How a Chapter 7 Bankruptcy Works In New Jersey
Key individuals in a bankruptcy are the debtor(s), the trustee and the creditors. The individual who has filed for any bankruptcy case is called a “debtor.” An individual who is assigned to review, administer and evaluate your case to ensure you meet the specifications for the Chapter 7 Bankruptcy Law is called the “trustee.”
The goal of a Chapter 7 debtor is to obtain an order of discharge. A discharge is an order from the court that shows the debtor holds an elimination of debt. Should the trustee believe that the debtor has met all the the requirements for a Chapter 7, he/she will recommend to the court and the judge to allow for a discharge to be given to the debtor. For best practice, the debtor’s attorney should not file this type of bankruptcy unless the debtor meets all of the requirements.
An individual would file a Chapter 7 Bankruptcy to discharge unsecured debt. Some examples of unsecured debt would be credit card, health care, personal loan debt and other non-specified items that do not require an item of collateral. The debtor is required to report all assets and liabilities, including all debt as well as creditors on the Bankruptcy petition. You may not pick and chose which creditors to include as the law will determine how you will treat each type of creditor.
The Chapter 7 laws specify which debt is dis-chargeable, meaning eliminated, and which debt is not dis-chargeable. Should you meet all of the requirements under a Chapter 7, which is best scenario, there may still be certain debt that is not discharged.
The following is a list of differences between dis-chargeable and non-dis-chargeable debt.
Dis-chargeable Debt: (Remember, this is debt that can be eliminated.): Credit card, personal loans, any type of medical bills such as doctor or healthcare bills; depending on the situation none, some or all income tax liability; mortgage, auto loans if you are surrendering your automobile, etc.
Non-Dis-chargeable Debt: (Debt that cannot be eliminated.): Student loans insured by the government; depending on the situation none, some or all income tax liability, auto loans if keeping the automobile with a signed reaffirmation agreement; debt incurred by fraud, fines, etc.
Most commonly, a person would file for Chapter 7 Bankruptcy protection because he/she is unable to continue to pay their unsecured debt. Should the individual meet the Chapter 7 requirements at the time of filing they will be granted a discharge or dismissal of the debt.
How a Chapter 7 Will Affect Home Ownership
In most circumstances a debtor is permitted to keep their home if they desire to do so. However, if the fair market value of the home is substantially more than the liens to include the mortgage, the trustee may have a right to sell the house to repay part of the debt in the bankruptcy. To avoid this a debtor would not file a Chapter 7, they may wish to file a Chapter 13 to protect this asset.
If a debtor is however, behind on their mortgage payment, the Chapter 7 will not protect the individual from the loss of their home through foreclosure. The court will permit the mortgage company to proceed with the foreclosure actions and a sheriff’s sale.
A Chapter 7 will allow the debtor to surrender (give up) their home whether or not the debtor is behind on the mortgage payments. Should the debtor surrender the home and there is no substantial value to the home (equity), the trustee will not sell the house, usually the trustee will allow the mortgage company to move forward and complete the foreclosure processes.
In unusual circumstances, the debtor may wish to allow the trustee to sell their home or other assets for the purpose of receiving a payment from the excess proceeds of the sale. The proceeds will be designated to any other debt that is on the discharge sheet or if no other debt is repayable the moneys will be granted to the debtor.
How a Chapter 7 Bankruptcy will affect your Automobile
The prior explanation with regard to saving your home is the generally the same for your automobile. You are allowed to keep or surrender a financed or leased automobile. Should you not be current on your payments a Chapter 7 will not stop a repossession. If you are however, current with your financial obligations to the automobile, i.e. your lease/ loan payments and the automobile has no substantial value, you may be able to keep it. Should you decide to keep the financed automobile there will be an addition requirement of the Chapter 7; the debtor must be able to make future monthly finance payments without any fore scene hardships. This means if the court, the judge and the trustee agree the debtor can afford the payments then they will allow the debtor to keep the vehicle.
The following are the requirements that must be met in order for the debtor to obtain a Chapter 7 discharge.
The first requirement is Assets.
The debtor must provide a list and value of all personal and real estate assets, for the trustee and the court. This list must include all of the said listed: bank accounts, furniture, houses, automobiles, jewelry, investments, stocks, bonds, claims or law suits against others, etc. Retirement accounts are however able to be excluded and will not be considered by the court or trustee.
In the unlikely event that the debtor has an asset with substantial value, that exceeds the lien amounts, the trustee is granted the permission to sell the asset. What this means is that the debtor is allowed to only deduct specific amounts from the value of each asset. These specific amounts are referred to as exemptions. So in legal terms this means that the law provides the guidelines on exemption amounts for each type of asset. Should the exemption amount total more than the value of the asset minus the amount of the lien or liens, if any, the debtor may keep the asset.
How A Debtor Is Able To Keep Their Assets According To The Court Ruling
The court reviews the following analysis to determine whether the debtor will be allowed to keep their automobile in a Chapter 7 Bankruptcy. The court will deduct the replacement value of the automobile, the financing payoff amount and any other liens tied to the vehicle. Thereafter, the court will deduct the total amount of the allowable exemptions. Should the balance after deducting these items is $0.00, the debtor will be allowed to keep the vehicle.
For a home the analysis differs slightly but the same outcome applies. In order to make the determination for the debtor to keep their home in a Chapter 7 Bankruptcy the analysis is as follows. The fair market value of the home must be obtained. The court will deduct from this value: the mortgage(s) payoff amount, any other secured liens tied to the home and an amount equal to ten percent of the estimated fair market value, representing costs. Thereafter, the court will deduct the exemption amount for the residence. Should the balance after deducting these items is $0.00, the debtor will be allowed to keep the home.
Some exemptions are as follows:
Furnishings and household goods, collectables and clothing $10,775.00
Furs and Jewelry $1,350.00
Auto $3,225.00
Residence $20,200.00
Any property $1,075.00
Any property (unused exemption from your residence) $10,125.00
From personal experience, about 90% of the individuals considering filing Chapter 7 Bankruptcy are able to keep all of their personal property. The trustee may sell an asset if it is not completely exempt and/or protected by the law. If there is a nominal amount available after subtracting the exemptions, this is when the trust may not decide to sell the asset. The debtor should be advised of this matter prior to filing; allowing ability to make an informed decision as to file or not to file. If the property is not full exempt the other option would be to file a Chapter 13 Bankruptcy in order to keep the asset.
The Second Requirement – Means Test
The Means Test is the most significant new requirement under the recent bankruptcy law changes.
The debtor(s) gross, meaning before tax, household income for the six months prior to filing for bankruptcy is compared to the average gross income of a household of the same size in the same state where the debtor resides. If the debtor(s) gross household income is below the average gross income of a household similar then, the debtor meets this requirement. Thus so, if the debtor meets this requirement then the law presumes the bankruptcy was filed in good faith.
If in fact the debtor(s) gross income for six months prior to the bankruptcy filing is higher than the average gross income then the filing may or may not meet this requirement. In certain circumstances if the household’s gross income is above the average; the bankruptcy will still said to be filed in good faith if and only if the debtor’s months household income results in a “0” or less than “0” after deducting the following items from the gross household income:
- Income Taxes
- Allowable pay stub deductions
- Allowable living expenses, based on the Internal Revenue Service’s Laws. These laws include items such as: allowable household expenses, allowable food and living expenses, allowable transportation expenses, allowable clothing expenses, allowable auto operating expenses, etc.
- Insurance payments
- Mortgage payments
- Auto finance payments or leasing payments, etc.
Please understand that this list of expenses is not a complete list and may also vary depending on the state of residence. Furthermore, some of these may not be your actual expenses, but the expenses that are allowable according to the I.R.S. guidelines.
Should the gross income result in an amount above $0.00 after deducting these allowable items, the Chapter 7 is deemed to have been filed in bad faith. If the court determines the case was filed in bad faith, the individual would be unable to file for Chapter 7 protection.
In reference to the relevant income period required, the six month period will begin on the fist pay of the sixth month prior to the month filed and will end with the last pay of the month prior to filing. This being said, should the petition be filed on February of 2008, the six month period will star on August 1, 2007 and end with the last pay for January of 2008. Please also not that certain types of income may not be included.
The application may still vary based on the trustee and judge who is assigned to your case. This reason is mainly based on the means test and is application has not yet been fully clarified and is not clearly defined by the courts and trustees.
Which individual represents the household would be one issue that is not yet settled. The test does require all persons living in the home to be included however, there maybe others whom are not living in the home contributing to the household’s gross income on a continuous and monthly basis. These types of contributions must be included in the test. Understand that in every case, should a husband and wife be living together and are not separated, the income of both spouses are included even when only one spouse files for bankruptcy.
The average income per the IRS is based on the U.S. Census Bureaus for each state. The IRS National Standards govern such items food, clothing, personal items, housekeeping supplies, and entertainment. The IRS Local standards govern housing, utility and transportation costs. The list of these IRS standards can be found at www.irs.gov
Present Income and Expenses (Third Requirement)
In order for this requirement to be met, the present household monthly net, meaning after tax, income must be , less than your monthly necessary, meaning actual, but be aware these expenses must be reasonable. These types of expenses will include your living expenses only and not payments to your unsecured creditors, meaning credit card debt, personal loans and doctor’s bills.
These monthly expenses include, but are not limited to the following: mortgage, rental, real estate taxes, housing insurance, food, clothing, water, sewer, medical, auto, transportation, auto insurance, child support, child care, etc. All of these expenses must be reasonable based on the number of persons in the household and other special circumstances. With similarities to the means test, the household income includes the husband and wife’s income and expenses, regardless if one or both spouse’s are filing for bankruptcy.
Be advised that there are two basic differences between this and the means test requirement. The first difference being that the means test based on the number of people in a household and this requirement the expenses represent the actual, but reasonable expenses for the household that are allowable under the IRS laws.
The second difference being that according to the means test, the income of a household must be represented for six months prior to the actual bankruptcy filing. Based on this requirement income is going to be based on the amount earned immediately prior to and as of the time of filing. Be advised that the trustee may also consider the debtor’s foreseeable future income. This particular requirement may not include household members’ income that is included under the means test.