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The Importance of Consultation

Prospective clients considering bankruptcy have often done some homework before making an appointment for a consultation.  Many of my clients even know that they want to file bankruptcy before they make the appointment. Many clients even have a good idea of what debt can be discharged in Chapter 7 and what debt cannot be discharged.  Most prospective clients do not know how vital proper timing in the Chapter 7 case’s filing can be.

One of the first things to know about a Chapter 7 bankruptcy case is that there is a Trustee assigned to every case.  The U.S. Trustees appoint the local Trustees, and they serve a critical function in the process.  A typical bankruptcy case is different from what many people envision when they think of a court case.  In most Chapter 7 cases, there are no hearings with the evidence presented by two sides and a judge making decisions based on that evidence.  For most Chapter 7 cases, the debtor will never appear in front of the judge.  In the vast majority of cases, the judge does not hear evidence and decide whether or not a discharge will be entered in the case (the discharge is the order that formally eliminates the unsecured debt in the Chapter 7 case).

In every Chapter 7 case, the assigned trustee will review all of the schedules, statements, and other documents filed by the debtor’s attorney in the case. The trustee will also hold the “meeting of the creditors” or “341 hearing”.  Debtors who hear the term “meeting of the creditors” are often anxious that they will have to face their creditors.  In reality, creditors seldom show up to the 341 hearing. The Trustee holds the 341 hearing, and the debtor(s) answer a list of standard questions under oath.  Most 341 hearings take about five minutes.

One thing that the Trustee must determine in every Chapter 7 case is whether there are any non-exempt assets owned by the debtor(s).  In a Chapter 7 case, the debtor is allowed to keep all exempt assets.  Any non-exempt assets are subject to being claimed by the Trustee who will sell the non-exempt property and distribute the proceeds to the creditors in the case. What property is exempt is determined according to state law.  Which state law applies is determined according to the Bankruptcy Code.

Arizona defines specific property as exempt.  For example, equity in the debtor’s primary residence up to $150,000 is exempt.  One vehicle per debtor worth up to $6000 is exempt.  Household goods, furniture, and electronics worth up to $6000 is exempt.  Retirement accounts are exempt according to federal law.  There are exemptions for the debtor’s clothing and other personal items.

Although Arizona has generous exemptions in some respects, Arizona has a very limited exemption for cash on hand or money in a bank account. A debtor can exempt only $300 held on the day of filing.  Money owed to the debtor is also generally not exempt. Still, there are certain exemptions (for example, money owed to the debtor resulting from a claim for disability benefits is exempt).

This time of year, one non-exempt asset that might not occur to most debtors is their tax refund for the current year.  In early 2021, people will be filing their 2020 tax refunds, and many will be entitled to a refund.  However, if someone who will be entitled to a refund for the tax year 2020 were to file a Chapter 7 case near the end of 2020, a large portion of their tax refund would be considered non-exempt and would be taken by the Trustee for their case and paid to their creditors. The reason for that is that a tax refund is considered “earned” over the course of the year.  So a person who files at the end of November 2020 would be deemed to have already “earned” and be “owed” 11/12ths of their 2020 tax refund. For a person filing a Chapter 7 at the end of the year, this can be a rude shock.

However, this can be avoided by waiting to file the debtor’s case until the debtor has received and spent their tax refund.  It is perfectly legal and legitimate to receive your tax refund and either purchase an exempt asset (like a used vehicle) or spend the refund on necessary living expenses.  When I am meeting with clients in the latter part of any year, I ask them about how much they expect to receive in their tax refund for that year.  Proper planning of the timing of filing a Chapter 7 case can allow debtors to keep the benefit of their tax refund for themself rather than having it go to their creditors.

If you are struggling with debt and want to know your options, contact my office now to schedule a free consultation.