Thursday, 17 January 2019 15:56

The Basic Chapter 7 Bankruptcy Process

The Chapter 7 bankruptcy process starts when a debtor files a petition and schedules in the bankruptcy court.  The debtor must include information about property, debt, and income.  The debtor must also file a means test.  The bankruptcy means test is a relatively new requirement that Congress designed to weed out abuse of the bankruptcy system.  It adds up income and expenses, many of which are set by IRS standards, and determines if income exceeds expenses by more than a few dollars.  Unfortunately, the means test is poorly drafted and illogical, and does not do much to stop abuse.
After the debtor files the petition and schedules, the bankruptcy court assigns the case to a bankruptcy trustee.  The trustee will hold a meeting of creditors about one month after the debtor files.  The meeting of creditors is the creditors’ chance to ask questions about the debtor’s finances and bankruptcy.  Creditors rarely show up and the trustees generally complete six meetings every half hour.  However, the trustee also asks several questions during the meeting and asks all of the questions necessary to establish jurisdiction and the prima facie case for a Chapter 7 bankruptcy.  Therefore, most people never have to go back to court for their bankruptcy.
Meanwhile, it is the trustee’s job to gather up the debtor’s nonexempt assets, sell them, and distribute the money to the creditors.  Most Chapter 7 cases have no nonexempt assets.  Sometimes this requires some planning prior to filing for bankruptcy.  For example, if the debtor has nonexempt cash, he can spend it on something exempt prior to filing.  Also, trustees will often not pursue nonexempt property because it is not profitable to seize the nonexempt property.  For example, a person in bankruptcy may have a nonexempt vehicle that does not run and might sell for just a couple hundred dollars.  If the trustee wants it, the trustee will have to pay to have it towed, pay to store it, and pay an auctioneer to sell it.  In the end, it is just not worth it.
After the meeting of creditors, interested parties such as creditors have 60 days to file objections to the bankruptcy.  They may file objections to the discharge of specific debts, and/or an objection to the entire bankruptcy.  In most bankruptcies, no one files an objection.  If no one files an objection, the court enters the bankruptcy discharge after the 60 days pass, usually within a couple weeks after the 60th day.  If someone files an objection to discharge of a specific debt, the court will still issue the discharge, but the debtor will have to litigate the specific debt before a bankruptcy judge. 
After the court enters the bankruptcy discharge, the case stays open for a few months and the debtor still has to update the court with a new address if the debtor moves.  This is the end of most bankruptcy proceedings.  If you need bankruptcy advice, please contact me.
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Late last year the Arizona Court of Appeals ruled on a case in which the former husband filed for bankruptcy one month after the Family Court entered his divorce decree dividing the former wife's pension and a substantial amount of community debt.  People often consider filing for bankruptcy after their divorce or worry that their former spouse may file bankruptcy.  This case directly addressed the subject.


The Family Court evenly divided the former wife's pension and ordered each party to pay one-half of the wife's student loan debt, and allocated about $15,000 in credit card debt among the parties.  The former husband then immediately filed for Chapter 7 bankruptcy relief and received a discharge as to all of the debt.  The former wife then filed to set aside the Family Court's decree and to re-allocate her pension.  The trial court set aside the decree and awarded the former wife 100% of her pension because she was now stuck with all of the debt.


The Court of Appeals affirmed the trial court's ruling using the abuse of discretion standard, which means that if the trial court's ruling is consistent with the law and if there is an evidentiary basis for the ruling, then the appellate court will not disturb the trial court's ruling.  You can review the Court of Appeals Decision here:

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Thursday, 01 September 2016 13:22

What Does the Bankruptcy Automatic Stay Stop?

When a debtor files bankruptcy, a powerful legal injunction known as the automatic stay goes into effect.  It prevents creditors from taking action against you while it is in effect.  If you have overwhelming debt that you cannot pay, I can file a bankruptcy in Arizona on your behalf.
The automatic stay can stop wage garnishment, vehicle repossession, home foreclosure, and creditor lawsuits such as collection actions on a credit card debt.  The automatic stay will not stop a suit for child support or spousal maintenance. 
Not only does the bankruptcy stop these actions, but it can also discharge all or most of your debt, depending on what kind of debt you owe.  Generally, unsecured debt that is not incurred fraudulently and is not for a family support obligation is dischargeable, but there are many more exceptions.
However, do not be mislead about the automatic stay.  While it will stop a home foreclosure or a vehicle repossession for the time being, it does not mean that you get to keep your home or vehicle without paying for it.
This is a general guide and there are many nuances to bankruptcy law.  If you have questions about your own potential bankruptcy, schedule a free bankruptcy consultation with a bankruptcy lawyer.
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Social media such as Facebook, Twitter, Instagram, and Reddit can be a wealth of information for attorneys in family law and other areas of law because people post so much of their lives online and often have online tantrums.  Something as seemingly innocent as a check-in on Foursquare can turn into incriminating evidence.  Your social media activity can be a trail of evidence that the other party can use against you in family court, particularly when legal decision-making (custody) and parenting time are issues.  It can also hurt you in other types of cases, such as bankruptcy or collection matters.

Information that people post on social media can be evidence of state of mind, intent, communication, times and places of activities, employment, actions, contempt for the other parent, child alienation, and many other issues.  In one case, my client found on the other parent’s Facebook page a picture with a caption bragging about hiding assets during the divorce; pictures and check-ins at various bars, restaurants, sporting events, and entertainment venues while the other parent claimed to have no money; disparaging remarks about the client; pictures of the other parent’s new motorcycle which he had denied owning; and pictures of the other parent with various items of jewelry which he denied owning.  In several collections cases, I have found the opposing party’s place of employment on Facebook.  I have often found evidence on social media that directly contradicts what opposing parties claim in court.

I usually receive this sort of evidence because someone saw it and printed it.  However, social media is now open to the discovery process in many states (but not Arizona - yet).  This means that upon the request of the other party you must print your social media, such as your Facebook time line, and give it to the other party.

Here are some guidelines to help you prevent someone from using your social media against you in court.

1. Do not use social media. This is the only way to be certain that no one will use your social media against you.  If you must use social media, use the other guidelines.

2.  Do not post anything that you do not want a judge to see.  If you don’t want the judge to see it, don’t post it.

3.  Be honest.  If you do not lie in your legal proceeding, you will not have to worry about getting caught because of your social media use.  If you do not lie on social media, for example trying to impress someone by exaggerating your affluence, you will not need to worry about it coming back to haunt you in court.

4.  Set your accounts to private.  This is a good idea regardless of legal proceedings, but it also prevents people from trolling your social media looking for incriminating evidence.

5.  Do not have the opposing party or their friends and family on your friend or contact list.  These are the most likely people to look for something incriminating on your page.  This seems obvious, but this is usually how the other party gets the information.

6.  Do not post pictures or write about doing things that you should not do, such as illegal drug use, alcohol abuse, gang activity (I had one opposing party who posted multiple pictures of himself and his gang flashing gang signs), criminal activity, endangering your children, and generally showing bad judgment.  Do not make a public record of things that you should not do in the first place.

7.  Do not disparage the opposing party, the opposing party’s family, the opposing party’s friends, any former spouse, any former girlfriend or boyfriend, any parent of any of your children, or anyone else that you know. This includes posting threats.  People have actually done this and hurt their family law case.

8.  Be nice. A large part of a family law case is presenting yourself as reasonable. Do not post evidence in public that you are not reasonable.  Being mean online may or may not hurt you in court, but it certainly will not help you.

9.  Do not post trashy things. This includes profanity-laced status updates about various frustrations, filthy jokes, explicit pictures, anything racist, and the like.  Again, this may or may not hurt you, but it certainly will not help you.

10.  Keep most private details of your life private. Posts about how much you love your children, or how much fun you had with your children during a particular activity are fine. Posts about every detail of your life can lead you to post something that you later wish you did not post.

11.  Do not post details about your case.

12.  Free speech is not the issue.  Your focus should be on winning your case.  This includes not saying or posting whatever you want to say or post.  You may have every right to say something, but it will still hurt your case.  One litigant had remarried and his current spouse posted foul, horrible things about the opposing party several times every day. The litigant took the position that his wife is entitled to free speech and can post whatever she wants. He lost his case.  Being right is not worth losing your children.

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Many people think that they will lose everything they own in a bankruptcy.  However, a Chapter 7 bankruptcy does not require you to lose everything you own.  The bankruptcy code and state law provide several exemptions for people in bankruptcy.  With a little planning, many people can emerge from a Chapter 7 bankruptcy without losing their property.  The following list includes all of the common exemptions under Arizona law.



1. The following household goods and furnishings up to a total value of $4,000.00:

A. Dining room table and chairs

B. Couch

C. Living room chairs

D. Three coffee or end tables

E. Three lamps

F. Carpet or rug

G. Beds

H. Bed-table, dresser and lamp for each bed

I. Bedding for each bed

J. Pictures, paintings and drawings by debtor and family in frames

K. One television, radio or stereo

L. Radio alarm clock

M. Stove

N. Refrigerator

O. Washing machine

P. Clothes dryer

Q. Vacuum cleaner

2. Food, fuel and provisions for six months

3. The following personal items:

A. Wearing apparel up to a total value of $500.00

B. Musical instruments up to a total value of $400.00

C. Pets, horses, milk cows, and poultry up to a total value of $800.00

D. Engagement and wedding rings up to a total value of $2,000.00

E. Library up to a total value of $250.00

F. Watch up to a value of $150.00

G. Typewriter, bicycle, sewing machine, family bible, burial lot, one shotgun or rifle or pistol for a total value up to $1,000.00

H. Vehicle up to a net value of $6,000.00 ($12,000.00 if disabled)

I. Prescribed prostheses including wheelchair

4. The following money benefits or proceeds:

A. Life insurance proceeds payable to a surviving spouse or child up to $20,000.00

B. The earnings of a minor child

C. Child support and spousal maintenance

D. Benefits from a health, accident or disability insurance policy

E. Money from a claim for the destruction of exempt property

F. Cash surrender value of life insurance policy maintained for two years or more with a dependant for a beneficiary

G. Annuity at least two years old with dependant as beneficiary

H. Claim for damages relating to exempt property

I. One bank account up to $300.00

J. Retirement plans under Sections 401(a), 403(a), 403 (b), 408, 408A, 409 and 457 of the Internal Revenue Code of 1986, but NOT an alternate payee pursuant to a qualified domestic relations order and NOT contributions made within 120 days of filing bankruptcy

5. Teachers’ school equipment

6. Tools of a trade actually used in a trade up to a value of $5,000.00

7. Farm equipment of a debtor whose primary income is from farming up to a value of $2,500.00

8. Arms, uniforms and accouterments required by law to be kept by debtor

9. A house, condominium, mobile home (plus the land on which the mobile home sits) up to a net value of $150,000.00 (or proceeds from the sale thereof) OR prepaid rent in the amount of $2,000.00


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With rising student loan debt and diminishing income and job opportunities for college graduates, many people with student loan debt are seeking discharge of their student loan debt. Discharging your student loan debt in bankruptcy is difficult, and I have heard many people, including attorneys, that you cannot discharge student loans in bankruptcy. However, an exception exists and the 9 Circuit Court of Appeals (Arizona is in the 9 Circuit) has issued a decision in recent years laying out what a debtor needs to do to discharge his or her student loans in bankruptcy. I have also heard from various sources that debtors successfully discharge their student loans about 40% of the time when they try. This may not sound like much, but its 40 points higher than 0%.

The Federal Bankruptcy Code says that a debtor may get a bankruptcy discharge on a student loan only if the debtor can prove that repayment of the loan would be an undue hardship. In order to prove an undue hardship, the debtor must file a separate action (called an adversary action) in the bankruptcy case by filing a Complaint to Determine Dischargeability. The debtor must then litigate the issues.

Because the term "undue hardship" is vague, bankruptcy courts have had to define it. Most bankruptcy courts, including the bankruptcy court in Arizona, have adopted what is called the Brunner test to define what "undue hardship" means. Pursuant to the Brunner test, a debtor may only get a discharge of his or her student loans if the debtor proves all three of the following factors:

1. Poverty. Upon examining the debtor’s income and expenses, the debtor cannot maintain a minimal standard of living for the debtor and the debtor’s dependants. The "minimal standard of living" is not a middle class lifestyle. It is a much lower standard of living. The debtor must maximize income and minimize expenses.

2. Persistence. The debtor’s current financial situation will most likely continue for a significant portion of the repayment period.

3. Good faith. The debtor must have made a good faith attempt to repay the student loans.

The most difficult part of the Brunner test is determining whether the debtor’s financial situation will likely persist. The Ninth Circuit says, in a case called Educ. Credit Management Corp. v. Nys, that absent other evidence, the court will presume that the debtor’s income will increase over time to the point that the debtor will be able to maintain a minimal standard of living and pay the student loans. Therefore, the debtor must present evidence to rebut this presumption. Nys set forth several additional circumstances for the court to consider, which should guide a debtor in what to present.

1. Serious mental or physical disability of the debtor or the debtor's dependents which prevents employment or advancement

2. The debtor's obligations to care for dependents

3. Lack of, or severely limited, education

4. Poor quality of education Lack of usable or marketable job skills

5. Underemployment Maximized income potential in the chosen educational field, and no other more lucrative job skills

6. Limited number of years remaining in the debtor's work life to allow payment of the loan

7. Age or other factors that prevent retraining or relocation as a means for payment of the loan

8. Lack of assets, whether or not exempt, which could be used to pay the loan

9. Potentially increasing expenses that outweigh any potential appreciation in the value of the debtor's assets and/or likely increases in the debtor's income

10. Lack of better financial options elsewhere

The Nys test is not an exhaustive list. Therefore, a debtor may present other evidence of circumstances not on the above list as long as it tends to prove that the debtor’s financial situation will not improve for a significant period of student loan repayment.

Additionally, in Arizona this is not an all-or-nothing determination. The bankruptcy court may discharge all of a debtor’s student loans, some of the student loans, or none of them.

Since Nys, bankruptcy courts in the 9 Circuit, including Arizona, have not just discharged student loans for people who are seriously disabled or elderly. Courts have allowed the discharge of student loans for debtors who are young, able-bodied, and working. Courts have focused on factors such as the following.

1. The debtor had reached the maximum income level available in his or her field

2. The debtor lived in a rural area with no realistic opportunity to increase income

3. The debtor lived very frugally the debtor did everything possible to minimize expenses

4. The debtor had children with special health needs

However, there is no consistent recipe for proving this factor. Every case is different and there is always a possibility of something new or different carrying the day and there are plenty of cases where a court did not grant a discharge even when a debtor proved one of the circumstances above. Also, student loan lenders often fight aggressively against a discharge.

Therefore, if your student loan payments are making your life miserable, do not immediately give up hope on seeking bankruptcy relief. I offer a free bankruptcy consultation and have helped hundreds of people seeking bankruptcy relief.



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In addition to family law, I also practice bankruptcy. My primary bankruptcy area of practice is individual debtor rights. Recently, several people have asked me about the possibility of discharging their tax debt.

It is simply not true that you may never discharge your taxes in bankruptcy. It is true that you may not discharge most taxes in a bankruptcy. For example, you may not discharge employer withholding taxes (“941 taxes”), and you may not discharge tax lien on the your real estate (although your personal liability on the debt may be discharged, if it meets the requirements), principally county or city real property taxes. This makes a certain amount of sense. Our state and federal governments operate on tax revenue. Real estate taxes fund a large part of local government budgets. So when Congress adopts bankruptcy laws, it is very protective of government revenues.

The rules governing the discharge of tax debt are very technical, so very particular information about your tax filings is necessary in order to analyze a possible discharge of your tax debt. Your federal tax information is readily available by phone, mail or online. You may request a transcript by calling 1-800-908-9946 or by ordering by mail by using an IRS Form 4506-T (Request for Transcript of Tax Return) You want a “Tax Account Transcript.” You may find copy of the Form 4606-T at


The taxes must be income-based. Income taxes are the only type of tax debt dischargeable in a Chapter 7 bankruptcy. The tax debt must be for federal or state income taxes or for taxes based upon gross receipts. Interest on dischargeable taxes is dischargeable if the initial tax meets the requirements for discharge, as does any interest that has accumulated. Penalties may be dischargeable even if the tax does not meet the standards required for discharge. Generally, if the event that gave rise to the tax penalty occurred more than 3 years before the filing of your bankruptcy case, then the penalty can be discharged in bankruptcy. To discharge tax debt, you must qualify under several provisions of the Bankruptcy Code.

Taxes must have been due three years ago. The taxes must arise from a tax return due (including all valid extensions) three or more years before you filed for bankruptcy. For example, if income taxes were owed on a 2008 income tax return for which extensions to file the return expired on October 15, 2009, the tax return due date test is satisfied if the bankruptcy petition is filed after October 15, 2012.

Taxes must have been filed on time or at least two years ago. The tax return must have been filed at least two years before filing the bankruptcy. The return must be properly signed, mailed, and sufficiently complete to constitute a tax return. For example, if an extension to file the 2008 return expired on October 15, 2009 and you filed the 2008 return on April 15, 2011, you will have satisfied the three year test but not the two year test. You must wait two years from April 15, 2011 to file your bankruptcy in order to discharge the tax year 2008 taxes. Federal taxes are deemed filed when you mailed them, if timely, or if they are late, then on the date the IRS received the return.

Taxes must have been assessed more than 240 days prior to filing bankruptcy. The tax authority must have assessed the tax against you at least 240 days before you filed for bankruptcy. The 240-day limit may be extended if the tax authority was forbidden by law from making the assessment, such as if you were in a prior bankruptcy or had made an offer in compromise to the IRS. Because the Bankruptcy Code does not define “assessment,” different courts have interpreted the event differently. The Ninth Circuit Court of Appeals Bankruptcy Appellate Panel (Arizona is in the Ninth Circuit) said that assessment is the “formal act of fixing a tax liability, and that this act comes after the calculation is completed but may be made before the amount is due and payable.” In re King, 122 B.R. 383 (9th Cir. BAP 1991).

There was no willful intent to evade taxes or fraud involved. The tax return must not be fraudulent or frivolous and you cannot have been found guilty of any intentional act of evading the tax laws. If you filed a joint return, the taxing authority must prove that both you and your spouse committed a fraudulent act related to the return or willfully attempted to evade the tax in order for the court to deny the discharge of the tax debt, if it is otherwise dischargeable. The legal definition of a fraudulent return is the same as that required for a civil fraud penalty pursuant to federal law.

These are the basic requirements to discharge a tax debt in bankruptcy. This can sometimes be a difficult issue. If you are facing this issue, you should seek the advice of a good CPA or bankruptcy attorney. Thomas Morton, Phoenix, Arizona bankruptcy attorney, is read yuo assist you with your Chapter 7 bankruptcy.



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(602) 595-6870

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