zero balance creditors on your schedules.  With that said, if you pay off a credit card within a close proximity of filing, the trustee can recover the funds from the creditor and you will no longer have a zero balance.  Furthermore, even if you do not list the creditor on the petition because it has a zero balance, I have found that credit companies frequently discover your bankruptcy and close out your account anyway. 

You can however keep a credit card if you decide to reaffirm the debt.  Credit card companies will normally allow you to enter into a new agreement to repay the debt called a reaffirmation agreement.  I would strongly advise against reaffirming a credit card or even obtaining a new credit card after filing bankruptcy.  There are other ways to improve your credit that are more beneficial and less risky.    

The next inquiry generally is, “What am I supposed to do in an emergency situation without a credit card?”, or “How am I supposed to build my credit if I don’t have any credit cards?”  Fortunately or unfortunately you will be able to obtain a credit card shortly after filing for bankruptcy.  In fact, you will probably receive more credit card offers than you have ever seen before.  The main justification behind credit card companies offering you a new credit card is that they know you cannot file bankruptcy for quite some time and will be able to collect on debt in the event of default.  

Obtaining credit cards after filing bankruptcy is not a good solution to building your credit.  Even though you may be establishing a history of on time payments with the creditor, your debt to income ratio may outweigh the positive effects of a good payment history.  If you are looking at rebuilding your credit, you will need a good financial plan that includes carrying short term loans through a bank that can be quickly repaid.

If you have a unique situation where a credit card is absolutely necessary, you should consult with a Tucson bankruptcy lawyer in determining whether you should attempt to keep a zero balance credit card, obtain a new credit card after filing, or stay away from obtaining new credit.  Our Tucson bankruptcy lawyers are available around the clock to answer your Chapter 7 or Chapter 13 legal inquires.

When I tell clients they have committed a fraudulent transfer I usually hear, “I didn’t do it on purpose to keep the bankruptcy court from taking my property,” or, “I didn’t even know I was going to file bankruptcy.”  Even though you may not have intended to defraud the bankruptcy court, the trustee does not have to prove any actual fraud or intent to commit fraud.  The act itself is enough for the trustee to avoid the transfer.  Occasionally I hear, “how is the trustee going to find out.”  To be honest, I don’t know how, but I can almost guarantee they will.  These days the internet makes it very convenient for trustees to discover transfers.

If a fraudulent transfer has occurred, the bankruptcy trustee has the power to avoid the transfer and recover the property from a friend, relative or third party.  The trustee will then sell the property and distribute the proceeds to your unsecured creditors.  Additionally, you do not receive the exemption amount you would have been entitled to had you not made the fraudulent conveyance.  

For example, bankruptcy filer Bill transferred his $9,000 PT Cruiser to Uncle Phil 7 months prior to filing for bankruptcy.  This is a fraudulent conveyance and Uncle Phil will be required to turn over the vehicle.  In addition to the vehicle being sold and proceeds going to Bill’s unsecured creditors, Bill cannot claim the motor vehicle exemption which would have resulted in him receiving $5,000 (Arizona’s motor vehicle exemption).  Therefore, it is often best to wait to file bankruptcy if you have made a fraudulent transfer.

When confronted with these facts I often hear clients suggest, “I’ll sell it to it a family member or friend for a small sum of money.”  It may sound a little better than giving it away, but the bankruptcy court does not recognize the difference.  Property can be sold prior to filing bankruptcy, but it must be sold for around fair market value.  Therefore, if you have a car worth $4,500, you cannot sell this car to your brother for $500.  This too is a fraudulent transfer. 

If you have transferred or sold property and you are considering filing bankruptcy, you should consult with a qualified Tucson bankruptcy lawyer in determining whether the transfer is a fraudulent transfer, and if so, how long you should wait to file your Chapter 7 or Chapter 13 bankruptcy.  Our Tucson bankruptcy attorneys are available around the clock to answer any questions you may have regarding fraudulent transfers and fraudulent conveyances.

If you find yourself in a situation with a mix of business debt and personal debt you should consult with an experienced Tucson bankruptcy attorney to determine whether your debts are primarily consumer or non-consumer, and whether you will be subject to the Means Test.    

You may be wondering why someone with mainly business or other non-consumer debt would be excused from the Means Test?  Those with primarily non-consumer debt are excused from the Means Test because Congress wanted to encourage entrepreneurship by eliminating the fear of business failure and being left with significant debt or taxes.

What is the Difference Between Consumer and Non-Consumer Debt?

A consumer debt is a debt incurred by an individual primarily for a personal, family or household purpose.  Some common examples of consumer debt include credit card debt, personal loans, payday loans, residential real estate loans, personal car loans, and more.  Alternatively, non-consumer debt comprises of taxes, business credit card debt, business debts, debt incurred for motive for profit, investment real estate debt, business car loans, and more.  Consequently, if a majority of your debt is from income taxes, you will not have to pass the Means Test in order to qualify for Chapter 7 Bankruptcy.  The reason personal income taxes are classified as non-consumer debt is that tax debts are not incurred voluntarily, are assessed for the public wealth, and arise from the earning of money.  Personal injury and tort debts are also non-consumer debts due to the fact that they are involuntarily incurred for a purpose other than for family, household, and personal purposes.  Consumer debts on the other hand are incurred voluntarily for a personal and household purpose, and result from consumption. 

Classifying your debt as primarily consumer or non-consumer debt can be complex if some of your debt is both personal and business in nature.  An experienced bankruptcy lawyer in Tucson will help you assess the chances of having your debt classified as either consumer or non-consumer debt, and whether you will be compelled to take the means test.

There are many benefits to the automatic stay.  One such benefit is that the automatic stay stops garnishments.  It also prevents creditors from taking money in your bank accounts or putting a lien on your property.  While a creditor is allowed to garnish up to 25% of your wages. filing Chapter 7 or Chapter 13 bankruptcy will stop most wage garnishment orders.  If an ordinary creditor garnishes your wages or levies your bank account after filing for Chapter 7 or Chapter 13 bankruptcy, you will be entitled to a refund.     

Another benefit of the automatic stay is that if your home is about to go into foreclosure, filing bankruptcy automatically stops the proceedings.  If you are behind on your mortgage, Chapter 7 bankruptcy will only buy you some time before the primary mortgage holder can foreclose.  I have seen some debtors have to move as soon as a month and a half after filing, while other debtors have remained in their homes for over a year.  Filing Chapter 13 bankruptcy will not only stop the foreclosure proceedings, but will allow you to catch up on your mortgage by including your arrears in your Chapter 13 repayment plan.  If you are facing an impending foreclosure you should consult an experienced Tucson bankruptcy lawyer in determining whether you can save your home in Chapter 13 bankruptcy or whether surrendering your home in Chapter 7 is the better solution. 

If you are behind on rent, the automatic stay may buy you a few days or even weeks before you are ultimately evicted. However, if the landlord has a judgment for possession prior to you filing for bankruptcy, the automatic stay will have no effect.  If you are behind on rent when you file for bankruptcy, the landlord can file a motion to lift the automatic stay, which will most likely be granted, and will allow the landlord to proceed with eviction proceedings.

If you are facing an emergency situation due to a utility disconnection, the automatic stay will prevent disconnection for at least 20 days.  This may be helpful if you fear your electricity will be shut off.  Finally, the automatic stay prevents government agencies from collecting on public benefits that were overpaid.  Normally if you are overpaid public benefits a government agency can garnish your wages.

If you are faced with any sort of collection effort or creditor harassment, you should meet with a Tucson bankruptcy lawyer who analyze whether the automatic stay will help your situation.

In order for the Chapter 13 bankruptcy stay to apply, the following conditions must be met:

1.  The primary debtor must have filed Chapter 13 bankruptcy.

2.  The debt must be consumer debt incurred by an individual for personal, family, or household purposes.

3.  The co-debtor must be an individual.

4.  The co-debtor must not become liable on the debt in the ordinary course of business.

5.  The Chapter 13 case must not have been closed, dismissed, or converted to a case under Chapter 7 or Chapter 11. 

If the above requirements have been met, the Chapter 13 co-debtor stay will continue until completion of the Chapter 13 plan.  However, the co-debtor stay can be lifted for the following reasons stated in Section 1301(c) of the Bankruptcy Code:

1.  The co-debtor received the consideration for the claim held by the creditor.

2.  The co-debtor’s plan does not propose to pay the claim in full.

3.  The creditor’s interest would be irreparably harmed by the continuation of the co-debtor stay.

Therefore, in order to protect the non-filing co-signor, the Chapter 13 debtor must propose to pay the debt in full through the plan.  If the debtor attempts to reduce the amount of the loan through a cram down, the creditor can move to modify the stay and collect from the co-debtor.  If you have a debt that was co-signed by a family member or friend, you should consult with an experienced Tucson bankruptcy lawyer in determining the best course of action for protecting the non-filing co-signor.  The local Tucson bankruptcy attorneys of Ariano & Reppucci are available around the clock to answer questions regarding Chapter 7 and Chapter 13 bankruptcy.

Let’s assume you have just been served with a lawsuit.  You have the option of responding or doing nothing at all.  If you do not file an answer within the allotted time (usually stated on the summons), the plaintiff can ask for a default judgment for the amount stated in the complaint.  Once you have a judgment against you, a creditor can garnish your wages, levy your bank accounts, or put a lien on your property.  However, filing bankruptcy will terminate garnishments as to wages earned after filing bankruptcy, and will stop bank account levies. 

It’s possible that you are not even aware of a judgment against you.  You may be picking up your check on Friday and notice that 25% of your wages are missing, or you try to withdraw money from your bank account and a large sum of money has been taken out.  This means you have either not been properly notified or you have been noticed by alternative means approved by the court.  Either way, you are in a position where you will want to file bankruptcy right away, given the rest of your financial situation makes sense to do so.

Unfortunately I rarely see clients with a legal defense as to why they were unable to pay their debts.  That’s not to say I haven’t heard plenty of legitimate factual explanations, but regrettably they will fall on deaf ears with the court.  Most clients respond to the complaint to buy themselves time.  If you wish to file a response, you should visit the self-help center for the court which is listed on the paperwork you were served with.    You can expect to pay a response fee as well, usually between $50 and $200.  I would also try and get assistance on who needs to be served and in what manner.  Usually the court clerks are rather friendly, but remember they cannot provide you with legal advice.  You should always consult with an experienced bankruptcy lawyer in Tucson, Phoenix, or your surrounding area. 

If you dispute the claims in the complaint the court will set a hearing for you usually about 30 days out.  During that time you can either prepare your defense, if you have one, or prepare for what you are going to do if the court rules against you.  There is no requirement that you file bankruptcy before a creditor gets a judgment against you.  However, if you have a judgment lien, if the debt is non-dischargeable, or you have debts that are unliquidated, you will want to consult with a qualified bankruptcy lawyer about how the judgment will affect your bankruptcy case.

1.  The due date for filing a tax return is at least three years ago.

2.  The tax return was filed at least two years ago.

3.  The tax assessment is at least 240 days old.

4.  The tax return was not fraudulent.

5.  The taxpayer is not guilty of tax evasion.

Penalties on taxes that are dischargeable are also eligible for discharge. After the discharge of tax liability, a debtor is no longer responsible for paying the taxes and the IRS may not garnish a debtor’s wages or bank accounts.  In addition, other tax debts, such as sales taxes and similar taxes, may also be dealt with in your bankruptcy case.

On the other hand, there are some tax debts are not eligible for discharge.  These include:

1.  Tax penalties from a tax debt that is ineligible to be discharged.

2.  Tax debts from unfiled tax returns.

3.  Trust fund taxes or withholding taxes withheld from an employee’s paycheck by the employer

If you find yourself in a position with a nondischargeable tax debt, you will want to contact the IRS about entering into an installment agreement or making an offer in compromise to settle the tax debt for a lesser amount.  If you have substantial tax debts and are unsure whether they are dischargeable, you should consult with an experienced bankruptcy lawyer in Tucson, Arizona.  Our cheap Tucson bankruptcy lawyers can help you determine the dischargeability of your tax debts for very little cost.