Filing a bankruptcy is a big decision and it can be a little overwhelming. We’ve put together this list of all the important things you need to know so that you can make your decision with all the facts in 2015.
Types of Bankruptcy
There are two main types of consumer bankruptcy: Chapter 7 and Chapter 13. Under Chapter 7, you’ll give your non-exempt assets to the Bankruptcy Trustee. She’ll sell them and pay the proceeds to your creditors. Under Chapter 13, you’ll create a payment plan that will last 3 to 5 years. You’ll pay your “disposable income” to the Trustee every month and she’ll deliver it to your creditors. Your disposable income is the difference between your average monthly income and certain national and local standards for living expenses. You’ll have to pay your creditors at least as much as they would get if you filed under Chapter 7, so you must pay at least the value of your non-exempt assets through your plan.
At the end of either type of bankruptcy, your remaining unsecured debts will be discharged. Unsecured debts are not linked to any particular piece of property; common examples include medical and credit card debt. The fate of your secured debts, such as home and auto loans, depends on your bankruptcy. In Chapter 7, you may be able to reaffirm a secured debt and continue to pay it, depending on your income. In Chapter 13, you’ll be able to repay arrearages, or back payments, through your payment plan and continue to make your regular payments.
Qualifying to File
In order to file a bankruptcy in New Jersey, you’ll need fill out a Means Test form. That test will determine what type of bankruptcy you can file. If you earn less than the state median income or pass the Means Test, you are eligible to file under Chapter 7. In order to file under Chapter 13, you must show that you have enough income to make meaningful payments to your creditors and to pay at least as much as they would receive if you filed under Chapter 7. The Means Test is a complex calculation comparing your income to the state median income and certain state standard expenses. The test is a difficult one and is best prepared by an experienced attorney.
So, the state’s bankruptcy exemption laws determine how much of your property is safe from creditors and whether your Chapter 13 plan is acceptable to the court. In New Jersey, you can choose between state and federal exemptions. Note that exemptions refer to your equity in a given piece of property, not the value of your property. In other words, if you purchase a car for $5,000 and still owe $4,000, your equity is $1,000. If the law offers an exemption of more than $1,000, your car is safe from the bankruptcy process.
Federal exemptions protect up to $22,975 of equity in your home and up to $3,675 of equity in a vehicle. You can also exempt up to $12,250 of personal property such as clothing and furniture, but no single item can be worth more than $575. The federal exemption scheme also includes a “wild card” exemption for up to $1,225 of any property. Federal law also exempts your retirement accounts, federal and state benefits, and legal claims for damages related to crimes, personal injury, or the wrongful death of someone on whom you were dependent. These are just the major exemptions; the law also protects smaller amounts of equity in a number of other types of property.
If the federal exemptions don’t protect the property that matters most to you, you may choose to take advantage of New Jersey’s exemptions. New Jersey does not allow an exemption for your home and allows only $1,000 worth of exemptions in personal property. However, New Jersey allows a number of exemptions for benefits, insurance payments, annuities, and other sources of income.
The Automatic Stay
No matter what bankruptcy chapter you choose to file under, you get the protection of the automatic stay. It’s one of the most powerful tools in bankruptcy law. When you file a bankruptcy, the court wants to make sure that all of your creditors and all of your debts are dealt with through the bankruptcy process. To that end, the automatic stay forces a stop to all collection actions outside of bankruptcy. It will stop a foreclosure or wage garnishment. It stops repossessions and can even force a creditor to return your repossessed property, as long as it hasn’t been sold. It will prevent creditors from levying your bank accounts and will stop collection lawsuits in their tracks. The automatic stay gives you the time you need to organize your finances through the bankruptcy process and deal with your debts in a fair, orderly fashion.
The Bankruptcy Process
Before you can file a bankruptcy, you’ll need to attend a credit counseling session. Without proof that you’ve done that, you won’t be able to file for bankruptcy. After you file, you’ll have a “Meeting of Creditors,” often called a “341 meeting.” The name is somewhat misleading; creditors rarely attend. More commonly, it will be you, your attorney, and the bankruptcy Trustee. The Trustee will ask you questions about the information you included in your filing. She may want to know more about certain debts, income, or other financial information. If a creditor chooses to attend, she may have questions about how you intend to handle her specific claim. The 341 meeting is also where you’ll present your Chapter 13 payment plan to the Trustee; she’ll take it to a judge for approval.
After the 341 meeting, you’ll enter the bankruptcy process. If you file under Chapter 7, you’ll surrender any non-exempt property to the Trustee. Most debtors don’t have any non-exempt property and won’t have to give anything up. If you file under Chapter 13, you’ll start making your plan payments.
At the end of your bankruptcy, your remaining unsecured debts will be legally forgiven, or discharged. However, certain debts cannot be discharged through bankruptcy. For example, student loan debts are almost never dischargeable in bankruptcy. Tax debts are also difficult to discharge, although income taxes may be dischargeable under certain narrow circumstances. Priority debts are never dischargeable. These include child and spousal support. You also won’t be able to discharge a debt for injury or property damage that you caused while driving under the influence.
What will stop a discharge?
In order to reach discharge in your bankruptcy, you’ll need to show that you filed in good faith. That means you need to include accurate, honest, and complete information on all of your forms. You’ll also need to behave in good faith before you file. If you transfer property or cash to a friend or family member before you file, the Trustee may be able to claw that property back into your bankruptcy estate. The court will assume that you made the transfer in order to hide your assets and may dismiss your case if you are shown to have acted in bad faith. You also can’t rack up a lot of credit card debt just before filing. The Trustee will look at your purchase history. If you buy a stack of luxury goods just before filing, the court will assume that you made those charges without any intention of ever repaying them. That’s an action in bad faith and can get your case dismissed.
Finally, your case may be dismissed if you don’t comply with the requests of the court or if you can’t keep up with your Chapter 13 payment plan. If you can’t keep up with a plan, the court may force you to convert your bankruptcy to Chapter 7.
The Cost of Bankruptcy
Bankruptcy is a powerful financial tool, but it also has powerful financial consequences. First, it costs money to file a bankruptcy in New Jersey. The credit counseling will cost you around $50. A Chapter 7 filing fee is $306 and a Chapter 13 filing fee $281. If creditors object to your bankruptcy or payment plan, you may have to pay other fees to deal with their objections. Finally, attorney fees will vary based on the complexity of your case. While it may seem difficult to justify spending money on an attorney when you’re short on cash, your attorney will make a big difference in the success of your case. Only a fraction of people who file without an attorney manage to reach discharge.
In addition to the nominal costs, bankruptcy is going to affect your credit score. Filers with high credit scores are affected more than those with low credit scores, but you can expect to take a hit of a couple hundred points. Keep in mind, however, that every payment you miss is also taking a chunk out of your credit score. If you’re really struggling with debt, filing a bankruptcy can be a faster and easier way to clean your financial slate and rebuild your credit than attempting to deal with debt outside of bankruptcy.
Jenkins & Clayman Can Help
If you’re considering filing a bankruptcy in New Jersey, contact us today for a free consultation. We can go over your finances and help you decide if bankruptcy is the right option for you or if other debt management techniques would better serve your needs. If you do decide to file a bankruptcy, we’ll handle your forms and we’ll deal with the Trustee and the court to make sure you get the most out of your filing.