People file bankruptcy in Arizona to discharge most debts. The Arizona bankruptcy exemptions allow a debtor to retain certain property. This is called exempt property, and it is protected. In Chapter 7, a debtor may have to turn over non-exempt property to a bankruptcy trustee. A trustee will sell such assets to pay off some of the debts. Debtors must understand the Arizona bankruptcy exemptions to know which assets they may retain.
Applying Arizona Bankruptcy Exemptions
Arizona bankruptcy exemptions apply when a person has lived in Arizona continuously and interrupted for at least two (2) years before filing bankruptcy. If you have not continuously lived in Arizona for two (2) years prior to your expected bankruptcy filing, then Arizona bankruptcy exemptions may not apply. Please consult with a qualified Arizona bankruptcy lawyer to determine the correct exemptions, especially if you have not lived in Arizona for two (2) years before filing.
Common Arizona Bankruptcy Exemptions
Most people who file bankruptcy in Arizona have resided here for more than two (2) years and may use the Arizona bankruptcy exemptions. The information below will focus on the most common Arizona exemptions.
Homestead for Primary Residence.
Up to $400,000 of equity is exempt in a debtor’s primary residence. However, if you acquired the home less than 3 years and 4 months before filing bankruptcy, the homestead may be capped to a lower amount. In November 2022, voters passed Proposition 209 increasing the homestead from $250,000 to $400,000. However, please see my cautionary note about the applicability of the increased exemptions from Proposition 209. The Arizona homestead exemption applies to detached homes, condominiums, mobile homes, and manufactured homes. Rental properties and second homes are not exempt under Arizona’s homestead statute.
For example, assume you own a home worth $500,000. Assume you still owe the bank $200,000. The home has $300,000 of equity ($500,000 – $200,000 = $300,000 of equity). Therefore, the home has less than $400,000 of equity and is exempt. A debtor can get an estimate of the home’s value by going to www.zillow.com. However, Zillow is not always accurate. Sometimes a real estate agent’s opinion or an appraisal is necessary.
A debtor must watch out for the homestead appreciating above the homestead exemption while the bankruptcy is still open, even if the equity before filing was less than $400,000. If that happens, the trustee may try to sell it. But there are ways to avoid this risk.
Vehicles
Each debtor may retain one vehicle, provided that it does not have more than $15,000 of equity. A debtor with a physical disability gets a $25,000 vehicle exemption. If you own more than one vehicle, you cannot spread the $15,000 exemption to multiple vehicles. If you are married, each spouse gets one vehicle if each vehicle does not have more than $15,000 of equity. Alternatively, a married couple may “stack” both of their $15,000 exemptions on one vehicle. A debtor can get an estimate of the vehicle’s private party value by going to Kelley Blue Book at www.kbb.com. Please see my cautionary note about the applicability of the increased exemptions from Proposition 209.
Retirement
A person’s retirement (such as a 401(k), IRA, 403(b), etc.) and pension are usually 100% exempt.
- Some types of investments are not necessarily exempt retirement accounts. Certificates of deposits, company stock options, and most mutual funds are not exempt retirement accounts and are subject to forfeiture. Furthermore, money in a 401(k) or IRA is exempt only if it remains in the retirement account.
- Many debtors make the mistake of cashing out their 401(k) or IRA before filing bankruptcy. That is a huge mistake. I cannot say that enough. The withdrawal triggers penalties and taxes. Once retirement is deposited into a bank account, it is no longer exempt.
Household goods and furnishings
Most furnishings and household goods are exempt up to $15,000 in the aggregate ($30,000 for married debtors). This includes household electronics, furniture, and appliances.
Bank account
Up to $5,000 in a single bank account is exempt at the time you file. If you are married, each spouse can have one $5,000 bank account or one bank account with $10,000. You cannot spread the $5,000 among multiple bank accounts. The issue is how much is in the account on the day you file bankruptcy. For the most part, money you acquire after you file is yours to keep. Proposition 209 increased the bank account exemption from $300 to $5,000. A couple of points:
- Most trustees examine your last 4 bank statements. Actually, there is nothing preventing the trustee from demanding to see more statements, no matter how old.
- Large cash withdrawals showing up on your bank statements are red flags. The trustee may ask for evidence that the cash was legally spent before you filed. If you cannot produce such evidence (like receipts) that the money was spent, the trustee may object to your discharge.
- If you have more than $5,000 in your account and want to spend it before you file (so you don’t lose it to the trustee), please consult with a competent Arizona bankruptcy lawyer. It is important that if you spend such money, you spend it the right way. Otherwise, your discharge will be in jeopardy. And the last thing you want to do is pay family members or friends. Again, consult with a competent Arizona bankruptcy attorney to help guide you before spending money shortly before you file bankruptcy.
Tools of the Trade
Tools that a debtor uses to earn a living are exempt, provided that their aggregate value does not exceed $5,000 ($10,000 if married). For example, if a debtor does landscaping work, his tools are exempt if they are not worth more than $5,000.
Social Security
Federal law exempts 100% of social security deposits, even if the law requires a debtor to use Arizona bankruptcy exemptions. This includes funds from social security disability. It is best to set up a separate account that only contains social security deposits. When you commingle social security with other non-exempt monies, it may lose its exempt status.
Wedding Rings/Bands
Wedding rings and bands are exempt if they are worth less than $2,000 ($4,000 if married). No other jewelry is exempt in Arizona. If you own expensive jewelry, it will be forfeited to the trustee. Of course, costume jewelry is worth very little. As such, even though cheap jewelry may be non-exempt, a trustee will not likely require turn over.
Firearms
Firearms with an aggregate fair market value of $2,000 or less are exempt ($4,000 if married). They can be worth a lot of money. As such, make sure you have an idea of their fair market value.
There are many other Arizona bankruptcy exemptions. Please consult with an Arizona bankruptcy lawyer so you know if you risk losing any valuable assets. If you make a mistake, you do not have an absolute right to dismiss a Chapter 7 and get a “do-over”.
Non-exempt property in Chapter 7
Just because you have non-exempt property does not mean you will lose it. It just means that the trustee has the right to take it. If your non-exempt property has minimal value or would be difficult to sell, the trustee may not bother. A debtor can always pay a bid at a trustee’s auction to retain it. Common non-exempt assets that are usually forfeited include:
- Additional non-exempt vehicles.
- Real estate, other than a person’s homestead.
- High-value jewelry.
- Lawsuit claims that exist as of the date of filing. This would include rights to a personal injury lawsuit, even if you haven’t filed suit yet.
- Tax refunds you receive the following year you file bankruptcy.
Pre-bankruptcy planning
There is nothing wrong with converting non-exempt property to exempt property prior to filing. With a good Arizona bankruptcy attorney, such pre-bankruptcy planning is usually permissible. But you cannot do this to defraud creditors. Understanding the Arizona bankruptcy exemptions is key to proper pre-bankruptcy planning. Common pre-bankruptcy planning includes:
- Purchasing an exempt vehicle.
- Purchasing new household furnishings and goods, such as a new bed, refrigerator, or TV.
- Buying groceries or other necessities.
- Paying your bankruptcy lawyer!
- Depositing money into an exempt 401(k) or IRA.
But be careful! There are limitations to pre-bankruptcy bankruptcy. Consult with a competent Arizona bankruptcy lawyer before taking such steps. There is an old saying: “Pigs get fat, hogs get slaughtered”. Feel free to request a consultation.