A common belief of many people who are considering filing for bankruptcy is that they will lose all of their possessions if they file. Typically, the issue of assets is most significant in a Chapter 7 bankruptcy. This is because a Chapter 7 bankruptcy is considered a liquidation bankruptcy. When an individual files for relief under Chapter 7, all of their unsecured debt, and secured debt on any items they wish to surrender, will be completely wiped out. There is no repayment of debt in Chapter 7. However, to balance the wiping out of debt, the bankruptcy trustee will examine the individual’s assets to determine if there is anything that can be sold, or liquidated, to pay toward some of the debt. And this is where debtors start to get nervous.
But, before you fear too much, you can keep a slice of the pie for yourself even if you file a Chapter 7 bankruptcy. Remember pie charts from grade school? Create a pie chart in your mind. You begin with a pie that is filled with all of your assets. Assets mean everything you own. This includes real estate, like your house, or raw land, and personal property, like cars and furniture. It includes tangible property as well as intangible property, like patents or franchises. It also includes the right to certain property that you will receive in the future, like a life insurance benefit, or account receivable. When you file Chapter 7 bankruptcy, the assets filling up your pie become property of something called the bankruptcy estate. The assets, essentially, no longer belong to you. There are some exceptions. Certain assets never become property of the bankruptcy estate, such as educational IRA accounts.
So, you have filed bankruptcy and GASP!, your whole property has now become someone else’s pie. Again, don’t worry just yet. Now, we start to cut your slices of the pie that you get to keep. Each state has laws that outline that state’s property exemptions. In Arizona, the exemptions are primarily found in the Arizona Revised Statutes, Title 33. The items listed in this section of the revised statutes are exempt from creditors, which means they are also exempt from the bankruptcy estate. Arizona’s exempt items include (but are not limited to):
- $6,000.00 equity in a vehicle (up to $12,000.00 if married);
- $150,000.00 equity in a homestead;
- $6,000.00 in household goods and furnishings (up to $12,000.00 if married);
- $2,000.00 in wedding and engagement rings (up to $4,000.00 if married);
- $5,000.00 in required tools of a trade (up to $10,000.00 if married); and
- 100% value in qualified retirement accounts, which include 401Ks, IRAs, 457 accounts, and 403 accounts
From a bankruptcy attorney’s point of view, the Arizona state exemptions are pretty filling. There are a lot of slices that a person can take. There is also the option to conduct a little bankruptcy planning, within limits, if an individual owns many non-exempt items. In a typical Chapter 7, it is usually rare to find what is referred to as an “asset case.” Most people will be able to exempt most of their items and escape liquidation. One notable exception that will affect most people is the tax refund. Any tax refunds receive for the year in which an individual files bankruptcy are property of his/her bankruptcy estate. Currently, Arizona has no exemption to protect the tax refund. Some states have a wild card exemption that can be placed on any personal property, including a refund, but Arizona does not. The portion of the refund that goes to the bankruptcy estate is a pro rata share, i.e. it is based on how far into the year the bankruptcy was filed. So, if a case was filed in June of 2012, 6/12, or 1/2, of the 2012 refund would go to the bankruptcy estate. This can be an important concern for many people who receive large tax refunds, but the rule only applies to that one year. For most, it is a small sacrifice to keep other assets and have their debt discharged.
So, there it is. While a Chapter 7 bankruptcy can involve liquidation, it is more likely that you will get to have several slices of the asset pie.