If you’ve been considering bankruptcy and educating yourself about the process, you may already be familiar with the concept of bankruptcy exemptions. Bankruptcy exemptions are protections that can be applied to assets to “exempt” them from the case. Each type of exemption protects different types of assets, with a different amount assigned to each exemption for equity in those different assets. Some of the most commonly used exemptions in Arizona bankruptcy filings are the homestead exemption, the motor vehicle exemption, and the household goods and furnishings exemption. One type of exemption missing from Arizona’s bankruptcy laws is a wildcard exemption. When a wildcard exemption is available, the debtor can apply it to any asset of their choosing. This keeps it from being seized and sold at auction in chapter 7, or its value being factored into the payment plan in chapter 13. So how can a debtor in Arizona ensure that their most treasured possessions are safe in bankruptcy if there is no wildcard exemption? Read on for more information on this topic. To schedule your free consultation with a knowledgeable bankruptcy professional in Mesa, Arizona, call 480-485-1010.
Arizona’s State and Federal Wildcard Gap
It’s already been mentioned that Arizona doesn’t have a wildcard exemption. This isn’t uncommon- Arizona is one of approximately 30 states that don’t. It is also one of about 30 states that don’t allow debtors to use federal bankruptcy exemptions instead of state bankruptcy exemptions. Many of the federal exemptions are much smaller than Arizona’s state exemptions. For example, the federal homestead exemption is only $31,575, while Arizona allows debtors to protect $400,000 equity in their primary residence. So for someone who owns their home, the state exemptions will allow them to protect far more equity than the federal exemptions. But if the debtor doesn’t own a home or other assets that wouldn’t be protected, the federal wildcard exemption could be applied to an asset that doesn’t fall into any of Arizona’s exemption categories, such as a boat. The debtor can also apply up to $15,800 of an unused federal homestead exemption to the wildcard exemption of $1,675. This is a potential total wildcard exemption of $17,475, which can be doubled for married couples filing jointly. But debtors can only take advantage of this federal wildcard exemption if they are filing for bankruptcy in a state that hasn’t opted out of the federal exemptions.
Tips for Filling the Wildcard Gap
If you have identified that one of your assets isn’t eligible for protection from any of Arizona’s bankruptcy exemptions, you can explore other methods of filling the wildcard gap. Some tips for getting the most out of bankruptcy when you can’t use a wildcard exemption to protect an asset include:
- Spending unprotected funds before filing: Arizona’s bank account exemption is limited, and you may have other funds coming your way that aren’t protected in bankruptcy, such as a tax refund. If you don’t want to lose these funds to your bankruptcy trustee, you can spend them on reasonable purchases. Some things you could spend on include gas and groceries, vehicle repairs and maintenance, medical and dental care, and your bankruptcy attorney’s fees. Some household items can be stockpiled so that you don’t have to pay for those expenses during the vulnerable period shortly following a bankruptcy filing.
- Reinvesting: If you have an asset that you will inevitably lose in bankruptcy, it’s better to get rid of it on your own terms first. Some assets can be sold before filing for bankruptcy, with the proceeds being invested into an asset that does have a bankruptcy exemption. For example, non-exempt funds could be deposited into your retirement savings, which are generally protected in bankruptcy. However, the debtor should also be aware of the 120-day rule for retirement contributions in bankruptcy.
- Consider chapter 13 over chapter 7: A debtor can keep non-exempt assets if they file for chapter 13 instead of chapter 7 bankruptcy. Non-exempt assets just might increase how much a debtor has to pay into their plan. This is a common choice for bankruptcy debtors with non-exempt assets in Arizona, such as a second vehicle.
- Buy-back agreement: Sometimes the trustee will allow a debtor to keep a non-exempt asset if they execute a buy-back agreement. The debtor should be able to pay for the asset within several months and still maintain a reasonable standard of living to qualify. It helps to have an experienced attorney to negotiate such an agreement.
- Prepay rent: Bankruptcy debtors who rent can protect up to $2,000 in prepaid rent in Arizona. If the debtor has non-exempt funds they wish to protect, they could pay early rent up to the exemption amount rather than let those funds be taken by the bankruptcy trustee.
Selling Assets by Bankruptcy Auction
If a bankruptcy debtor can’t protect their assets with an applicable bankruptcy exemption, there is a significant risk that the trustee will take the asset to sell by auction. This can be done with just about any asset not protected by a bankruptcy exemption. Bankruptcy sales can either be public or private. Many debtors prefer public sales because there is more opportunity for higher bidders. Bidders attending the sale must provide the trustee with their name, address, and phone number. The trustee can also require them to submit a deposit before they can bid on any assets in the auction. Sometimes, an asset will sell at bankruptcy auction for more than the remaining value on its loan. This means that there will be excess sale proceeds. The debtor can keep excess sale proceeds if there was an exemption to protect the asset.
Debtors in chapter 13 bankruptcy can surrender assets if they can no longer afford the payments, or keeping them would make their payment plans infeasible. This can be a massive benefit, especially if the debtor has an asset with a loan balance higher than the asset’s market value. This helps the debtor avoid all of the fees and penalties that would typically come with this. However, a chapter 13 debtor under these circumstances should consult with an attorney first to see if selling the assets and utilizing other financial strategies could help them avoid filing for bankruptcy altogether.
Protect Your Interests in Bankruptcy with a Dedicated Legal Team
One of the downsides of filing for bankruptcy in Arizona is the lack of wildcard exemption, so debtors can protect miscellaneous assets. If you file for bankruptcy in Arizona, some of your assets could be at risk if they can’t be protected with existing exemptions. No bankruptcy debtor wants to go through the experience of having their assets taken by the trustee and sold by auction. But there may be legal strategies available to help you avoid this. And this isn’t the end of the benefits you can receive by filing for bankruptcy with a qualified legal team. Quality bankruptcy representation can make every step of the process smoother, clearing your debts as efficiently as possible. Don’t let bankruptcy put your financial situation in any more risk than it already is. Schedule your free consultation with Chapter Bankruptcy Lawyers today by calling 480-485-1010.
