The filing of a bankruptcy creates a “bankruptcy estate” consisting of all of the property of the debtors.[1] However, State and Federal law allows the debtors to protect (or “exempt”) certain property from creditors and from sale through the Bankruptcy Court.

In Arizona, state exemption law applies to debtors filing bankruptcy who have resided in Arizona for two continuing years.[2] In addition, Federal law protects IRAs and benefits from some Federal programs, such as Social Security, and those tied to Veterans’ benefits or Veterans’ insurance.

If the debtor has not lived continuously in Arizona for two years, the debtor can claim the exemptions from the state in which they previously lived, so long as they had continuously lived there for two years. If the debtor does not meet either residency requirement, the debtor must use those of those of the Federal Bankruptcy Code.

The Homestead Exemption

In Arizona, the Homestead Exemption protects the equity in a primary residence up to $150,000, beyond mortgages on the property.

  • The homestead exemption (or any other state law exemption) does not protect against IRS liens.
  • The homestead applies only to a residence where the debtors reside.
  • Only one homestead is available to a married couple.
  • The Homestead Exemption can be applied to a mobile home which is not attached to real property (i.e., land).

In a bankruptcy, the homestead is reduced to $146,450[3] if the filing debtor owned the house for less than 3.3 years (actually 1,215 days), unless the debtor lived in another house in Arizona and sold that house to move into their current home.

Personal Property Exemptions

Exempt property is not subject to being sold through a bankruptcy. Partially exempt property is subject to being sold. The following are examples of personal property exemptions. It is not meant to be a full list.

  • $4,000 in household furnishings, including a table, chairs, a couch, lamps, a bed, a dresser, a television, radio or stereo, a refrigerator, a washer and a dryer, and a vacuum cleaner;
  • six months worth of all food, fuel and provisions;
  • $500 for wearing apparel;
  • $250 for musical instruments;
  • $500 for domestic animals;
  • $1,000 for engagement and wedding rings;
  • $500 collectively for a typewriter, bicycles, sewing machine, Bible, burial lot, and rifle, shotgun or pistol;
  • $100 for a watch;
  • $5,000 equity in a motor vehicle; and
  • $2,500 for debtors’ tools used in business or trade (for example, a plumber’s tools, or a computer used in a home-based business).

For husbands and wives (a joint case), the personal property exemptions are doubled. For example, in a joint case, a husband and wife can claim $300 in one bank account, or each can claim an account, with the maximum amount in each being $150.

Nonexempt Property. All property which is not exempt may be turned over to the Bankruptcy Court’s Trustee for distribution to creditors. Nonexempt property most often includes (a) income tax refunds due at the time of filing and (b) money owed to the debtors at the time of filing. Ownership in a corporation, limited liability company or limited partnership is also nonexempt. Also, the excess of value of property beyond the exemption is nonexempt.

Partially Exempt Property. Some property is both exempt and nonexempt. For example, if a debtor’s vehicle has a fair market value of $15,000 with a lien of $5,000 and resulting equity of $10,000. Debtor gets the $5,000 exemption, but the Trustee will administer the remaining the $5,000 nonexempt portion.

1 Notable exceptions are most retirement programs and benefits under a spend-thrift trusts.

2 The Bankruptcy Code allows a State to choose whether its citizens in bankruptcy shall be entitled to State exemptions or Federal exemptions or both (11 U.S.C. §522[b]). Arizona elected to be an “Opt-Out State” pursuant to A.R.S. § 33-1133(B), and with few exceptions only Arizona exemptions are available to its citizens.

3This number periodically adjusts (it started at $125,000 in 2005).