New Jersey is one of the greatest states in the nation, but it’s also one of the most expensive to live in. High rent and higher property taxes often lead many of us to fall behind on our bills. As the bills continue to pile up, it may make sense to consider filing for bankruptcy.
The word “bankruptcy” often carries with it images of losing one’s home and car, or watching as their possessions are gathered and sold. It’s considered a last resort, an option for the person who has already lost everything, but this isn’t always the case. Many people with good jobs and regular sources of income still fall behind on some of their bills and need a plan to get caught back up. Filing for Chapter 13 bankruptcy is the best way to create such a plan.
What is Chapter 13 Bankruptcy?
Chapter 13 of the federal bankruptcy code was designed to help individuals and married couples get out of certain debts by establishing a plan to pay back some or all of these debts over the course of several years, rather than all at once. A person filing for Chapter 13 bankruptcy will need to have a regular income sufficient to follow the plan that is put together, but not so much income that they disqualify (see eligibility below).
Once a plan is created and followed for it’s term (three to five years), the court will issue a discharge of any remaining debt that was included in the plan. Any debt that has been officially discharged through Chapter 13 bankruptcy can no longer be collected on by creditors. A creditor that attempts to collect on a debt discharged in bankruptcy will be subject to fines by the court.
Am I eligible?
In order to qualify for Chapter 13 bankruptcy, an individual must meet several requirements, including:
- Maximum unsecured debts: individuals filing for Chapter 13 cannot have unsecured debt (like credit card charges and medical bills) exceeding $394,725. Read more about unsecured debt here.
- Maximum secured debts: individuals filing for Chapter 13 cannot have secured debt (debt attached to an asset like a home loan) exceeding $1,184,200. Read more about secured debt here.
- Current on income taxes: individuals filing for Chapter 13 must provide proof that they have filed their federal and state taxes for the last four years.
In addition to the above, anyone filing for Chapter 13 bankruptcy must have sufficient regular income to make payments on their proposed plan. This makes sense — if a person does not have sufficient income to continue living their lives while also making payments on their debt over the course of years, then this person would likely be better suited filing for Chapter 7 bankruptcy.
“Income” can come from a variety of sources and not necessarily just one’s regular wages. A married person filing alone can include income from their spouse (or the two could file together). Other sources of income that will be considered in approving one’s “plan” include pension payments, social security benefits, unemployment benefits, rents, and even the proceeds from the sale of property. A person with sufficient income that also meets the other listed requirements will be eligible to file for Chapter 13 bankruptcy in New Jersey.
Why File for Chapter 13 and Not Chapter 7?
Anyone filing for Chapter 13 bankruptcy will also consider the benefits of filing for Chapter 7. Completion of a Chapter 13 debt reorganization will take between three and five years and will require the person filing to pay back some or all of the debt they owe. On the other hand, a person filing for Chapter 7 will typically complete the process in less than a year, and will not be responsible for any of the debts that are discharged through this process.
So why file for Chapter 13 over Chapter 7? There are some important advantages, primarily revolving around the ability to keep one’s property during and after the completion of the bankruptcy proceeding. Chapter 7 bankruptcy is typically referred to as “liquidation,” because the person filing for Chapter 7 usually has little or no assets, and whatever they do have (minus any exempt property) will be gathered into the bankruptcy estate and sold, with the proceeds getting distributed amongst their creditors.
This is why those filing for Chapter 7 bankruptcy typically do not have a sufficient income to put together a plan to pay off their debts. Moreover, a person filing for Chapter 7 who does in fact have such an income may have their case converted by the courts into a Chapter 13 proceeding, in attempt to maintain fairness and not let an otherwise solvent person avoid paying debts they owe.
Advantages of Filing for Chapter 13
While filing for Chapter 13 may not necessarily wipe out debts in the way that filing for Chapter 7 does, it does carry with it several advantages, including:
- Keep your property: A person filing for Chapter 13 bankruptcy is not required to gather their assets and other property for sale by the bankruptcy estate. So long as they are able to make payments in accordance with their plan, they will keep all of their possessions throughout the proceeding.
- Stop foreclosure: Filing for Chapter 13 will halt foreclosure proceedings and give an individual time to bring past due payments current. These individuals will still be required to make all payments on their home going forward, but if they can do so they will keep the property after the completion of the bankruptcy proceeding.
- Automatic Stay on collections: When a person files for Chapter 13 the court automatically issues a stay on all collection attempts by their creditors, immediately halting all wage garnishments, lawsuits and even collection calls. Learn more about the automatic stay here.
- Some consumer debts reduced: Depending on the individual’s Chapter 13 plan, they may be able to pay only a portion of certain consumer debts like credit card charges and medical bills and have the remaining portion discharged at the completion of the bankruptcy proceeding. Once discharged, this debt can no longer be collected on by the creditor.
- More eligible debts than Chapter 7: Chapter 13 allows for the inclusion of certain debts deemed non-dischargeable under Chapter 7, including certain debts from divorce proceedings, tax obligations and debts resulting from willful and malicious damage to property. Learn more about non-dischargeable debts here.
Disadvantages of Filing for Chapter 13
It’s important to discuss the advantages of filing for Chapter 13 over Chapter 7 with a bankruptcy attorney who can help an individual choose the best path based on their specific financial circumstances. Attorneys will also review some of the disadvantages to filing for Chapter 13 bankruptcy, including:
- Non-dischargeable debt: Not every debt can be included in the Chapter 13 plan and ultimately paid off or discharged at its completion. Certain debts, including federally guaranteed student loans, debts arising from damage caused by driving under the influence, child support and alimony debts, as well as some other debts are not deemed eligible for discharge in bankruptcy proceedings.
- Disposable income will be depleted: Completing a Chapter 13 plan usually involves using the disposable income of the person filing to make payments on the plan, meaning that they may not have extra money to spend on “luxury” or non-necessary expenses throughout the course of the plan.
Filing for Chapter 13 is a complex and involved process, it remains on a person’s credit history for several years, and it may have other far-reaching impacts on one’s personal finances for years to come. Before making the decision to file, it’s always best to consult a qualified attorney who can discuss an individual’s options, the process of filing, and develop a strategy that will result in a smooth proceeding that is completed to the person’s highest advantage.
The Process – Prerequisites to Filing
Filing for Chapter 13 begins by filing a petition with the bankruptcy court that serves the area where the person resides. Along with this petition, the individual filing must also:
- Pay the fees: Currently filing for Chapter 13 is $310: $235 case filing fee + $75 miscellaneous administrative fee
- Get credit counseling: Anyone filing for Chapter 13 bankruptcy must attend an approved credit counseling course within 180 days of filing, and submit to the court at the time of filing a certificate of completion along with any debt repayment plan developed in the course.
- Gather financial documents: In addition to the above, a person filing for Chapter 13 must also file with the court a schedule of their assets and liabilities, current income and expenditures, any executory contracts and unexpired leases, as well as a general statement of their financial affairs. In order to accurately complete this step, the person filing will need to compile:
- A list of all of their creditors, including the amounts owed and the nature of the claims
- The amount and frequency of all sources of income
- A list of all their property
- An expansive list of their monthly living expenses, which should include everything from food and shelter to clothing, taxes, medicine, and even clothing or other consumer needs.
The Process – Appointing a Case Trustee and the Automatic Stay
Once all the required information is submitted to the court and the petition is officially filed, the automatic stay will begin. At this point all attempts to collect on debts included in the bankruptcy proceeding must halt, and any attempt by a creditor to collect on these debts while the stay is active will subject them to fines. This stay applies to “co-debtors” of the person filing as well. Learn more about the automatic stay here.
In addition to the automatic stay, the court will appoint a “case trustee” to the proceeding. The case trustee is an impartial person responsible for the administration of the bankruptcy proceeding. They will gather payments from the person filing and distribute them to the creditors in accordance with the plan. This person will also be responsible for making any modifications to the plan if necessary.
The Process – Meeting of the Creditors and Developing a Repayment Plan
Around a month after the petition is filed and the case trustee is appointed, a “meeting of the creditors” will be held. The person or married couple filing for Chapter 13 will be required to attend this meeting, at which they will be placed under oath and asked questions by the trustee and their creditors.
The goal of the meeting is to ensure that all parties have a firm and accurate understanding of the filing party’s debts, assets and income. This meeting will also serve as an opportunity to discuss the proposed terms of the filing party’s Chapter 13 repayment plan.
The Chapter 13 repayment plan is a document that sets out the three to five year plan whereby the person filing for bankruptcy will repay some or all of their current debts. It must be submitted to the court within 14 days of filing the initial petition. There are several important factors that must be included in the plan in order for it to be approved by the courts at the confirmation hearing, including:
- Repayment of all “priority debt”: Priority debts are a special kind of debt granted elevated status by law. They include debts like child support and alimony, as well as certain tax obligations. The Chapter 13 repayment plan must be designed to pay these debts in full (unless the creditor agrees otherwise) or it will not be confirmed.
- Repayment of secured debt: Secured debts are debts which are attached to collateral like a mortgage or car loan. The Chapter 13 repayment plan must set out payments to these creditors over the course of the plan that amounts to at least the value of the collateral. Depending on timing, some collateral property like a car may have depreciated in value and therefore full repayment of this debt will be required. Repayment of mortgages can remain on the original payment schedule so long as past due payments are brought current.
- Some repayment of unsecured debts: Unlike secured debt, unsecured debt does not attach to any valuable property that can be repossessed. The plan still must set out to repay all of this debt, or if full repayment is not possible after first repaying secured and priority debts, the plan must use all of the debtor’s “disposable income” throughout the course of the plan to pay as much of these debts as possible.
The length of the plan will depend on the debtor’s monthly income and household size. It will be three years if they fall below the state median income, and five years if they are above that number. Disposable income is calculated by taking the individual’s income, setting aside any child support payments, and then subtracting an amount reasonably necessary to support themselves and their dependents. Disposable income is capped at to 15% of the filing party’s gross income.
Creating this plan is a difficult process that must be completely accurate and financially feasible in order to be approved by the court at the confirmation hearing. The confirmation hearing will also give creditors an opportunity to object to the plan. If an objection is made by a creditor the factual and legal reasoning behind the objection will need to be explored and responded to by the filing party, potentially delaying approval of the plan by months or causing it to be denied by the court.
Given the complexities and pitfalls of this part of the filing process, it’s best to consult with an experienced attorney who will be able to help an individual filing for Chapter 13 develop a plan that is best suited to their needs and goals while avoiding any objections and still meeting the requirements of the court.
The Process – Completing the Plan
Once a plan is put together and confirmed by the courts, it’s up to the individual filing to make timely payments to the case trustee for the length of the plan. In addition to making the payments, the debtor must consult with the case trustee before taking on any new debts, as these new obligations may affect their ability to continue making payments on the plan.
If the debtor is unable to make the payments in accordance with their Chapter 13 plan, depending on the reasons for not paying, the case trustee may modify the plan accordingly. If modification is not possible, the court may convert the case into a Chapter 7 liquidation, or dismiss it entirely.
After the completion of the plan the case trustee will write a report certifying that all payments have been made and the court will notify all parties of the impending discharge. The discharge of debt will release the filing party from all obligations to repay any remaining debt owed to creditors that were included in the plan.
As discussed above, this discharge will not release the individual from all debts. Whether a debt is still owed at the completion of a Chapter 13 bankruptcy will depend on the nature of the debt and whether it was included in the repayment plan. The court may also consider a “hardship discharge” of some debts under certain circumstances where it can be shown that the debtor’s failure to make payment was beyond their control.
Understanding what debts are eligible for discharge, what plans will be approved by the courts and accurately completing all of the required paperwork for filing Chapter 13 bankruptcy can be a difficult and long process. At Rosenblum Law our attorneys are ready to help, call us today.