Can you continue to negotiate a loan modification if you file a Chapter 7 Bankruptcy petition?

Arizona Chapter 7 Bankruptcy Basics

Arizona Chapter 7 FAQ’s

The following information is general legal information only and not intended to serve as legal advice, or a substitute for seeking legal counsel. Contact a Chapter 7 Bankruptcy Attorney to discuss your case. Certain information below may be incomplete, inaccurate or outdated as laws can and do frequently change.


Question: The first thing everybody asks is Can I Keep My Home?

Answer: In a Chapter 7 the same rules apply outside of bankruptcy – you have to be current on your mortgage to be able to claim the right to keep your house or you rhave to at least be “good” with the lender. For example, if you are late on your mortgage payments but are being considered for a loan workout, or you are in the loan modification process, the lender may not demand to lift the “automatic stay” that comes with a BK filing.

When we get calls from Phoenix and Scottsdale homeowners stating “I hear you have to be current or else I’m going to lose my home” well, that’s not exactly the case because you just have to be good. So whether you are in process of a HAMP modification or other loan modification. As long as you good with your Lender there is a chance to keep your house.. Just keep in mind, the lender’s power to foreclose doesn’t go away, and the power to seek relief from the automatic bankruptcy stay does not go away either. When it’s in an Act of Bankruptcy, they have to file a Motion for a Leave or Relief from an Automatic Stay to Foreclose, but their rights are still there to foreclose.

So basically in a house that is upside down being financed, you have to be good on all mortgages (first and second) in order to be able to safely say that they cannot take your home.

You have to be good on your first mortgage, and good on your second mortgage and if you have a third – same thing. Again, the Lender still has the rights to foreclose, they just must ask the Court’s permission to do so.

Alot of times the Courts or Lenders, even if you are current, will file the Motion for Relief from the Stay, in order to get it approved just in case you get behind then they can just basically come right in and foreclose on it. So they just file the motion for relief from automatic stay just to basically have it in their back pocket ready to foreclose if need be.

Question: Can you “lien strip” a first or second mortgage in Bankruptcy Chapter 7?

Answer: For the most part the answer is NO. There was a New York BK case that came down saying this was permissible, but that is not Arizona law. So nothing gets stripped away in a Chapter 7 for the most part. If you qualify for a Chapter 13 BK you have the opportunity under the right circumstances, to strip a lien where it is not secured by any equity in the property.

Question: Does the Court take all my assets in a Chapter 7 Bankruptcy Case?

Answer: Just like with anything else in a Chapter 7, it is important to realize it’s the equity in things that the Bankruptcy Court wants. In Arizona, the Homestead Exemption is $150,000. That does not change whether you are married or single, its $150,000. So what does that mean? That means if you have a paid-in-full house, if it’s worth $150,000 or below, you are protected (which means it is an Exempt Asset that cannot be attached and it’s exempt from the Bankruptcy).

If you have a $200,000 house … The exemption is $150,000 and you are therefore $50,000 over the exemption. If you file the bankruptcy in a situation like that, (which you probably wouldn’t do) but if you did, the Trustee wants that $50,000 equity to pay other creditors. The Bankruptcy Trustee basically wants equity to pay the other unsecured creditors in a case. The Trustee doesn’t necessarily want the house itself, but you can rest assured they will want that $50,000 in equity that you have that is not exempt.

To get that money, the Trustee might seize the house and sell it, and then cut you a check for $150,000 (to cover your homestead exemption) and then keep the $50,000 and apply it to your creditors. In this scenario, you would not of course keep your house and protect it from being sold. Most people don’t like this scenario.

Question: As to the Homestead exemption of $150,000, does this apply to any house including mobile homes, etc.?

Answer: Mobile Homes / Condo Homes / Trailers – if you live there as a primary residence, chances are good that can be treated as your homestead. For example, a trucker who lives in his 18 wheeler truck can try to exempt that under the homestead exemption, but keep in mind, this could also be a grey area that has to be litigated in a Bankruptcy Court (ex. In contested proceedings and/or adversary proceedings).

Question: What about re-affirmation agreement following Bankruptcy? Do I have to reaffirm to keep my house?

Answer: You never have to reaffirm on real property. So basically, when the bankruptcy is filed, as long as you have continued to make regular payments and stay current, you don’t have to sign a Reaffirmation Agreement. That means, let’s say you have a first and second mortgage and you file for bankruptcy, as long as you are current on the payments, 6 months down the road if you want to walk from the house, you can walk with no liability. Your in personam (personal) liability is eliminated, but your in rem (property) liability remains, meaning if they are the valid creditor holding the note/lien, then they still have the right to foreclose on the property.

But note, that if you do not re-affirm the real estate debt, the drawback to that is that it does not get positively reported on your credit ever again. So you don’t have to reaffirm on the house, you can just continue to retain the property and make regular payments, but it won’t be positively reported on your credit and the power to foreclose if you become late always remains.

NOTE: You can reaffirm the home (by written agreement) and have it positively reported on your credit and yet still, in many cases, be protected by the Arizona Anti-Deficiency Statute, but that is something where you could be subjecting yourself to possible litigation if you do not make your payments and potential foreclosure as well.

Question: Does a Chapter 13 bankruptcy in Arizona save the home from foreclosure?

Answer: Maybe. In a Chapter 13, it works a little differently. In a Chapter 13, the amount that you are behind, (your arrears), will be put into your Chapter 13 Bankruptcy Plan. It will be thrown into your general pot of debt. Going forward, you do have to continue to show that you are able to make the house payments. The bottom line is that if a person can’t afford their mortgage payment, then Chapter 13 is not going to save them because they are going to have to continue to make those payments.

NOTE: Chapter 13’s do allow for a lien stripping on a second mortgage or a third mortgage and basically anything that doesn’t have any equity that can be stripped away (through an adversary proceeding which is basically a lawsuit in the BK Court). Under the Bankruptcy Code it defines what unsecured debt is. If a second or third mortgage is unsecured, it may be subject to being stripped. How can you tell if there is equity? An appraisal will normally be done within 10-15 days of filing. The closer they are to showing that you have equity in your property to cover the second or third mortgage, the more of a potential legal battle you will face. No 2nd or 3rd mortgage holders wants its lien stripped. Typically when someone calls us and is considering filing a Chapter 7, they are usually behind on their second mortgage payment. But this won’t be stripped in a Chapter 7, but could be in a Chapter 13.

Again, on a Chapter 13, you can strip the second away if it doesn’t have any equity, but that is contingent on the successful completion of your Chapter 13 bankruptcy. So whether it’s a three or five-year plan payment, your stripping of your second is contingent upon you completing the bankruptcy. If you cannot complete your Chapter 13 (and a good number never get completed for a variety of reasons), then you are really in a tough spot, because you are now 1-3 years behind on your second mortgage payments, and the lien goes right back onto the house. So, you better make sure when you are stripping your second that your Chapter 13 is successful or you are going to have that second mortgage back.

Question: What does it normally take to qualify to file a Chapter 7 bankruptcy case in Arizona?

Answer: To qualify for Chapter 7 bankruptcy in Arizona, basically a good generic way of thinking of it in a Chapter 7 is that you have to make below a certain amount and you have to be negative on your expenses.

How this is determined is basically by first looking at a person’s gross income six months average prior to filing. If you are below that median income for your size household, then the means test does not apply.

If you are over the median on gross income, there is another way to qualify and that is that you can pass on your Net. This basically means using allowable expenses, you take your Gross which is over the median and you essentially pass the means test by using allowable expenses. In this scenario, you are basically saying: “Yes I am over the median income, but I’m passing on my Net, I’m passing on my take-home.

There is a lot of different factors to take into consideration in regard to the Arizona Means test, and there some things you can take and there’s things you can’t.

The other part of the equation (being negative on the expenses), is an easier problem to fix sometimes than if you are failing the means test. For example, you can be a little positive, like $100 or $150 and still qualify. Basically the negative expense test is if your disposable monthly income is more than a certain amount (there’s a formula that you can go by) then the two questions you have to ask yourself is: (1) can I pay 25% of my unsecured debt back, and (2) is it more than $10,000? If the answers to these questions are YES, then basically you need to file Chapter 13 instead of Chapter 7.

All the Chapter 7 means test is essentially doing is to see if you have the “means” to do a Chapter 13. If you don’t have the means for that, then the Chapter 7 is permissible for you to file.

Question: What about the day of filing and exempt cash?

Answer: The big thing is on the day of filing if you are a single person $150 cash is exempt and that is an aggregate over all your accounts. It doesn’t matter, married people can have $300. ($150 cash or $300 if you are married couple). No more than that on filing.

POST FILING (After Filing)

You essentially can file your case on let’s say, Monday and you can have just the $150/$300 at the time of filing on Monday. If you get paid, let’s say, on Thursday, it’s fine. You can have all the money in the world go into your account after Monday, that’s not a big deal, its the time of filing that matters And keep in mind again, it’s the aggregate of all of YOUR accounts. If you have money in your kid’s account, for example, and you are the custodian or guardian, then that is fine … it’s not your account. But if you have money in your child’s bank account and that happens to be a joint account (you and the kid on a joint bank account) then that is considered an asset of yours. If your mom is on your bank account, you have a 50% ownership in that bank account. That is an asset. That’s how the cash exemption works. They will always pull ATM receipts and bank statements. You just can’t pull cash out and sit on it. They are going to sniff that out. People do that all the time. So if someone has for example $800 in their bank account, you will probably want to wait until you spend that money before filing for bankruptcy.

Question: What about SOCIAL SECURITY and exemptions?

Answer: You can’t credit it – you can’t garnish Social Security. You can’t garnish Unemployment and Social Security Disability. You can’t garnish any of those. Once it becomes cash, it is part of your assets, it’s just cash. It just gets converted completely into cash. Another thing is that Social Security and Social Security Disability is not considered in the Means Test, but it is considered on your expenses. If you are positive because of Social Security, then you are positive. Everything is considered on your expenses. All sources of income. On the Means Test, Social Security and Social Security Disability are not included on the Means Test. So if you are on Social Security, you don’t have any means. It is not even an issue. It doesn’t even apply really because of Social Security, Unemployment and Social Security Disability.

For older people, if you are positive $500, $600 or $700 and you are just off a Pension and Social Security, you are fine. Even though a single person was positive $700, they would probably have to be a Chapter 13, you are fine if you are an older person. No one is making you do a Chapter 13 if you are the sole source of income or most of it is Social Security, pension, or disability. You are just not going to be a Chapter 13. Most elderly people do not do Chapter 13.

Question: What happens if a creditor ior second mortgage holder s trying to collect on a debt before I have filed for Chapter 7 Bankruptcy in Arizona?

Answer: When you are getting into a position where as a Debtor, you are late on your credit card. They will start to harass you with collection calls. They will send you a Notice of Default. You get behind on your debt and so then they want to sue you on the debt. They serve you with a Summons and Complaint and then you basically have 20 days to respond. Most people generally don’t respond. A bankruptcy attorney will often advise clients in this position not to respond. The idea is that you want the wheels of justice to slow the process down as much as possible. You have 20 days to respond to the complaint, and let’s say that you don’t. Then, the creditor will normally move for a Default Judgment and then you usually have like 30 days on that. Once they get the Default Judgment, of course they have to take action to enforce it, for example, garnish your wages, find out where you work, find out where your bank account is, etc. That process often takes another 20-30 days. So, as you can see, you might have about 90 days before a default judgment turns into an action of garnishment.

If they do hit you with a Garnishment, that’s usually the time bankruptcy gets filed. The process involves filing the bankruptcy petition, and then serving a Notice to the HR Department, and to the creditor, and the garnishment must stop. So, basically, when someone gets sued on an outstanding debt, you basically just want the wheels of justice to slow down as much as possible.

Keep in mind, lenders can’t foreclose AND sue on the note. So sometimes a second mortgage holder will get stupid and they will try to sue you, which means they will have lost the security interest because they sued on the note. That means if you follow through and file a bankruptcy petition, then the second mortgage holder essentially becomes an unsecured creditor and they have lost their security interest in your property. Now, sometimes they might take a gamble like that because they are so far upside down and they know they are never going to get it all back on the property, so they take the chance to sue you on the note and seek garnishment and basically hope you don’t file for bankruptcy. At that point its just a calculated risk on the part of the mortgage holder.

Question: If someone is suing me for fraud should I file bankruptcy?

Answer: Any court award that is based upon and proven to be fraud is not dischargeable in bankruptcy. So, if someone gets a judgment against you for fraud, you cannot discharge that debt by filing bankruptcy. So, if you think someone is going to prove fraud against you then you have to really fight the case so that they do not prevail on the fraud claim. If they get a judgment, let’s say for $500,000 but there is no fraud proven, in most cases you can just file BK on the $500k judgment. Another thing that is not dischargeable in a bankruptcy is sales tax. You also can’t discharge things related to alimony, or child support.

Question: Can the bankruptcy trustee come after me if I buy a nice expensive item right before filing bankruptcy?

Answer: Yes, they can. The big thing too, talking about other debts that might not be dischargeable in bankruptcy, (i.e. where you can get a non-dischargeability complaint – called a 523 Complaint – filed against you) is where you figure you are going to be filing for bankruptcy and you get this wild idea to go out the night before and go on a shopping spree at your local electronics store and pick up a $2,500 flat screen let’s say. That is not likely to stand in a BK court. A 523 complaint is non-dischargeable. It means the creditors file the complaint arguing that this shopping spree debt is not dischargeable. Essentially it requires an opposition to the complaint, which in most cases means you will have to be ponying up extra money to your BK lawyer to fight the allegations, if warranted.

The other option is to make arrangements to start paying on the debt. It’s very rare and usually screened out but sometimes people just go out and buy things without telling the Bankruptcy Attorney, and go get a $10,000 flat screen right before the filing, that’s just not cool and you cannot do that. Sometimes it comes in the form of credit card usage right before the bankruptcy, another example being last minute cash advances. You know a balance transfer is a new debt. Moving credit cards debt from one card to another card is essentially treated as acquiring a new debt which can also trigger a complaint. All that being said, non-dischargeable complaints are pretty few and far between, but they can arise where a BK client has done something stupid and greedy before filing for bankruptcy

Question: Can I still work on a loan modification with my lender or loan servicer while I am in bankruptcy?

Answer: This is another big question – the loan mod in BK question. Again, you are dealing with third parties, so you often have no control over it. It’s pretty much up to each individual lender. Some lenders prefer a bankruptcy because it changes your debt to income ratio for the better by wiping out some of your “back-end” expenses, like credit card debt making it more likely for you to qualify for a loan modification.

The BK wipes out the unsecured debt giving you more money to commit to the mortgage. Some lenders want you to do your loan modification before the bankruptcy, and some lenders/servicers would prefer you wait until after the bankruptcy to re-open the loan modification/loss mitigation process. Either way, once the bankruptcy is filed, you need to send a letter in to essentially get permission to continue on with it.

Again, every loan modificatio is up to the individual lender. It’s not a good or bad thing. It’s just one of those things that come down to the fact of how they want you to do it. I have never heard of any lender saying since you have filed bankruptcy we are not willing to help you any longer. But keep in mind, it can be tough when the Automatic Stay is in place for them to communicate and work on your loan mod, they do not want to risk contempt for violating the Stay. So if it is anything, it’s more like a pause because it sets things back and it slows it down a bit.

Other than that it’s the common question, can I do a loan modification while in bankuptcy. The answer is often times yes. If the bankruptcy is filed, they will normally need the Client or Attorney’s permission to speak to you. Once they get it, it’s the normal loan mod options, discussions, and negotiations.

Again, as I have said before, you have to be good with your lender. They don’t lose their rights to foreclose in a bankruptcy, its just that they have to file a motion to lift the Automatic Stay (by filing a motion for relief from Stay). If the Court grants this, and the lender refuses to modify your loan, they can still foreclose on the property if it is in default and the foreclosure procedures have all been followed.

Question: What is the credit counseling obligation for someone considering filing bankruptcy in Arizona?

Answer: Basically the Bankruptcy Code requires that debtors do credit counseling in order to qualify for bankruptcy. There is a pre-petition and a post-petition Credit Counseling Program that you have to complete. There’s a list of approved companies that do it and there is a fee associated with it. Typically it is very easy, and you can do it over the phone or over the Internet. It is just a little credit counseling to teach you some of the basics about your finances and bankruptcy. When you complete the pre-petition course you will get a certificate that you must attach to the bankruptcy petition before filing, unless there is an emergency, and credit counseling was requested but not available. Best bet is to finish the course before you file for BK.

So the first part that you do (the pre-petition) gets filed with your petition. The second part you have to do within 45 days of your 341 creditors hearing. It is the pre-discharge crediting counseling. It works just like the first one. You can do it online or over the telephone. Keep in mind you have to do it within 6 months of filing.

So if you did it and waited 7 months to file your case, you would have to do it all over again. It has to be done within 180 days of filing your bankruptcy.

Question: What are some of the things a Phoenix, Arizona Bankruptcy Attorney will ask a client in the interview process?

Answer: Here are a few things we will want to know so we can advise you on a bankruptcy.

Are you married?

Probably the first question. What is being married going to tell us? One, it tells us that it increases the household size from 1 to 2 which has potentially important ramifications, and we also need to see if this is going to be a joint filing or not.

Do you have kids?

For example, if you have 3, 4 or 5 kids etc., this increases your household. The bigger the size of the household, that means you always have to keep in mind your Gross Median Income. It changes per household. The more kids you have, there are expenses you can take on the Means Test. Everything gets bigger – your food allowance, your clothing allowance – for each dependant. The bigger the family, just like anything else, the more tax breaks. Who gets taxed the worse…of course its the single individuals. Also you want to keep in mind that with Domestic Partners, you have to keep in mind what expenses they are each paying. For example, if you have a roommate that gives you $500 a month, you have to count that as income. That means that you are not paying $500 a month on your mortgage payment.

How long have you lived in Arizona?

Have you lived in Arizona for the past two years? In order to use Arizona exemptions or anybody’s exemptions, you have to live somewhere for 2 years. In order to file in Arizona, you have to live there for 91 days. So to file – 91 days. To use Arizona exemptions – 2 years. If you haven’t lived in Arizona for 2 years, then that is when you pull out your exemption manual. Where did you live for the two-year period. The easiest way to figure it out is you look back two years. If you lived in multiple places, look back two years and then look at the six months prior to that two-year mark. So, today say it is January 30, 2010, so you would look back to January 30, 2008, on that day exactly. Look back six months, and find out where you spent the majority of time. That is the exemption you will use. Some states allow you to use the Federal exemptions and their State exemptions. That just becomes a matter of looking it up in the Exemption Manual of that particular state. That matters because that tells you what property is exempt and what property is not exempt.


Are you keeping the house? Are you surrendering the house? Are you current? Do you have any other property, such as vacant lots or things of that nature? Those are not exempt. In regard to vacant lots – are you financing it? If you are current, you keep it. If not, it is paid in full, you are going to lose it.

Another thing is Reverse Mortgages. Absolutely no bankruptcies on reverse mortgages! You should note that in most cases you can get rid of un-exempt assets prior to filing. There is nothing wrong with that. No one is going to question that. You just have to receive fair market value for it. So, for example, if I have a paid-in-full vacant lot worth $15,000, I can sell that as long as I get fair market value for it. I can’t give it away. Then I can spend that money on reasonable living expenses and no one is going to criticize me for liquidating an asset prior to filing. The trustees do not take kindly when you just give things away.

To digress for a second, that leads me to another subject as to what can you spend money on? Reasonable living expenses. Say you sold that vacant lot and you got that money. The case law basically says reasonable living expenses such as food, clothing, things for you kids, a car repair, home repair, and you can even do things like buy a new refrigerator, etc.. There are a lot of things you you can legitimately spend the money on, but just normal and reasonable items. You can’t give the money away. You can’t buy a flat screen television and you can’t go on a vacation for the most part.

Cars Vehicles? This is a typical question, how many paid-in-full cars do you have? What are their values? How many cars are you financing? What else are you financing, boats, quads, jet ski’s, anything like that? Do you owe taxes?

Taxes (this can be a very complicated issue). Taxes due within the last three years of filing, (so right now 2008, 2007, and 2006) are not dischargeable in a bankruptcy. Never. That shouldn’t really surprise anyone, the government gets its money. So 2006, 2007, 2008 taxes are not dischargeable. Now, taxes older than that generally are dischargeable, but there are special things that the IRS can do to make them not dischargeable. It is a very complex question when someone owes the IRS. This is when we have to pull a Tax Transcript. If the IRS has assessed a penalty and a fine on you then that is not going to be dischargeable. Also, you have to be on time filing. When the Trustee looks through your case, you have to be current on your taxes. You don’t file your 2008 or 2009 taxes or if you are not up-to-date, the Trustee is never going to give you a discharge. He wants to know what the tax liability is. So when people say I can’t do my taxes, that’s fine. OK. We can file your case, but it will be open forever until they get done. So, you are never going to get the discharge until your taxes are current. The bottom line is there is no way around this.

Property tax goes with the property. If you are surrendering your house, you are not responsible for it. If you are staying, you have to pay it.

HOA DUES, Again, you have to be current on your HOA dues if you are going to keep the property. If you are walking away from the house, this would be included in your bankruptcy. You are responsible for your HOA dues post filing until the Bank takes back the house. So basically, if you are walking from your house, you file the bankruptcy. If the bank doesn’t come get the house for another 6 months, you are responsible for those 6 months of HOA’s. The reason for that is that you have to remember you are not required to Re-affirm Real Property. So the HOA doesn’t know if you are in there making the payments or not. The house is still in your name and it is still in their community, so you are obligated to be paying for it. You could go back in there and make payments and get current. So that is why you are responsible for HOA after that.

Child Support As we discussed above, is never dischargeable in a bankruptcy. Alimony is also not dischargeable. For example, you hired a Divorce Attorney for your divorce, you can discharge your divorce attorney’s fees, but you are not discharging your back alimony. Student loans are not dischargeable (can you imagine how many people would be filing to get rid of those large student loans?). Any criminal penalty or fine, is also not dischargeable. Anything of that nature are not dischargeable. Law suits are dischargeable (again with the exception of judgments based on fraud).

Another big question is divorce. If two people are going to get a divorce, you are better off doing a joint bankruptcy while still married. One, it cuts down on the fee, so you both don’t have to do the bankruptcy. Two, when you are doing the Divorce Decree, there is no debt anymore.

                Preference Payments.

Another thing we will want to know is preference payments. Do you have any accounts receivableAnything coming in? You know a Trustee just steps into your shoes, so anything coming in needs to be accounted for. For example, I sold a car to a buddy of mine a long time ago. He’s been making me a $1,000 per month payment. That is not yours anymore. You lost that. That is part of the bankruptcy estate once you file the petition. Also, nothing in Trust. Trust property doesn’t get exemptions. You can’t have your IRA in a Trust. You can’t have a home in a Trust. It all has to be out of a Trust. Trusts are not exempt. People get an exemption, not a Trust.

Summary: As a bankruptcy attorney, it is our job to guard against things that the Client may stand to lose when filing the BK petition. So, some of the questions that will be asked are: Have you lived in Arizona for 2 years? Any prior bankruptcies in the last 8 years? Did you do your credit counseling? Do you owe the Government any taxes we don’t know about? Have you recently co-signed for anybody? Have you been appointed a Trustee or Guardian recently? Do you have any plans to sue anybody? Remember you will lose any claim that you win. For example, if you were in an auto accident and you have a great PI claim, and a great recovery potential, and you file your bankruptcy, you are going to lose it. If you are in the midst of a $50,000 lawsuit for food poisoning and you file the bankruptcy, you don’t get that lawsuit anymore. The trustee takes over and it becomes the property of the bankruptcy estate. It is any interest in any asset that the trustee is interested in. The trustee is working on behalf of the unsecured creditors to liquidate and distribute assets equitably.

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