The Ultimate Arizona Bankruptcy Guide – pt. 7 – The Path to a Chapter 7 Discharge

In most chapter 7 bankruptcy cases the activity in the case is front loaded. What I mean by that is prior to filing the bankruptcy case there is a lot of activity around pulling all of the necessary information and documentation together to prepare the bankruptcy petition and schedules. Then there is the required credit counseling course, the signing, and preparing for the filing of the case.

Now that the Meeting of Creditors has taken place in most cases it really becomes a waiting game for the bankruptcy court to enter the Discharge Order which signals the elimination of your debts and most cases the end of your case.

Sometimes there are a few loose ends that need to be taken care of during the 60-90 days from the date of the Meeting of Creditors until the entry of the Discharge Order.

Financial Management Course

Within forty-five (45) days from date of the Meeting of Creditors you are required to complete a financial management course. Here at the Arizona Consumer Law Group this is something that we help you get signed up for. As with the pre-filing credit counseling course this is typically done online and takes a little over an hour to complete. Once you have completed the course your attorney will file a certificate with the court.

While this is simply an informational course it is vital that you complete it and that the certificate is filed with the court. If you don’t complete the financial management course you run the risk of having the bankruptcy court close your case without a discharge of your debts. This would mean that you went through the entire bankruptcy process for nothing.

It is important to note that if you have had your bankruptcy case closed without a discharge that the court does permit you to reopen your case, file the financial management certificate, and then a discharge will be entered – however they do charge a fee to reopen your case that exceeds $200.

Reaffirmation Agreements

If you have a car loan prior to filing for bankruptcy and you want to keep that car after your bankruptcy you are required to sign a reaffirmation agreement. This document basically states that you agree to continue making the payments and that you remain liable for the balance owed on the vehicle. A reaffirmation agreement is nothing to take lightly because if you sign this document and the court approves it then you are bound to make the payments. If you don’t make the payments and the car gets repossessed then you can be held liable for any balance owed on the car – even if you successfully receive a discharge of your other debts.

Depending on a few different factors there may or may not be a hearing set before your bankruptcy judge to go over the reaffirmation agreement. Sometimes your bankruptcy judge will want to discuss the agreement with you and make sure you fully understand all of the benefits and implications of signing a reaffirmation agreement.

What it really boils down to is this – if you want to keep your car you must sign the reaffirmation agreement and continue to make the monthly payments.

Liquidation of Assets

In a chapter 7 bankruptcy, with few exceptions, all of your unsecured debts will be discharged (eliminated). If you have assets that are (1) owned free and clear of any liens, and (2) are no protected by an Arizona or federal exemption law, then the bankruptcy trustee can seize the asset, sell it, and give the money to your creditors. Most assets are protected by the various exemption laws, however if there are non-exempt assets then the trustee will either seize the asset and sell it or ask you to submit an offer whereby you would pay the trustee the value of the non-exempt asset in order to keep it.

I know that is a little confusing so let me demonstrate with an example:

Let’s say you had a boat that was worth $12,000.  Let’s also say that you currently owe $3,000 on the boat.  This would mean that you have $9,000 in equity in the boat ($12,000 – $3,000).  Because there is $9,000 in equity and because there is no exemption in Arizona for boats, the bankruptcy trustee would either (1) sell the boat, pay off the $3,000 loan, and then distribute the rest of the money to your creditors, or (2) ask you if you would like to make a cash offer so that you could keep the boat. For instance maybe you can offer to pay $7,000 to the trustee.  The trustee may accept this offer, you pay the $7,000 to the trustee which is then distributed to your creditors, and you get to keep the boat.

Sometimes exemptions will play a big role in determining whether you lose the asset or not. For example:

Let’s say you own a car that has a value of $25,000. Let’s also say that you currently owe $26,000 on the car. This means that you have no equity in the car and thus will not be required to surrender the vehicle or to pay any cash to the trustee.  As long as you keep making the payments to the bank you can keep the car.

Let’s make it a little more complicated –

Let’s say you own a car that has a value of $25,000 and you currently owe $20,000. This means that you have $5,000 in equity in your car ($25,000 – $20,000). In Arizona there is an exemption for cars. This exemption allows you to keep a vehicle with up to $6,000 in equity. In this example there is only $5,000 in equity, so you would be able keep the car so long as you continued to make the monthly payment.

I know this can get confusing, but let’s give you one more example:

Let’s stick with this same car, value is $25,000 but now let’s say you owe $15,000 on the car. This means that you have $10,000 in equity ($25,000 – $15,000). As I stated Arizona exemption laws only protect $6,000 in equity in a car. If you apply this to these facts you will still end up with $4,000 in non-exempt equity ($10,000 in equity – $6,000 exemption).

In a situation like this the bankruptcy trustee could (1) sell the car, pay off the $15,000 loan, write you a check for $6,000 to cover your exemption, and then if there were any funds left over the trustee could distribute those funds to your creditors.  Alternatively the trustee could ask you to submit an offer to “purchase” the non-exempt equity in the vehicle. So for instance you could offer to pay $3,000 to the trustee to cover the $4,000 in non-exempt equity and then you keep the vehicle.

These negotiations typically take place after the Meeting of the Creditors and prior to the entry of the Discharge Order.  However, it is important to note that even when your case has been Discharged the trustee is still able to liquidate the assets and sometimes these negotiations will extend beyond the entry of the Discharge Order.

Once all of the above steps are completed the bankruptcy will administratively close your case. That will be the final step in your bankruptcy.

After that your focus should be on making sure that you obtain the most of your bankruptcy discharge, that your credit report accurately reports your bankruptcy, and that you take the appropriate steps to improve your credit score moving forward.

Do You Need Additional Information on Bankruptcy?

If you are dealing with serious debt problems we are happy to offer a free consultation to discuss the various bankruptcy options and provide further details about the bankruptcy process.  Give us a call at (480) 420-4028 or email me at john@skibalaw.com.