Common scenario: a potential debtor comes into my office frantic because he is buried under a mountain of debt. Car loans, credit card debt, unpaid taxes, an under-water second mortgage - you name it, he has it. Yet he is 8 feet under, dead set against filing for bankruptcy and only wants a consultation regarding debt negotiation.
Why? Because he has fallen victim to......[bum, bum, bum] Bankruptcy Myths [Oh No].
I love when clients take it upon themselves to get educated about the process of filing for bankruptcy. It means they will have a better understanding of how their bankruptcy attorney is handling their case and therefore avoid any surprises. Like most top bankruptcy lawyers, I try to avoid surprises at all cost.
Fortunately, there is a wealth of information available to potential debtors regarding filing for Arizona bankruptcy protection. Unfortunately, a lot of it is incorrect. So your neighbor's, uncle's, 3rd cousin says you will lose your house if you file for bankruptcy....is this what is keeping you from filing?
If it is, then you have come to the right place. Today you will get the cold, hard facts regarding common bankruptcy myths straight from the lips of an experienced Phoenix bankruptcy lawyer.
Let me just say that this couldn't be further from the truth. let's consider chapter 7 bankruptcy. Arizona exemptions ensure debtors exempt equity in their primary home of up to $150,000. This means that if you are an Arizona debtor filing for bankruptcy, your primary residence (up to $150,000 above and beyond the value of all associated liens) is excluded from the bankruptcy estate. Provided that you remain current on your mortgage, your home is safe.
Chapter 13 bankruptcy allows homeowners the additional benefit of catching up on past mortgage payments. The overdue amount can be easily incorporated into your monthly plan payment, spreading it over a period of 60 months. This means there is no need to scrounge together a large lump sum payment.
In additional, chapter 13 bankruptcy also allows the debtor to keep their home in cases where their equity exceeds the maximum homestead exemptions. Unfortunately, we don't see this too often here in Phoenix.
First things first. Many debtors will actually keep their car in bankruptcy. Consider an chapter 7 debtor whose car is paid in full. They are allowed an automobile exemption of up to $5,000. This number can be doubled and applied to two cars in the case of a joint filing. Remember that this number is not based on what you paid for the car, even if you just drove it off the lot 20 minutes ago. Instead, it is based on the fair market value (think KBB). In case you haven't learned this lesson yet, cars depreciate pretty darn.
What about debtors that have a substantial automobile loan? When filing bankruptcy, you have to consider the 3 R's: redemption, reaffirmation and r'surrender. This means that you can either buy out the loan in one lump sum and own the car outright, reaffirm the loan so that personal liability passes through the bankruptcy intact or surrender the vehicle to the lien holder.
In any case, it has been my experience (remember, I am an experienced Phoenix bankruptcy lawyer) that vehicle loans are available to many or even most debtors immediately after filing. What's more is that they are often pretty good offers. Think about it - your financial situation improves profoundly when you file bankruptcy, which makes it easier for many to make their monthly car payment. In addition, creditors are savvy to the fact that chapter 7 debtors are not be able file for a second liquidation bankruptcy for many years - longer than the duration of the loan.
This isn't necessarily a myth, but I have included it in this post because I have found that clientshave an exaggerated belief in the powers of debt negotiation. Unfortunately, my experience has shown me otherwise (think Clark Kent, not Superman).
Why? For one, many creditors are not willing to negotiate. Or, perhaps even more commonly, they claim they are willing to negotiate your debt, but force you to jump through countless hoops only to leave you no better off than you started. Joe in customer service puts you on hold for 23 minutes before transferring you to Dorris in account support, who places you on hold for 43 minutes before transferring you to Jose, who puts you on hold while he consults with his boss and, at 5:00, transfers you to voicemail without so much as an explanation. Pretty frustrating.
In addition many creditors will negotiate your debt, even obtaining offers of 20-50 cents on the dollar is not uncommon, but they will require the debt be paid in one lump sum. For many clients, this is not feasible. Lastly, you must be able to negotiate with all creditors in order to address all of your debt. Please remember that you cannot negotiate and pay a creditor prior to filing for bankruptcy protection (search 'preference transfer' above).
Bankruptcy is offered to allow those facing insurmountable debt the ability to start fresh. This means there are restriction as to who can file. While this may not seem fair, these restrictions protects creditors from the discharge of debts that could have easily been repaid. That being said, I would estimate that upwards of 90% of my free bankruptcy consultations qualify for either chapter 7 or chapter 13 bankruptcy.
What about that other 10%? Their circumstances are diverse - some have income that exceeds the median income allowed under the means test but secured debt that exceeds the chapter 13 maximum. Others qualify per se, but have non exempt property that exceeds their debt which makes filing for bankruptcy protection a bit foolish. Regardless, this doesn't mean they are out of options.
Remember that, even for those potential debtors that do not qualify for chapter 7 or chapter 13 bankruptcy protection, there may be options for debt relief under the other bankruptcy chapters. Many great bankruptcy attorneys [raises hand] offer free bankruptcy consultations - make an appointment to get more information.