Is There a Most Common Type of Bankruptcy?
Bankruptcy is a legal process that enables individuals and businesses to get relief from their debt by either liquidating their assets to pay off creditors or reorganizing their debts and creating a plan to pay off their debts. When a person or company files for bankruptcy, it is done under one of the chapters of the U.S. Bankruptcy Code. The most common chapters in Arizona are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
In Arizona, the most common bankruptcy type is Chapter 7 bankruptcy, also referred to as “liquidation” bankruptcy. This category of bankruptcy is designed for individuals and businesses who cannot pay off their debts and need a fresh start.
When someone files for a Chapter 7 bankruptcy, their assets are liquidated or sold to pay off their creditors. However, certain assets, such as a primary residence, personal property, and a car with up to $6,000 in equity per spouse, are protected by Arizona bankruptcy exemption laws as outlined in the Arizona Revised Statutes (A.R.S) and are not subject to liquidation.
Chapter 7 bankruptcy is most common for those struggling with overwhelming debt, such as credit card debt, medical bills, and personal loans. It is also common for those who have lost their jobs or experienced a significant reduction in income.
In Arizona, in 2021, the statistics of Chapter 7 bankruptcy show that:
- A total of 8,461 Chapter 7 bankruptcy cases were filed in Arizona
- Of those cases, 8,292 were filed by individuals, and businesses filed 169.
Pros of Chapter 7 Bankruptcy
- The least expensive type of debt relief
- Flexible in that one can reaffirm (pay a portion or the entire debt) the debt if they do not wish to sell a certain unsecured debt
- Quicker than other types of bankruptcy; it takes about four months to discharge
- It provides a fresh start by relieving an individual of unaffordable unsecured debts such as personal loans, credit card debt, and medical bills
- Stops creditors from harassing an individual through debt-collection lawsuits.
Cons of Chapter 7 Bankruptcy
- There are specific non-exempt items that you have to sell
- The creditor can still pursue the debtor’s co-signer if they cannot reach the debtor
- You can only file for Chapter 7 bankruptcy once every eight years
- To qualify, your average monthly income for the last six months must be below the median income for your household size.
Chapter 13 Bankruptcy
Another common category of bankruptcy in Arizona is Chapter 13 bankruptcy, also called “reorganization” bankruptcy. Chapter 13 bankruptcy can be filed by individuals or business owners who have a regular income and desire to retain their assets, including their primary residence or vehicle., while they repay their debts over three to five years. However, corporations are not eligible for a Chapter 13 bankruptcy.
Individuals who have defaulted on their mortgage or car payments and seek to catch up while eliminating other unsecured debts often file for Chapter 13 bankruptcy. It is also a good option for those who do not qualify for Chapter 7 bankruptcy because they have too much income or too many assets.
In Arizona, in 2021, the statistics of Chapter 13 bankruptcy show that:
- A total of 1,338 Chapter 13 bankruptcy cases were filed in Arizona
- Of those cases, 1,324 were filed by individuals and 14 by businesses.
Pros of Chapter 13 Bankruptcy
- Permits individuals to retain their assets, including their primary residence or vehicle, while paying off their debts over three to five years
- It can help individuals catch up on missed mortgage or car payments and avoid foreclosure or repossession
- It can help individuals pay off their tax debt over a longer period
Cons of Chapter 13 Bankruptcy
- Individuals must have a regular income to qualify for Chapter 13 bankruptcy
- The court must approve the repayment plan, and the individual must stick to it for the plan’s duration
- It can be more expensive than Chapter 7 bankruptcy in the long run, as it typically lasts longer.
- Not all debts are dischargeable in Chapter 13 bankruptcy
It is worth noting that filing for bankruptcy has consequences, such as a negative impact on credit score and difficulty in obtaining credit in the future. Consult a bankruptcy attorney to discuss the bankruptcy type best for your financial situation.
Contact the Tucson Bankruptcy Attorney Today
If you are seeking financial freedom in Arizona, contact our seasoned Tucson bankruptcy lawyer Eric Ollason and his office. You may also reach us at (520) 389-5241. We can help you learn your options depending on your financial position.