One of the most frequent questions asked of Arizona bankruptcy attorneys is whether a client who needs serious debt relief would be better served by the Chapter 7 "liquidation" bankruptcy process or by a Chapter 13 "reorganization" bankruptcy. While that answer can only be given after a full assessment of the unique financial challenges faced by a couple or individual, a few basic concepts may help them understand where their best legal options lie.

The first thing to consider is whether you are eligible for Chapter 7 in the first place. Liquidation bankruptcy is a powerful tool for giving consumers a fresh start from a life of worry about crushing debt, but since federal bankruptcy laws were changed in 2005 a means test has been required to determine eligibility for Chapter 7.

However, even those who qualify for Chapter 7 may have good reasons to opt instead for the Chapter 13 process. There are many reasons why this may be so, but here are a few examples:

• The potential bankruptcy petitioner has a large proportion of non-dischargeable debt in relation to unsecured obligations such as credit card debt and medical expenses. Obligations such as child support, student loans and back taxes are not eligible for Chapter 7 liquidation and cannot be discharged.
• The couple or individual owns prized property that is not subject to Arizona bankruptcy exemptions, including collectible items such as a rare second automobile that would be subject to liquidation to satisfy creditors.
• Significant second or third mortgages on the individual or couple's residence may tilt the balance toward Chapter 13 as the preferable bankruptcy option. While liquidation removes personal obligations for repaying these debts, the lender still retains a legal lien against the property. Chapter 13 lien stripping might provide significant advantages if the value of the home is matched or exceeded by the balance on the first mortgage (in other words, the property is "under water").

An experienced Phoenix bankruptcy lawyer's first order of business with a new client is to sit down and examine all sources of income and all outstanding financial obligations, as well as the extent of all assets, including retirement savings, real property and securities. The good news: customized solutions based entirely or in part on federal bankruptcy provisions can provide significant debt relief.

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