Types of Debts in Arizona Bankruptcy and What Will Happen

A Chapter 7 is commonly known as a liquidation. That means that debtor, whether an individual or a business, eliminates all their unsecured nonpriority debt. Unsecured nonpriority debt would include things like credit card bills, medical bills, and other bills that do not have a security interest. The term security interest means property securing a debt. The most common examples are home mortgages and car loans. For secured debt, if the debtor does not pay that bill the creditor can repossess that security interest. For example, if a debtor does not pay his car loan the car company can repossess the vehicle, or if the homeowner does not pay his mortgage the mortgage company will foreclose on the home. In a Chapter 7 bankruptcy, the bankruptcy court will not eliminate secured debt; thus, if you have property that you want to keep it there as a loan secured against the property, you must keep making payments. 

One important point, however, regarding a Chapter 7 bankruptcy and repossessed motor vehicles. In Arizona, if a secured creditor repossess your motor vehicle and sells it at auction for less than the value of the loan, you are liable for the difference. If you do not make up that difference the creditor can sue you and garnish up 25% of your wages. In that case, chapter 7 bankruptcy would help you because once you get your debt discharged, you would not be liable for the difference. 

With regard to home foreclosures, as a general rule a home owner is not responsible for the shortfall of a foreclosed property sold at auction. This is known as the anti-deficiency statute.  Thus, if you had at your house foreclosed upon and the bank sold for less than the loan amount, usually they will not sue you for difference. That rule applies when the loan being foreclosed is called a purchase money loan or refinance of your original home loan.  There is an exception if your loan was a line of credit.  In that case, you would be personally liable for the difference and the bank can sue you if there is a shortfall at auction.   Also, Arizona is currently going back and forth on the issue of auction shortfall for investment properties.  The Arizona legislature recently changed the law and an investor who did not use the property as a personal residence could be liable for any shortfall, even if the loan was purchase money. 

The benefit of a chapter 13 bankruptcy is that you can make up late payments through the chapter 13 plan.   For example, if you are 6 months late on your home mortgage for the sum total of $10,000.00 in arreages, you can use the chapter 13 plan to make up those late payments.  Further, in chapter 13 bankruptcy, you can strip off junior unsecured liens on your property.  That means if you are upside down on your first home loan and you have a second lien against the property, in a chapter 13 bankruptcy you can strip off that unsecured lien and make it a general unsecured debt like a credit card or medical bill.  That would mean that junior lien is no longer a mortgage with no threat of forceclosure if you do not pay your mortgage.