Phoenix Bankruptcy Attorney Blog

Many Arizona residents are aware that they are allowed a “homestead” exemption for equity in their primary residence.  Many bankruptcy attorneys are aware of this fact as well.  Currently, the homestead exemption in Arizona is $150,000.  In the past, it was a tolerated, if not wholly supported, practice for individuals facing bankruptcy to sell assets they would otherwise lose in a bankruptcy and use the proceeds to pay down the mortgage on their home.  This allowed debtors to potentially protect $150,000 in property by putting it into their home.  In other states, such as Texas and Florida, the homestead protection was even more generous, allowing debtors to shield far more assets from creditors.

I recently met with a potential client that had seen three prior bankruptcy attorneys.  One of these had suggested to the potential client that she sell a valuable piece of property that she owned free and clear, and use the proceeds from the sale to pay off the mortgage on her home here in Arizona.  Then, he recommended she file bankruptcy and “protect” the equity in her home.  As few as five years ago, this may have been an acceptable strategy, and under the right circumstances MIGHT, and I emphasize might, still be possible today. 

However, the prior attorney failed to mention that major changes to the Bankruptcy Code in 2005, severely limit a debtors ability to engage in this form of “pre-bankruptcy planning.”  The specific code provision in question is Section 522(o).  This section limits the homestead exemption in the context of “pre-bankruptcy planning.”  It requires the deduction of the value attributable to fraudulent conversions made within 10 years of filing, to the extent that such value could not have been exempted if the disposition had not been made.  In plain English, if you sell an asset that you were going to lose in bankruptcy for $100,000, (like a brick of gold, vacant land you were going to build on some day, or any number of other items), and you use the money to pay down the mortgage, you are in for a rude awakening when the trustee objects to your claimed $150,000 homestead exemption.  

The statute speaks of “value… attributable to… property that the debtor disposed of… with the intent to hinder, delay, or defraud a creditor.” The language is strikingly similar to that used in Section 548(a)(1)(A), which authorizes the avoidance of transfers made with actual fraudulent intent, and in Code § 727(a)(2), which bars a Chapter 7 discharge for such conduct. The similarities may suggest parallel analysis, although there is not yet a Ninth Circuit case setting forth the precise standard to be used to determine whether the transaction was done with “intent” to defraud, hinder or delay.  However, there are lower court cases that state the Trustee (or objecting creditor) need only show fraud by a preponderance of evidence, rather than the higher, “clear and convincing evidence” standard that is sometimes used. 

Section 727(a)(2) prohibits the grant of a discharge to a Chapter 7 debtor that engaged in fraudulent asset conversion in the year prior to filing bankruptcy.  Seciton 522(o) now adds loss of the homestead exemption to the price the debtor will pay, and more troubling, extends the look back time for an astonishing 10 years.  Furthermore, section 522(o) not only applies in Chapter 7 cases, but across the bankruptcy code. 

While pre-bankruptcy planning, and the conversion of nonexempt property into exempt property, without more, is allowable, the intent to hinder or delay creditors is fraudulent under the code.  Whether a particular transaction is fraudulent is a fact intensive question, and the objecting creditor or the Trustee bears the burden of proof.  However, if you are considering bankruptcy, and you are thinking about selling, giving away, or otherwise disposing of any assets prior to filing, you should speak to a competent bankruptcy attorney first.

For more information, or to register for one of our free bankruptcy seminars, please visit www.mcguiregardner.com or www.freearizonabankruptcyseminar.com.

Bankruptcy clients often have a difficult time determining which chapter to file under.  The Chapter 7 is the most commonly considered type of bankruptcy.  It is faster, cheaper, simpler, and the entire case is usually concluded within months.  However, for some people, there are many advantages to filing a Chapter 13 Bankruptcy, even if eligible for a Chapter 7.

First, the debtor and his or her attorney must determine if the debtor is eligible to file for a Chapter 7.  The 2005 law changes included a means test, that requires the debtor to determine eligibility to file for a Chapter 7.  Our office can help you understand the means test and determine if you qualify.

One consideration is that voluntary retirement contributions and retirement loan repayments are deductible in a Chapter 13, but not in a Chapter 7 case when determining disposable income.

Another consideration is eligibility for a discharge.  If the debtor filed a bankruptcy within the last eight years, the debtor cannot receive a Chapter 7 discharge, but can receive a Chapter 13 discharge so long as it has been at least four years since filing for a bankruptcy that resulted in a discharge.

The debtor must also determine if it is likely that he or she will incur additional debts in the near future.  A Chapter 13 may be voluntarily dismissed by the debtor much more easily than a Chapter 7, allowing the case to be refilled to include subsequent debts if necessary.

A Chapter 13 allows a debtor to retain a vehicle without reaffirming the debt. The problem with reaffirming a debt in a Chapter 7 case is that the debtor may be responsible for the deficiency if the vehicle is later repossessed, or totaled in an accident when the vehicle has negative equity.

Many debtors have assets that exceed the permitted exemptions.  Filing a Chapter 13 provides an opportunity for the debtor to keep un-exempt assets. 

Debtors that own a sole proprietorship should strongly consider a Chapter 13, which would allow for the continued operation of the business with much less interruption and interference than would result from a Chapter 7 case.

Certain non-dischargeable debts are more easily handled in a Chapter 13 case, including non-dischargeable taxes, secured debts, real property arrearages, etc.

Finally, in many cases we can assist the debtor in stripping off second or third mortgages on real property, and/or cramming down the amount that must be paid on a vehicle to the value of the vehicle, not the greater amount still owing on the loan. 

On the other hand, Chapter 13 cases cost more, though the additional cost is generally paid through the bankruptcy plan.  There is additional paperwork and the case remains open for years, not just months. 

If you are considering bankruptcy, and would like to learn more about a Chapter 7 or Chapter 13 case, please call us today for a free initial consumer bankruptcy consultation, or attend one of our upcoming free bankruptcy seminars.  To learn more, visit us at www.McGuireGardner.com or www.freearizonabankruptcyseminar.com