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What Assets Can I Keep if I File for Bankruptcy?

Atchley Law Firm, PLC May 10, 2024

A businessman sitting on the floor opening the empty walletFiling for bankruptcy is a major decision that can have long-term financial and legal ramifications. It's often seen as a last resort for individuals or small business owners in Arizona who find themselves overwhelmed with debt.  

However, before you decide to file for bankruptcy, it's important to understand what assets you can keep and what assets creditors could potentially take away under certain bankruptcy filings.  

At Atchley Law Firm, PLC, we have experience guiding our clients through the bankruptcy process and making sure they're informed every step of the way. Located in Mesa, Arizona, we proudly serve clients throughout Gilbert, Tempe, Chandler, and the Phoenix Metro Area. 

Understanding Bankruptcy Exemptions 

Bankruptcy exemptions are specific laws that protect certain assets of an individual or business from creditors during a bankruptcy proceeding. These exemptions allow filers to keep essential property and assets that are necessary to work and live, even after declaring bankruptcy. Arizona has its unique set of bankruptcy exemptions, which differ from federal bankruptcy laws. 

Arizona does not follow federal bankruptcy exemptions. Instead, those filing for bankruptcy must use the state-provided exemptions. Unlike some other states, Arizona doesn't offer a wildcard exemption (which can be applied to any property the debtor chooses). However, married couples filing jointly in Arizona can double the exemption amount in certain categories, effectively protecting more of their assets.  

It's important to consult with a legal professional to understand how these rules might apply to your specific situation, especially since exemption updates can greatly impact the outcome of a bankruptcy filing. 

Assets You Can Keep When Filing for Bankruptcy 

Under Arizona's bankruptcy exemptions, you can retain a considerable number of assets when filing for bankruptcy in the state. Some of the primary assets you can keep include the following. 

Homestead Exemption 

Arizona's homestead exemption allows individuals filing for bankruptcy to protect up to $150,000 of equity in their primary residence. If you own a home and owe less than its value, up to $150,000 of the equity in your home cannot be touched by creditors seeking to recover debts.  

This exemption is designed to prevent homeowners from losing their homes, but it applies only to their primary residence, not second homes or rental properties. 

Personal Property Exemptions 

Arizona offers a wide range of exemptions for personal property, including household goods and furnishings, electronics, clothes, books, and other miscellaneous items up to a specific dollar amount. These exemptions are intended to allow filers to keep essential items necessary for daily living and include the following: 

  • Clothing, up to $500 in value. 

  • Household furniture and appliances, up to $6,000 in combined value. 

  • Engagement and wedding rings up to $2,000 in value. 

  • A personal library, including books, up to $250 in value. 

  • One watch up to $150 in value. 

  • A single motor vehicle with equity up to $6,000, or $12,000 if you are physically disabled. 

  • Domestic pets, horses, milk cows, and poultry, up to a combined value of $800. 

Financial Asset Exemptions 

In addition to personal property, Arizona also offers exemptions for specific financial assets, including: 

  • Bank deposits in a single account up to $300. 

  • Proceeds from a life insurance policy or annuity contract that are payable on the death of an insured person, provided the contract stipulates that the proceeds cannot be used to pay the beneficiary's creditors. 

  • Retirement accounts, including 401(k)s, 403(b)s, and most other tax-exempt retirement accounts.  

  • Traditional and Roth IRAs. 

Tools of the Trade Exemptions 

Professionals can exempt certain tools and equipment up to $5,000 in value that is essential for them to continue their trade or business. This includes, but is not limited to, tools, instruments, and books. This exemption is often critical for small business owners and contractors who rely on tools to generate income. 

Insurance and Public Benefits Exemptions 

Under Arizona law, life insurance proceeds are exempt if the policy prohibits the proceeds from being used to pay creditors. Additionally, public benefits such as unemployment compensation, social security benefits, and disability benefits are exempt from bankruptcy proceedings. 

Assets You Can't Keep When Filing for Bankruptcy 

Despite the generous exemptions offered under Arizona's bankruptcy laws, there are several significant assets that you won't be able to keep when filing for bankruptcy. These non-exempt assets can be liquidated by a bankruptcy trustee to pay off creditors. Some major assets that are typically considered non-exempt in a bankruptcy filing include: 

  • Second homes or vacation properties: Unlike primary residence protection, second homes or vacation properties do not qualify for any exemption and can be sold to pay creditors. 

  • Additional vehicles: If you own more than one vehicle, and the value of the additional vehicles exceeds the exemption limit or if they are not necessary for your employment, they can be taken. 

  • Investment accounts: Non-retirement investment accounts, such as stocks, bonds, and other non-exempt financial instruments, are subject to liquidation in a bankruptcy case. 

  • Cash savings: Amounts in bank accounts or cash on hand that exceed the modest exemption limit can be taken. This includes savings that are not earmarked for retirement and do not fall under specific protected categories. 

  • Luxury items: High-value luxury items such as expensive jewelry (beyond the wedding and engagement ring exemption), artwork, and collectibles can be liquidated and sold. 

  • Recreational vehicles and boats: RVs, boats, and other recreational vehicles are usually considered non-essential and therefore, can be subject to liquidation. 

  • Business assets owned personally: For small business owners, assets that are owned personally and not protected as tools of the trade may be at risk. This distinction depends on how essential the assets are to the debtor's trade or profession. 

It is essential to thoroughly assess your assets with a bankruptcy attorney to determine which of your possessions might be at risk and to strategize how best to protect your property. 

Chapter 7 vs. Chapter 13 Bankruptcy 

When deciding whether you should file for bankruptcy, it's important to decide which type of bankruptcy best suits your personal and financial circumstances. 

Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," involves the sale of any non-exempt assets by a bankruptcy trustee. The proceeds from this sale are used to pay off creditors. This type of bankruptcy: 

  • Is designed for those with limited income who are unable to pay back their debts.  

  • Can lead to the discharge of most unsecured debts, such as credit card debt and medical bills 

  • Might cause you to lose possession of personal assets if they don't qualify for exemption. 

Chapter 13 bankruptcy, known as a "reorganization bankruptcy", is tailored to individuals who have a regular income and who can afford to pay back a portion of their debts through a repayment plan. Chapter 13 bankruptcy: 

  • Allows debtors to keep their assets, including those that would be considered non-exempt under Chapter 7. 

  • Allows debtors to make structured payments to creditors over three to five years.  

  • Offers increased asset protection and the opportunity for individuals to catch up on missed mortgage or car loan payments, potentially avoiding foreclosure or repossession. 

The choice between Chapter 7 and Chapter 13 will largely depend on your income, assets, and specific financial goals. Those seeking to discharge their debts quickly and who may not have a significant number of non-exempt assets may find Chapter 7 bankruptcy more fitting, while those with a stable income and larger assets might find Chapter 13 bankruptcy more suitable.  

It's crucial to consult with a bankruptcy attorney to thoroughly understand the implications of each type and to determine the best course of action based on your financial situation and objectives. 

Legal Advice You Can Trust 

At Atchley Law Firm, PLC, we emphasize the importance of professional legal counsel when considering bankruptcy. Determining the type of bankruptcy that best fits your situation will largely depend on your income and number of assets. With our help, we can help you determine the best way to protect your assets and work toward rebuilding financial security. 

If you or a loved one is struggling with unmanageable debt, contact us today to schedule a consultation.