New Jersey Bankruptcy: Chapter 7 vs. Chapter 13
If you’re thinking about filing bankruptcy in New Jersey, you may not know that you have a couple of options.
Most people seeking debt relief file Chapter 7. Of all the New Jersey bankruptcy filings in 2020, 10,765 were consumers filing Chapter 7, while 3,898 individuals filed Chapter 13. So, which one is right for you?
Chapter 7 Bankruptcy
Chapter 7 is often called liquidation bankruptcy because it discharges your eligible debt in exchange for you surrendering non-exempt property for liquidation and distribution among your creditors.
You’ll notice that we said ‘eligible’ debt. This is because certain debts cannot be discharged in a New Jersey bankruptcy case. They include:
- Spousal and child support payments
- Most tax debt
- Debts incurred through fraud
- Criminal fines and penalties
- Debts arising from a DUI case that caused death or injury
- Federal (or federally-backed) student loans (unless paying them would cause undue hardship)
Chapter 7 Means Test
Chapter 7 is intended to help honest debtors who can’t afford to repay their debt, but at one time, people who were in a position to repay were taking advantage of the relatively quick Chapter 7 process. Consequently, the U.S. Bankruptcy Code was amended to include the Means Test as a Chapter 7 qualifier.
This test compares your household income to the median income for a similarly-sized household in New Jersey. If you make less, you’ve passed the means test and can file for Chapter 7 bankruptcy.
If you make more, you must deduct allowable expenses like rent, food, clothing, and medical care to see if you have enough disposable income left over to pay your debt. These permitted expenses are based on national and local standards: for example, national standards address food and clothing while local standards cover housing. Your New Jersey bankruptcy attorney will help you identify and categorize your expenses.
If your disposable income is low enough, you will probably qualify for Chapter 7. If it’s too high, you will have to repay your debts in a Chapter 13 filing (more on that later).
It is important to note that not everyone has to pass the means test to file Chapter 7. Under the current bankruptcy laws, if you are a disabled veteran or the majority of your debt is not consumer-related, you are exempt from taking it.
New Jersey Bankruptcy Exemptions
When you file bankruptcy in New Jersey and opt for Chapter 7, you may choose state or federal exemptions to protect your property (but not both). In most cases, married couples filing together can double the exemption amounts.
If you opt for the New Jersey state exemptions, you should be aware that, unlike other states, New Jersey does not have a homestead exemption. (It will, however, protect your spouse’s survivorship interest in a property held as tenancy.) If you want to protect the equity in your home, you may have to use federal exemptions instead. The same goes for motor vehicles- there is no exemption in New Jersey.
Personal property exemptions include:
- Clothing (unlimited)
- Up to $1,000 in household goods and furniture.
- Goods, chattels, corporation stocks, and personal property (excluding clothing) up to a combined value of $1,000.
- A $1,000 wildcard exemption you can use to protect the property of your choice.
New Jersey also lets you protect:
- Up to 90% of unpaid wages if you make less than $7,500 per year. The percentage goes down if your income is higher. Military personnel has additional wage and allowance protection.
- Annuity contract proceeds up to $500 per month.
- Life insurance proceeds (if you are not the insured)
- Health and disability benefits
- Disability, death, medical or hospital benefits for civil defense workers
- Disability or death benefits for military members
- Group life or health policies or proceeds
- Fraternal benefit society benefits
- Public benefits like workers’ compensation, unemployment benefits, and disability
- Pensions for specific careers, like teaching, civil defense, and municipal employees
If you opt for federal exemptions, you may protect assets like the following:
- Up to $25,150 of the equity in your home
- Up to $4,000 equity in a motor vehicle
- Clothing, appliances, furnishings, books, household goods, musical instruments, animals, and crops up to $625 per item. The total value must not exceed $13,400.
- Up to $1,700 worth of jewelry
- Up to $2,525 of professional books or tools you need for work
- Health aids (unlimited)
- A $1,325 wildcard exemption you can apply to any property. You can also apply an unused proportion of your homestead exemption, up to $12,575.
- Life insurance policy with loan value up to $13,400
- Life insurance payments for a person you depended on for support
- Unmatured life insurance policy (except for credit insurance)
- Disability, unemployment, or illness benefits
- Retirement savings accounts like 401(k)s, 403(b)s, SEP and SIMPLE IRAs, and profit-sharing and money purchase plans. IRAs and Roth IRAs are capped at $1,362,80.
- Up to $25,150 worth of compensation in a personal injury lawsuit (does not include pain and suffering, which is not exempt).
Chapter 13 Bankruptcy
Chapter 13 is designed to help people who have sufficient disposable income create a plan to repay some or all of their debts over three to five years. For this reason, it is known as a ‘reorganization’ bankruptcy.
To qualify for Chapter 13, you must meet the following criteria:
- No more than $394,725 in unsecured debt like medical bills and credit cards.
- Your secured debts, such as the mortgage or auto loan, cannot exceed $1,184,200.
- You have filed all of your federal and state taxes for the last four years.
Why File for Chapter 13 and Not Chapter 7?
Not everyone files Chapter 13 because they failed the means test. Advantages include:
- You keep your property. Unlike Chapter 7, you are not required to surrender non-exempt assets to your trustee for sale and distribution. As long as you make payments on your court-approved plan, you keep all of your property.
- You stop foreclosure. As soon as you file for Chapter 13, any foreclosure proceedings immediately halt. You can address your arrears in the Chapter 13 plan while maintaining regular mortgage payments moving forward.
- Some debts are reduced. Depending on how your plan is structured, you may be able to pay only a portion of unsecured debts like medical bills and credit cards.
- You can get a discharge from a wider range of debts. With Chapter 7, you cannot receive a discharge from debts like child support, alimony, and taxes. Chapter 13 allows you to catch up on arrears and get a discharge.
How the Repayment Plan Works
Around a month after you file your Chapter 13 bankruptcy petition, you will attend a meeting of creditors, where you answer questions from your trustee and your creditors under oath. Chapter 7 filers must attend one of these meetings as well, but the difference is that you will discuss the proposed terms of your debt repayment plan.
In general, the bankruptcy court will approve your petition if:
- It repays all priority debt such as child support, alimony, and taxes in full.
- With secured debt like the mortgage or car loan, you repay an amount that, at the very least) equals the value of the collateral. In some cases, such as property that has depreciated in value (e.g., a car), full repayment is required, while others, like the mortgage, require you to bring past due payments up-to-date.
- It repays as much of your unsecured debt as possible.
The duration of your Chapter 13 plan will depend on your household size and monthly income. If you are below the state median income, the plan will last for three years. If you make more, you will enter into a five-year plan. Should you run into financial difficulties later on and be unable to make your Chapter 13 payments, your bankruptcy trustee may modify the plan accordingly. If this outcome isn’t feasible, the court may convert your case into a Chapter 7 or dismiss it entirely, so if you lose your job, get legal advice right away.
Do You Need to Speak to a New Jersey Bankruptcy Attorney?
When you’re debating whether you should file Chapter 7 or Chapter 13, you should meet with a knowledgeable New Jersey bankruptcy lawyer who will help you choose the best option based on your financial situation. At Gershburg Law, P.C., we will explain the advantages and disadvantages of each bankruptcy chapter, help you complete the bankruptcy forms, and guide you through the process so that you benefit from the debt relief you need.