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Frequently Asked Questions (FAQ) about Bankruptcy in Arizona: Debunking Bankruptcy Myths
What are My Rights as an Arizona Debtor?
Do I Need to Hire an Attorney to File Bankruptcy in Arizona?
How Does Bankruptcy Affect My Credit?
Can I File Bankruptcy and Keep My Property in Arizona?
Can Just One Spouse File for Bankruptcy in Arizona?
How will Bankruptcy Affect My House and Car?
During bankruptcy, and as discussed next, a debtor may “strip” a second mortgage during a Chapter 13 Bankruptcy proceeding, if this mortgage is wholly unsecured. Stated differently, if the home is worth less than the outstanding first mortgage, a debtor can file a Chapter 13 and remove any secondary liens, which are removed after the bankruptcy discharge. Lien stripping is accomplished through filing an adversarial complaint within the bankruptcy and with plan language that places strict requirements on a lender to follow through with loan removal after the bankruptcy has been completed.
With respect to a vehicle, a debtor may negotiate the terms of their reaffirmation agreement, which includes adjustments to the outstanding principal and/or adjustments to the interest rate. This is done in a Chapter 7 Bankruptcy proceeding and works well with particular lenders. However, some lenders will not negotiate terms. The second option for Chapter 7 debtors is to “redeem” the vehicle, which means purchasing the vehicle from the lender at what it is worth, versus what is owed on it. This can be a great benefit to a debtor and there are some loan programs that will even assist debtors with redemption loans. In a Chapter 13 Bankruptcy proceeding, a vehicle can be paid off at what it’s worth if the vehicle has been owned for more than 910 days. This is called a “Cram Down.” Also, in a Chapter 13, the vehicle’s interest rate is always reduced to a very low amount, usually prime plus one percent and is spread out over 3 – 5 years.
Can I Eliminate My Second Mortgage?
Arizona's Community Property Laws & Debts?
Bankruptcy Before or After Filing for Divorce?
The exception to this rule is where separated couples can sometimes use the separation as an opportunity to qualify for a Chapter 7 bankruptcy individually, of which they may not have been eligible to file jointly. That said, debtors are not allowed to separate solely for the purposes of defeating or circumventing the bankruptcy code. The other advantage of filing bankruptcy after a divorce, is that couples can properly plan for bankruptcy and assign assets strategically among each other via the divorce decree, which should not trigger any preferential payment or transfer issues. Next, debtors can then file and structure a bankruptcy petition to try and use one spouse’s filing to cover both spouses’ obligations. These types of situations involve precise planning and insight to how a creditor will treat a bankruptcy proceeding. Always speak to a bankruptcy attorney first.
What are the Bankruptcy Myths?
First, as discussed above, most debtors do not loose property. This is especially true, if they have an excellent attorney that is versed in the delicate counsel of negative asset planning (pre-petition asset planning), and well versed in the state and federal exemption schemes. If a debtor misses an exemption, or if their attorney fails to claim the exemption, the debtor loses it. This is unfortunately common.
Second, bankruptcy often improves your credit and it has minimal affect on your overall credit score. Most, if not all, debtors are aware that bankruptcy remains on a credit report for 7 – 10 years (the actual answer is 10 years). However, few debtors understand that bankruptcy only affects the credit score for two years, and thereafter, its presence is negligible at best. In addition, most creditors do not care about the existence of a bankruptcy once it has been discharged for more than two years. Finally, credit scoring models compare bankruptcy debtors to other bankruptcy debtors for purposes of generating a credit score, which is an opportunity for debtors that understand how to reestablish credit. These individuals that are motivated and follow through with credit restoration will be compared against other debtors that filed bankruptcy and did nothing thereafter to improve their credit.