Qualifying for Chapter 7 Bankruptcy

With the October 2005 amendments to the Bankruptcy Laws, you may wonder whether you qualify for a chapter 7 bankruptcy in New Jersey. Many people think they have “too little” or “too much” debt which makes them ineligible. Chapter 7 bankruptcy relief, however, is available irrespective of the amount of debt.

To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity. Most individuals that qualify for a chapter 7 bankruptcy will choose that option because it provides a “clean slate” immediately. Several factors that will influence your ability to file a chapter 7 bankruptcy include:

Ownership of Property

New Jersey does not have a homestead exemption. This means that your property is not exempt from attachment by creditors. If you have too much equity in your property, there will be a forced sale. However, New Jersey allows individuals to choose between the state exemptions and Federal exemptions for exempting certain property. We typically recommend the federal set because it provides for larger exemptions. The federal exemptions allow individuals to exempt $20,200 for real property (including co-op and mobile home) and $40,400 for joint (husband aRebuilding Credit After Bankruptcynd wife).

We will recommend that you obtain an appraisal to determine how much equity you have in the property (if you do proceed with the filing, the bankruptcy trustee will require a recent appraisal to determine the value of the property). If you have more equity than allowed by the federal exemptions, we recommend that you choose an alternative to a chapter 7 bankruptcy unless you do not have an intention to keep the property. A chapter 13 bankruptcy will be an option you can explore.

Previous Bankruptcy Filings

Under the new bankruptcy laws, if you have filed a chapter 7 bankruptcy in the previous 8 years, you cannot file again. In other words, you have to wait 8 years between filings. We have seen countless cases dismissed because individuals are unaware of this requirement. The judge has absolutely no discretion or leeway in providing an exception to this rule.

Our firm utilizes the NJ PACER system to do a thorough search on previous filings by our clients. Statistically, most individuals that are filing for a chapter 7 bankruptcy in NJ are doing so for the first time.

Assets

As mentioned above, New Jersey allows individuals to select the federal exemption set to keep their assets. Even the federal set of exemptions has limitations. If you have assets that are valued at more than the exempt amount, you will lose the asset. For example, if you own a car that is valued at $25,000 (fully owned), you will lose that asset. The federal exemptions only allow you to exempt $3225.

Many individuals that have too many assets will opt not to file for a chapter 7 bankruptcy for the fearing of losing them.

Income

The 2005 amendments to the Bankruptcy Laws have provided for a “means test”. If an individual’s income is above the state’s median income, they are subjected to an income based test. This test will compare the income to debt and determine whether there is a presumption of abuse. If there is a presumption of abuse, it can only be rebutted by “special circumstances”. As a general rule, an individual’s average monthly income for the 6 months preceding the filing of the chapter 7 bankruptcy must be less than the New Jersey’s median income.

Statistically, most individuals have income that falls below the state’s median income and therefore are not subject to the means test. For cases filed after March 15, 2009 the median family income in New Jersey is the following:

For updated statistics, please review the U.S. Department of Justice website

Individuals, Partnership, Corporation

Although a partnership and corporation can file a chapter 7 bankruptcy, it should be noted that these entities cannot receive a chapter 7 discharge. One of the primary purposes of filing a chapter 7 bankruptcy is to discharge the debt to obtain a fresh start. Unfortunately, this is not available to partnerships and corporations.

Residency/Domicile

Under the new bankruptcy law, the Congress wanted to prevent individuals from “forum shopping”. In other words, Congress did not want individuals moving to another state that has more lenient bankruptcy laws (provides for more exemptions). As a result, the new law has residency/domicile requirements.

Specifically, if an individual has not been domiciled in a state for 2 years prior to the filing of the chapter 7 bankruptcy, the individual must choose the exemptions of the state in which they were living for the better part of the 180-day period prior to 2 years before your filing date.

Credit Counseling and Financial Management Course Requirements

The 2005 amendments to the Bankruptcy Laws require individuals to obtain two certifications which acknowledge the completion of informational courses. The ultimate goal of these courses is to provide individuals with knowledge about alternatives to bankruptcy and how to avoid financial difficulty in the future. The first course must be taken within 180 days prior to the filing of the bankruptcy petition from an approved credit counseling agency. The second course must be taken and the certificate of completion filed within 45 days after the date first set for the Section 341 meeting. The failure to complete these courses will result in the case being closed or dismissed without a discharge.

The debtor may file a motion for exemption of this requirement for one of the following reasons:

Please review our links page for information on these courses. Our firm provides an opportunity to complete these courses in our office for the convenience of our clients.

Miscellaneous

An individual cannot file under chapter 7 or any other chapter if during the preceding 180 days a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court, or the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.

Bankruptcy Timeline

The timeline below outlines several important dates in the NJ chapter 7 bankruptcy process:

8 years
If you have filed a previous chapter 7 bankruptcy in the last 8 years and received a discharge, you are ineligible to file again. You must wait 8 years between chapter 7 bankruptcy filings if you have received a discharge in the previous filing.

6 years
If you have filed a previous chapter 13 bankruptcy in the last 6 years and received a discharge you are ineligible to file for a chapter 7 bankruptcy. The exception to this rule is if you paid at least 70 percent of your allowed unsecured claims and your plan was proposed in good faith, you will be eligible to file a chapter 7 bankruptcy.

1 Year
If a prior chapter 7 bankruptcy case was dismissed within the 1 year time period of filing the current chapter 7 bankruptcy petition, the automatic stay period is limited to 30 days. This means that your creditors can pursue collection efforts after the expiration of this 30-day time period. The exception to this is if you can prove the chapter 7 bankruptcy was filed in good faith.

180 Days
180 days prior to filing of the bankruptcy petition, you must take a credit counseling course from an approved provider. This course provides debtors with alternatives to bankruptcy and knowledge on how to prevent falling into financial hardship again. Our office provides clients an opportunity to complete this requirement in the office. We recommend using www.cccsinc.org for completion of the course requirement. Please review the links page for a link to all approved providers.

If you fail to obey court orders or you voluntarily request a dismissal, you must wait 180 days prior to filing another chapter 7 bankruptcy petition.

Filing of Your Bankruptcy Petition

We highly recommend that you hire a qualified attorney to file a bankruptcy petition. The bankruptcy laws are very complicated. Your attorney will prepare and file the bankruptcy petition. As a standard practice, we initially obtain your credit report to ensure that all debts are included in your petition. Once we receive the necessary documents from you, our firm will typically file your petition the same day.

The chapter 7 bankruptcy process begins with the filing of a petition with the appropriate New Jersey bankruptcy court. Our firm files all petitions through the NJ court’s electronic ECF system. As soon as your case is filed, the court will enter an Automatic Stay order which prevents any collection efforts by creditors. This will put a stop to all threatening calls, letters, etc. The court will assign a trustee to oversee your case and will send a notice to all the creditors listed on your petition to inform them of your filing. You and your attorney will be notified of the date set for the meeting of creditors.

Approximately 6 Weeks After Filing

Currently, in New Jersey, it typically takes about 6 weeks after the filing of your bankruptcy petition to have a date set for the meeting of creditors. Seven days prior to this meeting, you are required to provide the trustee with your tax returns for the previous 3 years and proof of your income. Our firm obtains this information prior to filing and provides the trustee with the information within the required timeframe.

Review our page Chapter 7 Court Hearing for more information on the hearing.

45 Days After Meeting of Creditors

Within 45 days after the first date set for the meeting of creditors, the debtor must complete a personal financial management instructional course and file the certificate with the court. We recommend using www.123debtor.com for completion of the course requirement. Please review the links page for a link to all approved providers.

Receipt of Discharge

After filing the certificate of completion of the financial management course, the debtor will be granted a discharge of their debts (unless the trustee or creditors object within a required timeframe). The receipt of the discharge signals the completion of the chapter 7 bankruptcy. It typically takes several weeks after the filing of the certificate of completion to receive the discharge.

If You Are Being Sued

After a default, credit card companies will pursue collection efforts and will eventually file a complaint against you in the New Jersey county in which you reside. If you have made the decision to file for a chapter 7 bankruptcy, you may not need to file an answer to the complaint. You should consider filing an answer only if you have a defense or if you want to buy more time to evaluate your options. There are, however, certain category of debts that cannot be discharged in a bankruptcy and it may be important to file an answer. For example, if the lawsuit is alleging fraud or is alleging intentional tortuous act or injury, it is not dischargeable in bankruptcy. If you have a defense, we strongly suggest that you file an answer.

If you fail to answer the lawsuit or if you lose the suit, there will be a judgment against you. The creditor will attempt to collect on that judgment by submitting an application to attach to your bank account, garnish your wages, etc.

The filing of a chapter 7 bankruptcy will provide you the protection of the automatic stay. All collection efforts by the creditors will cease. If you are granted a discharge as to that debt, the judgment will be wiped out. Similarly, other judgments for unsecured debt can be wiped out.

If you are being sued for a secured debt (ex. car loan), the creditor will make an application with the bankruptcy court to grant a relief from the automatic stay. This relief will allow the creditor to cease the collateral.

Since the filing of a chapter 7 bankruptcy stops a lawsuit and wipes out a judgment, it is a very powerful tool. Many individuals are motivated to file a chapter 7 bankruptcy to rid themselves of a lawsuit or judgment. If you are being sued, contact us for a free evaluation to determine if a chapter 7 filing is the best option for you.

Property You Can Keep

When filing for a chapter 7 bankruptcy, it is important to know what property you can keep. This property is called “exempt”. The bankruptcy code recognizes the needs of individuals and provides for exemptions. New Jersey allows you to choose between the set of state exemptions and federal exemptions. We typically recommend using the federal exemptions because they provide for a larger amount of exempt property than the New Jersey set. If you are married and filing jointly, the amount of the federal exemptions doubles.

Your property will be listed on the bankruptcy petition. It will include a description of the property, the market value, and the law authorizing the exemption of the property. As soon as your bankruptcy petition is filed, all your property becomes part of the “bankruptcy estate”. The trustee, however, will not take physical possession of your property during this time. Additionally, your creditors have 30 days after the meeting of creditors to object to any exemptions on your petition. The burden falls on your creditors to prove that you have improperly claimed the exemption.

1. Your Home
New Jersey does not have a homestead exemption. This means that your property is not exempt from attachment by creditors. If you have too much equity in your property, there will be a forced sale. The federal exemptions allow individuals to exempt $20,200 for real property (including co-op and mobile home) and $40,400 for joint (husband and wife).

We will recommend that you obtain an appraisal to determine how much equity you have in the property (if you do proceed with the filing, the bankruptcy trustee will require a recent appraisal to determine the value of the property). If you have more equity than allowed by the federal exemptions, we recommend that you choose an alternative to a chapter 7 bankruptcy unless you do not have an intention to keep the property. A chapter 13 bankruptcy will be an option you can explore.

2. Your Car
By looking at the Federal Exemptions listed below, you will see that it allows you to retain a car that is worth up to $3225. This does not necessarily mean that you will have to give up a car that is valued at more than this amount. This is because the Federal Exemptions also allow for a wildcard exemption of $1075 and $10,125 of unused homestead exemption. Therefore, if you do not own a home, you can exempt a car that is valued up to $14,425. If you have multiples cars, you can split this amount amongst those cars.

If you are still making payments on a car or leasing a car, the above exemptions do not apply. On your bankruptcy petition, you can list whether your intention is to keep the car or give it back. If you decide to keep the car, your lender will prepare a reaffirmation agreement which will be signed by you and approved by the bankruptcy judge. This reaffirmation agreement is between you and the lender and it states that you will continue to make payments. On this reaffirmation agreement, you must specify your income and expenses to convince the judge that you will be able to afford making the payments post-bankruptcy. If you cannot afford to make the payments, the agreement will not be approved.

3. Other Assets
There are also exemptions for household goods and furnishings, retirement funds, clothing, jewelry, etc. Below is a list of the federal exemptions and of the New Jersey state exemptions.

A. Federal Exemptions

Bankruptcy Court Hearing “Meeting of Creditors”

As explained in our bankruptcy timeline, the meeting of creditors in New Jersey (often referred to as the section 341 meeting) is scheduled approximately 6 weeks after the filing of the chapter 7 bankruptcy petition. Depending on where you reside in NJ, your hearing will be scheduled in either Newark, Trenton or Camden.

What to Bring to the Meeting?

You must bring a photo ID (a driver’s license or passport) and your social security card (or other proof of your social security such as a W-2, signed tax returns, payroll stub). If you have not provided our office with the tax returns and proof of income, you must bring these documents with you to the hearing.

Who Must Attend?

If you have filed an individual petition, you must attend with your attorney. If you have filed a joint petition, both you and your spouse must appear with your attorney.

Will Creditors Appear?

Since this is a “meeting of creditors” it gives the creditors the opportunity to appear. In “no asset” bankruptcy cases, the creditors rarely appear.

Are the Meetings Private?

No. The creditor meetings are not private. You will be in a meeting room with others that have filed for bankruptcy and may listen to your meeting. In our experience, the trustees usually speak with a soft tone to prevent others from listening to your case and to prevent any embarrassment to you.

How Long Does the Meeting Take?

Once your name is called, the meeting lasts approximately 5 minutes. There are, however, a very large amount of cases being filed in New Jersey. As a result, it may take up to 1 hour for your case to be called. It is difficult to answer this question because the it is dependent on the volume of cases being heard on a particular day. We suggest that you plan to spend at least 1 hour at the hearing room.

Is There a Dress Code?

No.

What Will the Trustee Ask Me?

The following is a list of questions the trustee may ask you. Answer the questions truthfully and your hearing will be complete in approximately 5 minutes:

State your name and address for the record.

Please provide me with your photo ID and proof of social security.

Is that your signature on the bankruptcy petition? Did you review this petition with your attorney prior to signing? Does is accurately represent your assets and liabilities? Have there been any changes since the filing of the bankruptcy petition?

Have you previously filed a bankruptcy?

Rebuilding Credit After Bankruptcy

Most people shy away from filing a chapter 7 bankruptcy because they fear the negative impact on their credit. A bankruptcy filing will remain on your credit report for 10 years. This, however, should not prevent you from obtaining credit and rebuilding your financial health. Most debtors that have unsecured debt will have a positive effect on their credit score post-bankruptcy. The positive impact results from having a “clean slate” and from the fact that creditors are aware of the 8-year ban on you refiling a bankruptcy. This will make you more creditworthy. Our firm obtains credit reports from www.cinlegal.com which includes an estimated 12-month post-bankruptcy credit score. This will give you an indication on what to expect after receiving a chapter 7 bankruptcy discharge.

Use Credit to Rebuild Credit

The most common error that debtors make after filing for bankruptcy is staying away from credit. We meet a lot of clients that tell us “credit got us into this mess, and we are going to stay away from it for a long time”. The key to rebuilding credit is to obtain and use credit. You must show creditors that you are creditworthy and capable of repaying your debts. You may initially pay higher rates, but this will help you in the long run.

Clean Up Your Credit Report

Post-bankruptcy, you must clean up your credit report. Obtain a copy of your credit report after receiving your chapter 7 bankruptcy discharge and make sure that all debts included in the chapter 7 bankruptcy are properly listed. If the accounts show open and overdue, contact the credit bureaus and insist that they change it immediately.

Installment Loans

These types of loans will help you rebuild your credit quickly. These include car loans, student loans and mortgages. You may want to obtain a car loan from a sub-prime lender and make sure that all the payments are made on time. Make sure the lender reports the timely payments to the credit bureaus. Generally, student loans cannot be discharged in a chapter 7 bankruptcy. Continue to make your payments on time and try to pay an amount larger than what you owe. Similarly, paying your mortgage on time will help you rebuild your credit.

Revolving

This type of credit mainly includes credit cards. You will be offered credit cards after your bankruptcy is complete. We suggest that you open one or two and make sure that all payments are made on time. Do not use the entire amount of the available credit. Light usage of the credit cards will help build your credit score. There are also secured credit cards which will provide you credit up to the amount that you deposit at the issuing bank. These credit cards will help build your credit.

It is important to note that any negative effect on your credit due to a bankruptcy filing will not last forever. You must take the necessary steps to ensure that you rebuild your credit.

You may be wondering whether a chapter 7 or a chapter 13 bankruptcy is the right option for you. A chapter 7 is a liquidation bankruptcy where most debts are discharged and you never have to repay them. A chapter 13 is a reorganization bankruptcy where you must repay the debts (or a reduced amount) over a 3 to 5 year period. Generally, if you have assets which are exempt under federal or state exemptions and little or no money left at the end of the month, you should file a chapter 7 bankruptcy. If you have significant assets that cannot be exempted and you have excess income at the end of the month, you should file a chapter 13 bankruptcy.

Famous People Who Have Filed for Bankruptcy

Below is a list of famous people who have filed for bankruptcy. A majority of these listed individuals had utilized the bankruptcy process to obtain a fresh start and to rebuild their financial position. This list is meant to show that you are not alone. In 2008, there were over 1 million bankruptcies filed in the United States!

Many people have a misconception that the October 2005 amendments to the Bankruptcy Laws make it very difficult to qualify for a chapter 7 bankruptcy. Most individuals, however, still qualify under the new laws. We encourage you to contact us for a free consultation to decide whether you qualify.

Contact Aditya Surti Esq. at 201-518-6642201-518-6642 to schedule an appointment at the Jersey City Office or at 732-750-1269732-750-1269 to schedule an appointment at the Woodbridge Office. You can also email us at info@surtilaw.com to schedule an appointment. Appointments can be available on weekends and nights and evenings.

We represent clients in Middlesex County, Hudson County, Union County, Bergen County, Atlantic County, Camden County, Mercer County, Monmouth County, Morris County, Ocean County, Passaic County, Somerset County, Warren County and Burlington County of New jersey.

In New York, we represent clients in Manhattan, Bronx, Brooklyn, Staten Island and Queens.