Bankruptcy is a gut-wrenching and emotional process, but as evidenced from recent statistics, is also an oft-used solution for debt problems. Bankruptcy is a means for one to shed debts in an orderly fashion that is fair to creditors so that the debtor may obtain a fresh start. Bankruptcy is far better than the original option, debtor's prison, which was largely abandoned in the United States in 1833.
The bankruptcy process takes place in specialized courts within the greater federal court system and is overseen by a trustee from the Department of Justice. There are two chapters of the Bankruptcy Code which individuals use: chapters 7 and 13.
Fill out the bankruptcy questionnaire and gather the documents on the checklist, and call our Freehold, New Jersey, office at 732-333-0681 for an appointment.
In chapter 7, the trustee liquidates all non-exempt assets to pay debts, and any remaining debt is erased (called a discharge). Some items are exempt from sale, such as clothing, pensions, alimony. A portion of the equity in vehicles, real estate, household goods and family heirlooms is also exempt. Practically speaking, the effort of selling often exceeds the return, so the trustee typically only sells high value items. Debtors who wish to use chapter 7 are subject to a monthly disposable income ceiling determined by a "means test," otherwise they must use chapter 13.
In chapter 13, property is retained and a portion of debt is repaid over three to five years according to a plan. Monthly expenses allowed under the plan is a lifestyle greater than Spartan living, but excludes spa days and vacations. While the debtor may keep property subject to loans, the debtor must afford the loan payments and also make up past-due payments, penalties and interest, lest the property be liquidated.
Creditors in Chapter 13 are paid in a priority scheme, starting with tax authorities, domestic support, and case administration costs. Lenders that retain loans on financed property are paid either through a return of the property or through regular loan payments. Finally unsecured creditors are paid, e.g. such as credit card companies, medical providers, utilities, and the underwater portion of a loan for which the secured property was returned. In a marriage, one or both persons may file for bankruptcy, but if only one files, joint debts are not discharged.
Is there a difference between chapter 7 and chapter 13 in bankruptcy?
After resolving debts through a chapter 7 or 13, most remaining debts are discharged. Some taxes, DUI-related debts, and domestic support payments are not discharged, nor debts acquired in bad faith, i.e. in anticipation of shedding the debt in bankruptcy. Student loans are rarely discharged. After the completion of the bankruptcy process, creditors of discharged debt can no longer attempt to collect. A bankruptcy filing is reported on a credit report for about seven years. Many lenders know an individual fresh out of bankruptcy has fewer debts so is more likely to repay the lender than before the bankruptcy.
The Bankruptcy Code is exceedingly more complicated than described above. Because the process relies on a combination of bankruptcy, federal, and state law, it is advisable to consult an attorney or reliable debt counselor before filing. Few attorneys will take a case pro bono because every client claims an inability to pay. Bankruptcy is an extremely emotional process because one must lay open their financial affairs in a public setting where the court requires copies of all bank and credit statements and pay stubs.
All that said – when is bankruptcy a good option? There is no one-size-fits-all answer to whether it is a good idea to file for bankruptcy due to differing debt instruments, situations, and state laws. While these are big options to weigh, the worst action is inaction.
Contact a New Jersey Bankruptcy Law Lawyer
To schedule your free initial consultation at Tomes & Hanratty, P.C., call us locally at 732-333-0681 or toll free at 1-866-NJ-LAW-FIRM (1-866-655-29-3476). You can also contact our Freehold law firm online.
