Written By:
Adam H. RosenblumYour Dedicated & Trusted Legal Team
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Exemptions in the New Bill vs. Current Law
Bankruptcy in the United States is governed by the federal bankruptcy code. However, New Jersey provides its residents with an alternative set of exemptions that they may use when filing. When choosing exemptions, the filing party must choose either the state or federal set; they cannot mix and match from both options. Under the existing New Jersey bankruptcy law, a person filing for bankruptcy may exempt only $1,000 in a personal bank account and $1,000 in personal property. Personal property includes any kind of property other than real estates, such as cars, jewelry, or electronics. This also includes household goods, such as furniture and TVs. All other income and assets the individual filing for bankruptcy has been subject to the proceeding and will be factored into the payments the filer must make to creditors under the repayment plan in Chapter 13 or the assets added to the bankruptcy estate and sold off to pay creditors in Chapter 7.The new bill, S-2423, would increase the exempt amount in a personal bank account to $5,000 and the exempt amount of personal property to $10,000. Even more importantly, the bill would establish a $340,000 homestead exemption, allowing a homeowner to exempt up to $340,000 of home equity from the bankruptcy proceeding. Finally, any federal coronavirus emergency payments to a debtor would be exempt as well.
The New Exemptions in Practice (Chapter 13 Plan)
To help illustrate what the new exemptions would look like in practice, we’ll start by using a hypothetical Chapter 13 bankruptcy proceeding. In a Chapter 13 bankruptcy, a repayment plan is developed by calculating a person’s disposable income and the value of his or her assets, and then paying to the bankruptcy trustee a monthly amount equal to the greater of the income or assets over the course of the repayment plan. Chapter 13 is normally used by people with a steady income who want to repay debt over time. A Chapter 13 repayment plan lasts 3 to 5 years and the amount that must be paid every month is based on the person’s disposable income or the value of their assets. A person filing for bankruptcy may choose between either the state exemptions or the federal exemptions with no mixing-and-matching between the two. Currently, the federal exemptions allow for a $25,150 homestead exemption. Disposable income is calculated by subtracting a debtor’s monthly expenses from all of their monthly income. A debtor’s monthly expenses are the amount needed to support the debtor and their dependents, like food, shelter, transportation, and childcare. In this example, the debtor makes $5,000 per month in income and has expenses of a $2,000 mortgage payment, $1,000 for food, $500 for car payments, and $1,000 in childcare and medical expenses. This person has $5,000 in income and $4,500 in expenses, leaving a disposable income of $500 per month. Our example debtor’s assets include a paid-off $20,000 car and $200,000 in home equity, for a total of $220,000 in assets. Finally, we’ll assume they have $220,000 in total debt. Under a Chapter 13 repayment plan, assets are divided up monthly over the length of the plan in order to determine the amount the filing party will be required to pay back on a monthly basis. In this case, we’ll say the debtor is on a five-year (60 month) plan. First, let’s see how the debtor does with the federal exemptions. The federal exemptions include a $25,150 homestead exemption, which the debtor can deduct from the value of his home equity. They could also use the $4,000 motor vehicle exemption available under federal law. Using Federal ExemptionsMonthly | Length of Term | |
Disposable Income | $500 | $30,000 ($500 * 60 months) |
Assets | $3,180.84 ($190,850/60) months) | $190,850 ($220,000-$25,150-$4000) |
Monthly | Length of Term | |
Disposable Income | $500 | $30,000 ($500 * 60 months) |
Assets | $3,650 ($219,000/60 months) | $219,000 ($220,000-$1,000) |
Monthly | Length of Term | |
Disposable Income | $500 | $30,000 ($500 * 60 months) |
Assets | $167.67 ($10,000/60 months) | $10,000 ($220,000-$200,000-$10,000) |
The New Exemptions in Practice (Chapter 7)
The new exemptions will also prove beneficial in a Chapter 7 bankruptcy proceeding. In Chapter 7, the debtor turns over his or her non-exempt assets to a bankruptcy trust. The trust is then divided up among the creditors in exchange for the discharge of any remaining eligible debts at the completion of the proceeding. The debtor can use exemptions to shield some assets from being included in the bankruptcy estate. These exemptions are the same as the ones used to decide which assets in a Chapter 13 bankruptcy are excluded when calculating a repayment plan. Let’s use another hypothetical debtor to demonstrate how this works under the existing New Jersey exemptions, the federal exemptions, and the newly proposed New Jersey exemptions. In this example, the debtor owes $200,000 to various creditors and has $100,000 in home equity, $10,000 in household goods, a paid-off car worth $10,000, and $10,000 in the bank. Under the current federal exemptions, a debtor can exempt $25,150 in home equity, household goods up to a total of $13,400, a motor vehicle worth up to $4,000, and other personal property up to $1,325. Here are the assets our hypothetical debtor would have before and after filing Chapter 7 bankruptcy with the federal exemptions. Using Federal ExemptionsAssets | Assets After Bankruptcy | |
Home Equity | $100,000 | $25,150 |
Household Goods | $10,000 | $10,000 |
Car | $10,000 | $4,000 |
Bank Account | $10,000 | $1,325 |
Assets | Assets After Bankruptcy | |
Home Equity | $100,000 | $0 |
Household Goods | $10,000 | $1,000 |
Car | $10,000 | $0 |
Bank Account | $10,000 | $1,000 |
Assets | Assets After Bankruptcy | |
Home Equity | $100,000 | $100,000 |
Household Goods | $10,000 | $10,000 |
Car | $10,000 | $10,000 |
Bank Account | $10,000 | $5,000 |
Keeping an Eye on the Bill
The new exemptions haven’t been signed into law yet. However, the bill passed the New Jersey Senate with a unanimous 38-0 vote. If the Assembly passes it and the governor signs it, these new exemptions will make bankruptcy dramatically more useful to New Jerseyans in a time when they need it most. Bankruptcy is a complex process with many possible outcomes that will depend on the timing and finances of the person or persons considering filing. Our attorneys are experienced in dealing with bankruptcy and they’ll be able to help you determine the best way forward, based on your specific financial circumstances. We can help you decide whether it makes sense to file right away or to wait for the new exemptions to go into effect. Call us today to schedule a free consultation with one of our experienced attorneys.About The Author
Adam is the founding attorney and principal of Rosenblum Law. With more than two decades of legal experience in numerous areas of law practice, his primary focus is law firm management and business development.
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How to Cite Rosenblum Law’s Article
APA
Adam H. Rosenblum (Jul 27, 2020). New Law Will Make Bankruptcy More Appealing for NJ Residents Struggling with Debt. Rosenblum Law Firm, https://rosenblumlaw.com/new-bankruptcy-bill-nj-s-2423/
MLA
Adam H. Rosenblum "New Law Will Make Bankruptcy More Appealing for NJ Residents Struggling with Debt". Rosenblum Law Firm, Jul 27, 2020. https://rosenblumlaw.com/new-bankruptcy-bill-nj-s-2423/