New Jersey is a beautiful and diverse state, but it is also one of the most expensive places to live in the nation. With high rents and even higher property taxes, it’s easy to see how some of us can fall behind on bills from time to time. As the bills begin to pile up and the creditors increase their attempts to collect, the stress of debt can become overwhelming. One option to relieve this pressure is to file for bankruptcy.
When someone’s debts exceed their assets, and their income cannot support their bills, it may make sense to file for Chapter 7 Bankruptcy. Bankruptcy proceedings in the United States are governed by the Federal Bankruptcy Code. Chapter 7 of the code was designed to offer a “fresh start” to those with insurmountable debts by freeing them of liability for most consumer debts.
Filing for Chapter 7 bankruptcy is a complex process requiring the individual (or married couple) to calculate the value of all of their assets and liabilities, determine what exemptions will apply to certain property and ultimately obtain a discharge of the remaining debt. An experienced attorney can help you navigate this process successfully, and avoid a dismissal of your bankruptcy case. Read more about the value of hiring a bankruptcy lawyer here.
What is Chapter 7 Bankruptcy?
Chapter 7 of the federal bankruptcy code was designed to give debtors a “fresh start” by discharging most or all of their unsecured debt (secured debt has a collateral interest in some piece of property, like a real estate mortgage). Some debts that are commonly discharged in Chapter 7 bankruptcy include:
- Credit card charges
- Collection accounts
- Medical bills
- Civil court judgments (unless there is fraud involved)
- Past due rent
Unfortunately not every debt will be discharged in Chapter 7 bankruptcy. Absent a showing of extreme hardship, most student loans are ineligible for discharge (see full list of non-dischargeable debt here). Any debt incurred through fraud (like overstating one’s income in a loan application) is also deemed ineligible for discharge. While secured debt, such as a lien on real estate that is secured by an interest in the property may be discharged, the creditor will retain the lien and thus be able to take control of the property, absent a reaffirmation hearing (see below).
Once a person successfully files for Chapter 7 and receives a discharge, all debt that was discharged in the bankruptcy is no longer owed, and creditors are no longer permitted to seek collection of these debts.
Am I eligible?
In 2005 a new law was introduced aimed at stopping abuse of the bankruptcy system by those who can in fact afford to pay some or all of their debts. This law, called the Bankruptcy Abuse Prevention and Consumer Protection Act sets forth a maximum allowable income, based on household size, that will determine whether or not an individual is eligible to file.
In order to determine whether a person is eligible to file for chapter 7, first they must compare their income to the New Jersey median for a household of equal size (“means” test). As of May 1, 2020 the median income for New Jersey based on household size is as follows:
Household Size Monthly Income Annual Income
|Household Size||Monthly Income||Annual Income|
To determine your monthly and annual income, first add all of your total income from all sources (including your spouse, if you are married and living in the same household) for the previous 6 months, then divide this number by 6 for your monthly income, and multiply that number by 12 for annual.
For example, if in the last 6 months you earned a total of $24,000, your monthly income would be $4,000, and your annual income would be $48,000, meaning that you would qualify regardless of household size.
If someone is found to not qualify based on their income, the filing may be converted from chapter 7 to chapter 13, or the filing may be dismissed entirely. Consulting a knowledgeable bankruptcy attorney at this stage will help you determine your eligibility and alternative options.
- Fees – Currently the cost of filing for Chapter 7 in New Jersey is $306 ($245 case filing fee, $46 miscellaneous administrative fee, and $15 trustee surcharge).
- Credit Counseling – The 2005 Bankruptcy Act also requires any individual filing for Chapter 7 or any chapter of the Bankruptcy Code to receive credit counseling from an approved agency within 180 days before filing.
- Financial documents – In order to begin the filing process, you will be required to list all of your current income sources, your monthly living expenses, any recent major financial transactions (like purchasing a home), all of your current assets (including possessions like jewelry or cars), and all of your debts including any unexpired leases or expected future expenditures.
Individual debtors with primarily consumer debts must also file:
- A certificate of credit counseling and a copy of any debt repayment plan developed through counseling
- Evidence of payment from employers, if any, received 60 days before filing
- A statement of monthly net income and any anticipated increase in income or expenses after filing
- And a record of any interest the debtor has in federal or state qualified education or tuition accounts
Any errors in the gathering and listing of this financial information could potentially subject the filing to dismissal, so it is vital that this step of the process is performed accurately and honestly. Having an experienced attorney review your assets and liabilities will ensure that you are able to proceed beyond this stage of the filing without any issues.
Exemptions – can I keep any of my property?
Debtors filing for Chapter 7 bankruptcy in New Jersey can choose to work with either the New Jersey set of exemptions or the Federal Rules set of exemptions, but they cannot mix and match between the two. There are some important distinctions between these sets of exemptions that can have a major impact on what you will be able to keep during the filing process, so it is usually best to consult an attorney to discuss the details of your financial situation and determine which option will be best for you. Some important notes:
Homestead Exemption – Are you looking to keep your home? The ability to do this will depend on a number of factors, including whether you are current with your payments and how much equity (if any) is currently in the home. Debtors with enough equity in their home may be forced to allow their case trustee to sell the property and distribute the proceeds to their creditors.
However, the federal exemptions allow for a homestead exemption of $25,150, meaning that a debtor that will be able to subtract this amount from the current equity in their home, potentially allowing them to keep the property once the bankruptcy proceeding is complete. New Jersey does not offer this exemption, so if it is an important factor in your filing decision, it may be worthwhile to opt for the federal exemptions.
Pensions vs Retirement Accounts – Another area of exemptions where New Jersey differs from the Federal list is in the realm of pension and retirement accounts. In New Jersey certain government pensions are completely exempt from the filing process, while the Federal list offers protection to certain pension plans that fall into specific categories. On the other hand, the Federal rules allow retirement accounts that are exempt from taxation to be exempt from the filing process, whereas New Jersey does not offer this protection.
There are numerous other differences between the two exemption lists, each potentially having a major impact on what property you are able to keep once the bankruptcy process is complete. It is advisable to seek out an experienced attorney to help you navigate this complicated area and determine which set of rules would be most beneficial to your specific circumstances.
As mentioned above, under certain circumstances it is possible for a debtor to keep a large asset like a home or automobile while filing for Chapter 7 bankruptcy in New Jersey. If the property in question qualifies (determined by its value and the debtor’s equity in it), the debtor may opt to “reaffirm” this debt.
A reaffirmation is an agreement between the debtor and the creditor stating that the debtor will remain liable for the remainder owed on this specific property, despite this debt being otherwise eligible to be discharged in bankruptcy. In exchange for this acknowledgment by the debtor, the creditor agrees that it will not repossess or sell the property so long as the debtor continues to pay the debt.
In order to achieve this, the debtor must be current on their payments for the property in question, and they must file the written agreement between them and the creditor with the court before the discharge is issued. If the bankruptcy court finds that maintaining this debt will cause hardship on the debtor and his dependents, they may deny the reaffirmation. A qualified attorney will be able to assist in determining whether this avenue is possible and in the best interests of a person filing for Chapter 7 bankruptcy.
Once a person has completed the prerequisites of filing for Chapter 7, including credit counseling, listing of assets and liabilities and paying the associated fees, they will be assigned a case trustee. This person is responsible for overseeing the bankruptcy proceeding to ensure that any available assets are distributed fairly, and that there are no bad actors on either side of the process.
As soon as the filing is initiated there is an “automatic stay” on all other attempts by creditors to collect from the debtor. This means that any collection attempts either through garnishment, lawsuits or any other means are automatically stopped as soon as the bankruptcy filing begins. Any creditors that knowingly violate this stay on collections will be subject to penalties by the court.
Within a month of filing, the case trustee will hold a “341 meeting.” Named after the associated section of the Federal code, this is likely the only time a person filing Chapter 7 will need to appear in court during the bankruptcy proceeding. At this meeting the case trustee and all of the debtor’s creditors are given the opportunity to question the debtor, while under oath, about their debts and other property, in an attempt to make sure that no assets have been improperly excluded from the filing.
Once all parties are clear as to what property is available and what debts are owed, the case trustee will gather any nonexempt property owned by the debtor and enter it into a “bankruptcy estate” where it will ultimately be distributed to the creditors based on their individual claims. When this is complete, the court will issue a discharge of the remaining debt.
End Result of Filing: The Discharge
After the bankruptcy estate has been distributed to creditors, the court will issue a discharge of all remaining debt (except for the categories of debt described above that are ineligible for discharge). This is the end of the bankruptcy filing process, the debtor is now cleared of the debts that have been discharged, and creditors are no longer permitted to seek collection of this debt in any manner, and would be subjected to penalties for violating this order.
Other Important Considerations
When making the decision whether or not to file for Chapter 7 there are some additional important factors to consider. A married person must consider whether to file jointly with their spouse or individually, with varying consequences related to either decision. If you have filed for bankruptcy previously, depending on how you filed (what chapter) and how recently you filed, it’s possible that you may not yet be eligible to file again right away.
Furthermore, filing for chapter 7 will remain on your credit report for 10 years, so it is vital to understand which debts you are attempting to have discharged, which debts may not be eligible for discharge, and whether or not you will be able to keep certain property after filing. Only an experienced bankruptcy attorney can help you navigate this process successfully and to your highest advantage. Contact Rosenblum Law to speak with one of our qualified attorneys today.