Bankruptcy

If You Need to File a Bankruptcy, You Need to File a Bankruptcy; But Many Do Not.

By Joseph McDaniel, Esq.

One is the idea that many people who would benefit from filing a bankruptcy are not doing so. And that's certainly true, because only the folks who want a root canal for fun are enthusiastic about filing a Chapter 7 in Arizona.

But that idea has shown up in scholarly papers, and the idea has also shown up in a long USA Today article.

I recommend the USA Today article, because it's a fast read, and gives non-bankruptcy folks a glimpse into the bankruptcy universe that some of us get to see 24/7/365, because we practice bankruptcy law in Arizona, and spend our lives dispensing bankruptcy information and bankruptcy advice in Arizona.

And that beats the heck out of digging ditches for Pancho Willis in the hot, hot sun!

I want to go on record, however, questioning one paragraph in that USA Today article about bankruptcy; it suggests that in a bankruptcy, you can "save" your summer home and yacht, but you can't save your primary residence.

I'm not sure what state permits the saving of yacht and summer home, but I certainly want our homestead exemption in Arizona to be changed now: I want the summer home included, not just the primary residence with an upper limit of $150k in equity under our Arizona homestead exemption.

And I want our automobile exemption amended so that we, too, can save the family yacht, along with an auto for mom and dad with an equity limit of $5,000 for most folks, and $10,000 for folks who have a handicap that limits their walking ability.

The USA Today article almost seems to call for a change that would make student loans dischargeable in a Chapter 7 case, and I would support that change wholeheartedly.

Mind you, the Law of Unintended Consequences would apply to making student loans dischargeable; we would also see a down-shift as students decided to limit their economic exposure by going to less expensive schools, and we'd see the downsizing or closing of a bundle of very expensive schools.

And we would see new demand for high-quality, inexpensive education online, because there's no need to shop around for it today; a student just gets to talking with a "counselor", who hooks him up with a gigantic student loan, and the student gets to go to a big, shiny, brick-and-mortar school.

And that will all go away immediately after student loans become dischargeable, if they every do.

Instead, middle-class students will watch the same lectures they would have watched online, and take the same exams that they would have taken online, and get to print out a diploma when they're done.

And have a diploma without the gigantic student loan.

And that's such a good idea, you sort of have to wonder why it's not the general rule today.

And the answer is the easy-peezy access to nondischargeable student loans, which are easy to get because they're almost impossible to discharge.

The slice of 11 USC 523 that makes student loans very, very difficult to discharge follows:

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor?s dependents, for?
(A)
(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

And since we discussed our homestead exemption in Arizona, here's a look at that statute as well; bear in mind that it's modified by a part of the 2005 Amendments and the Supremacy Clause, so this is only part of the story (and remember, don't try this a home, kids!):

33-1101. Homestead exemptions; persons entitled to hold homesteads

A. Any person the age of eighteen or over, married or single, who resides within the state may hold as a homestead exempt from attachment, execution and forced sale, not exceeding one hundred fifty thousand dollars in value, any one of the following:

1. The person's interest in real property in one compact body upon which exists a dwelling house in which the person resides.

2. The person's interest in one condominium or cooperative in which the person resides.

3. A mobile home in which the person resides.

4. A mobile home in which the person resides plus the land upon which that mobile home is located.

B. Only one homestead exemption may be held by a married couple or a single person under this section. The value as specified in this section refers to the equity of a single person or married couple. If a married couple lived together in a dwelling house, a condominium or cooperative, a mobile home or a mobile home plus land on which the mobile home is located and are then divorced, the total exemption allowed for that residence to either or both persons shall not exceed one hundred fifty thousand dollars in value.

C. The homestead exemption, not exceeding the value provided for in subsection A, automatically attaches to the person's interest in identifiable cash proceeds from the voluntary or involuntary sale of the property. The homestead exemption in identifiable cash proceeds continues for eighteen months after the date of the sale of the property or until the person establishes a new homestead with the proceeds, whichever period is shorter. Only one homestead exemption at a time may be held by a person under this section.

NOTHING HERE CONSTITUTES LEGAL ADVICE RE A CHAPTER 7, CHAPTER 13, CHAPTER 11, OR CHAPTER 12. FIND AN ARIZONA BANKRUPTCY LAWYER WHO IS BOARD CERTIFIED IN BANKRUPTCY LAW, AV RATED, AVVO 10 RATED, ON SUPERLAWYERS, OR JUST VERY EXPERIENCED AND A FORMER CHAIR OF SOME BANKRUPTCY SECTION OR COMMITTEE. NOTHING HERE MAY BE USED AS LEGAL ADVICE IN CONNECTION WITH ANY BANKRUPTCY, WHETHER THAT BANKRUPTCY IS IN PHOENIX, GLENDALE, TEMPE, MESA, SCOTTSDALE, OR ANYWHERE ELSE.

Full post as published by Arizona Bankruptcy Attorney Blog on June 28, 2010 (boomark / email).