One of the most common fears of those facing bankruptcy is that they will be left homeless with no earthly possessions. Fortunately, this is not the case. Each state has its own set of exemption statutes that ‘exempt’ certain property — meaning that your creditors cannot take it from you. Most are familiar with the homestead exemption, but most are not aware that Arizona has exemptions that protect things like your household goods, a car, your wedding rings, right down to a shotgun, a bicycle, and a typewriter. Because of this, most do not lose any property while going through the bankruptcy process. Also, Arizona’s exemptions are relatively generous when compared to other states and protect most property.
A Chapter 7 bankruptcy is considered a liquidating bankruptcy. Specifically, if you own assets that are free and clear of liens, and are not protected by one of Arizona’s exemption statues, in a Chapter 7 bankruptcy case that property will likely be seized and sold with the proceeds going to your creditors. Thus, it is very important that prior to filing bankruptcy that you consult with a bankruptcy attorney to review your property and make sure that your property is properly protected. I have seen the sad situations that arise when people file bankruptcy without the benefit of legal counsel or who have accepted incorrect advice from friends or family. Often those in such a situation are blind-sided by the Trustee in their case and are shocked when the Trustee seizes property that the person thought was protected.
So what is exempt? While Arizona has numerous exemption laws, below are few of the most common:
- Homestead – you are permitted to have up to $150,000 in equity in your home (not a big problem for most in this economy). It is important to note that you can only claim a homestead in your personal residence, not an investment property.
- Household Goods – Single people in Arizona are entitled to keep household goods such as furniture, pictures, etc. that have a liquidation value (think yard sale value) of no more than $4,000. Married couples are entitled to double that exemption to $8,000.
- Cars - A single person in Arizona is permitted to keep a single vehicle with no more than $5,000 in equity. Married couples are each entitled to keep vehicles with no more than $5,000 in equity in each vehicle, or alternatively can apply both exemptions to one vehicle for a total exemption of up to $10,000. Further, an individual with a physical disability can claim up to a $10,000 exemption in one vehicle.
- Wedding Rings – A married couple is permitted to keep their wedding rings with up to $2,000 in liquidation value. Often people feel that this is insufficient and are worried about losing their wedding rings. I tell people that they should take their wedding ring to a pawn shop to get an estimate of what it is worth. Most are surprised (and a little depressed) at what the true liquidation value of their wedding ring is. Once I had a client who had purchased a wedding ring for nearly $15,000 many years before, and were surprised to learn that of the three pawn shops she went to, the most that was offered to her was $1,500.
- Cash – While most exemptions are very generous in Arizona, on the day you file for bankruptcy single filers are only permitted to have $150 while married couples are permitted $300. Any amounts over these limits, whether they be in savings accounts, checking accounts, money market accounts, stocks, or under your mattress, will be seized by the Trustee in a Chapter 7 bankruptcy.
With some planning you can often legally protect many non-exempt assets by converting them into exempt assets prior to filing bankruptcy. This takes time and informed advice. An Arizona bankruptcy attorney can advise you in your particular situation if your property will be at risk.
One of the benefits to a Chapter 13 bankruptcy is that you will remain in possession of all of your assets, whether they are exempt or not. You will, however, be required to pay back a small portion of all of your unsecured debts (i.e., credit cards) over a 3 to 5 year period. How much you must pay each month is largely dependent upon how much disposable income you have. Disposable income is essentially calculated by subtracting your monthly expenses from monthly income. The result is a good estimate of what your monthly plan payment will be.
However, this number will be inflated if you have non-exempt property. The more non-exempt property you have in a Chapter 13 bankruptcy case the higher your monthly payment will be. For example, if you own a boat free and clear of any liens that has a value of $15,000, you will be required to pay the value of the boat ($15,000) to your creditors over the 3 to 5 year period. On a 5 year plan that would be an additional $250 per month! You would be able to keep the boat, but as you can see from that example it can have a large impact on what you must repay your creditors.
With that in mind, it is important that you take full advantage of Arizona’s exemption laws in a Chapter 13 bankruptcy case to minimize the amount that you will be required to repay creditors. Some property (like a boat) is not exempt and there will be no way to avoid the impact it will have on your monthly plan payment, but most people’s belongings are exempt and properly claiming them exempt in your bankruptcy documents will save you considerable money as you are trying to get back on your feet through the bankruptcy process.
Important Note for New Residents of Arizona
If you are new to the state, it is important to know that you must have lived in Arizona for at least two years before you can avail yourself of Arizona’s exemption statutes. While you can file bankruptcy in Arizona after you have lived here for a little over three months, until you have lived here for two years you will be required to use the exemption statutes from the state you recently moved from. Often this is not a big deal, but there are states that have less favorable exemption statutes that protect much less property than Arizona’s laws do. Before filing a bankruptcy it is important to review your home state’s exemption laws to evaluate what property you have that may be at risk.
If you would like to learn more about how Arizona’s exemption laws will impact your Chapter 7 or Chapter 13 bankruptcy case, and to learn more about the bankruptcy process and how it can help you, contact attorney JacksonWhite for a free consultation at (480) 464-1111.