Bankruptcy: Legalities and Answers
Bankruptcy is a method of discharging or reorganizing your debts. Under the current law, an individual or husband and wife can file a Chapter 7, 11, 12 or 13 and a business can file a Chapter 7 or 11. Filing a bankruptcy is intended to provide an individual or business with protection from creditors while they liquidate or restructure under court supervision. In most cases, bankruptcy stops foreclosures, repossessions and lawsuits that banks or others may have filed against you. The debtor in bankruptcy is the individual or business who files a Petition in bankruptcy. Creditors are those individuals or businesses who are owed money. A Discharge forgives your obligation to repay certain debt.
This is the most common form of bankruptcy filed whereby you file a Petition listing everything you own, all of your bills, and your monthly income and expenses. The current law provides that you may claim an exemption to protect your property up to certain dollar limits. There are many different exemptions permitted under bankruptcy rules including equity in a house, a car, furniture/clothing, bank account, etc. Some assets such as a pension plan or IRA are not part of your case and your creditors cannot touch them. If you have an asset whose value exceeds a permitted exemption, a court appointed trustee may sell that asset in order to obtain some monies to pay down a portion of your bills. There are some obligations that are non-dischargeable such as child support, alimony, taxes and some student loans. If your assets do not exceed the exemption amounts, then all of your other debts are forgiven. The current court cost to file a Chapter 7 is $200. The attorney’s fee varies depending upon how much time is necessary in your particular matter. Most attorneys charge a flat fee up to $1,500.
A Chapter 13 is similar to a Chapter 7 except here you file a plan where you propose making monthly payments for three to five years to the trustee. Most people generally file a Chapter 13 when they are delinquent on their mortgage, car or tax payments and need time to catch up with those payments, while at the same time making current payments. Sometimes, your trustee payments will also include a share to unsecured creditors such as credit cards and medical bills. This is primarily dependent upon your income and monthly expenses as well as the equity in your assets. To qualify for a Chapter 13 you must have regular income such as wages, business earnings, pension, government benefits or family support and your total debts including mortgages, car loans, credit cards, medical bills, etc., may not exceed $1 million. The current court cost to file a Chapter 13 is $185. The attorney’s fees vary depending upon how much time is necessary in your particular matter. Customarily, the attorney’s fees in a Chapter 13 are higher than a Chapter 7 because there is more involved, including an additional appearance in court by the attorney. Most attorneys charge a flat fee in the range of $1,500 – 2,000. The court must approve your Plan and once approved, you may incur additional attorney’s fees for other work that the attorney provides in your case.
A business or individual may file a Chapter 11 to reorganize or to liquidate. Creditors must vote on a Chapter 11 Plan before it is submitted to the court for approval. The court must approve a Plan providing for the payment of debts while you continue to operate. Chapter 11 is complex and costly requiring you to keep detailed records and submit monthly reports. You also perform the duties of a Chapter 7 or Chapter 13 trustee and have specific obligations. The court cost to file a Chapter 11 is $830. Generally, you must provide a large legal fee retainer to your attorney up front that is billed on an hourly basis, plus expenses. Additionally, you will pay the U.S. trustee a quarterly fee based upon monthly disbursements. Unfortunately, many Chapter 11 cases are eventually converted to Chapter 7 and the assets are liquidated to pay some of the debt.
This form of bankruptcy is for farmers and rarely used in New Jersey. It is similar to, but simpler than, a Chapter 11.
CAN I BE FORCED INTO BANKRUPTCY?
Under certain limited circumstances the answer is “yes.” However, an individual cannot be forced into a Chapter 13, only a Chapter 7 or Chapter 11. This is extremely rare, as it is generally creditors who force businesses into bankruptcy.
WHEN IS BANKRUPTCY A GOOD IDEA?
You should always attempt to work out an arrangement with your creditors to repay or restructure your debts especially if you have a temporary financial problem. If the parties cannot agree, bankruptcy may be your only alternative, especially if a creditor has filed for foreclosure, sought repossession or has sued you. A bankruptcy can stop collection efforts, harassment, foreclosures and judicial sales.
WHEN IS BANKRUPTCY NOT A GOOD IDEA?
You should probably not file for bankruptcy if your debts are small, you will be inheriting property or monies within six months, you are getting property or assets in a divorce proceeding, you expect a large settlement in a personal injury case, or if you have been using your credit cards extensively within the past year or have made expensive purchases. You should also be aware that utility companies often require deposits for people who have account balances and file bankruptcy.
WILL BANKRUPTCY AFFECT MY JOB?
No. Under the Bankruptcy Code, under most circumstances, employers cannot discriminate against a person for filing bankruptcy. The government also may not discriminate against a person who filed bankruptcy.
WHAT PROPERTY CAN BE PROTECTED?
A creditor may have a valid security interest such as a mortgage or car loan on your property. In order to keep these assets, you must continue making payments on these loans. Below is a partial listing of some of the assets that you are entitled to own, again up to a certain value:
- Your house
- Your car
- Your family furniture and appliances
- Your clothing
- Your bank account
- Tools or equipment used in your trade or profession
- Life insurance policies
- Retirement accounts
You must describe all of your assets to your attorney so that he or she can help you to understand which you can keep.
WHAT DEBTS ARE NOT DISCHARGED?
Other than what is discussed above regarding child support, alimony, taxes and student loans, if you improperly transfer an asset, conceal an asset, provide the court with false information, or fail to cooperate with the court, then you may not receive a Discharge of their debts. Additionally, if you intentionally injure someone or injure someone while you are driving drunk, or are charged with a crime such as theft, those debts may not be Discharged. However, under Chapter 13 there are certain exceptions permitting Discharge of some of these obligations. The court or trustee will look at all sales or transfers of property that occurred three months before you filed your Petition and one year if you transfer an asset to a family member, friend or business associate.
If you borrowed money to buy furniture, appliances, electronics, computers, etc., and you want to keep those items, you may consider entering into a Reaffirmation Agreement whereby you promise to continue making payments. You and your attorney must review this Agreement very carefully.
CAN BANKRUPTCY PROTECT YOU FROM FORECLOSURE OR REPOSSESSION?
Yes. A bankruptcy will delay foreclosure, a repossession or lawsuit. In certain cases, you can retain the asset by continuing payments to the creditor or by paying the creditor the current value of the asset and Discharging any obligation that exceeds that value.
WILL BANKRUPTCY HURT MY CREDIT RATING?
Generally the answer is “yes” because your credit record will include a bankruptcy filing for up to 10 years. This record also includes any foreclosures, repossessions, judgments, slow payments, etc., that the creditor can report for up to seven years. Many individuals who file a Chapter 7 and received a Discharge often find that banks are willing to offer them credit because they know that you have no other or limited debt and are a better credit risk. Banks are not required to give you credit if you have a poor credit history, including a bankruptcy.
WHO CAN FILE A BANKRUPTCY?
It is not necessary that your debts are greater than your assets in order to file. However, most individuals and businesses do not file bankruptcy unless their debts exceed their assets. The answer is different in a Chapter 11 or 13 case.
HOW OFTEN CAN I FILE BANKRUPTCY?
Generally, if you receive a Chapter 7 Discharge, you cannot file a new bankruptcy for the next six years. There are different limitations with a Chapter 13 case but you can file a Chapter 13 as often as is necessary. There are restrictions that prevent an individual from re-filing a Chapter 13 after his or her prior case had been dismissed.
WHEN SHOULD BOTH THE HUSBAND AND WIFE FILE BANKRUPTCY?
A husband and wife should file a joint petition be it Chapter 7, 11 or 13 when some of their debts are in both names or each may be partially responsible for the bills. Under the current law, a husband and wife may file one petition thereby saving on attorney’s fees and court filing fees.
Before considering filing a bankruptcy petition you should review your entire financial condition, including all of your bills such as mortgages, car loans, credit cards, medical, personal loans, delinquent taxes, etc. You should also informally determine your assets’ value such as your home, cars, bank accounts, stocks, furniture, appliances, jewelry, etc. You will need information concerning your current income or means of support and your necessary monthly living expenses. You will also need to have current tax returns and review any legal papers that you have received from an attorney or court.
WHAT HAPPENS AFTER FILING A BANKRUPTCY PETITION?
The court sends all creditors that you listed in your petition a notice of your filing with specific instructions and deadlines. About a month after filing, you and your attorney will attend an informal hearing before the trustee called a “Meeting of Creditors”. Although creditors are invited, very few show up except Sears, which sends a representative to negotiate with you and offer you a new credit account. This is useful to re-establishing your credit. The trustee will ask you questions regarding your assets and income that you must answer. A judge is not at this hearing. In most Chapter 7 cases, that will end your involvement in the process and you will receive a Discharge notice in approximately eight weeks closing your case. In Chapter 13 cases, your attorney will appear before the trustee and judge about four months later for your Confirmation hearing. Only under the most unusual circumstances must you go to that hearing. If you are making your trustee payments, then the judge will confirm your plan. After you make all of your payments over the next three to five years, you will receive a Discharge and the court will close your case.
RECENTLY, THE U.S. HOUSE OF REPRESENTATIVES AND SENATE PASSED NEW BANKRUPTCY LEGISLATION WITH THE INTENTION OF SUBMITTING A NEW LAW TO PRESIDENT BUSH FOR APPROVAL. ALL INDICATIONS ARE THAT THIS NEW LAW WILL DRAMATICALLY CHANGE THE CURRENT BANKRUPTCY LAWS PREVENTING MANY INDIVIDUALS FROM FILING CHAPTER 7 AND DISCHARGING THEIR DEBTS SUCH AS CREDIT CARDS AND MEDICAL BILLS. THE LAW’S INTENT IS TO FORCE YOU INTO FILING A CHAPTER 13 AND REPAYING A PORTION OF YOUR DEBTS OVER A PERIOD OF THREE TO FIVE YEARS. IF YOU ARE CONSIDERING FILING BANKRUPTCY YOU SHOULD READ THE NATIONAL BUSINESS NEWS AND WATCH THE EVENING NEWS ON A REGULAR BASIS TO LEARN WHETHER A BILL HAS BEEN PASSED AND WHETHER PRESIDENT BUSH HAS SIGNED IT INTO LAW. IT IS OUR UNDERSTANDING THAT THE NEW LAW WILL CONTAIN A SIX-MONTH WINDOW BEFORE IT BECOMES EFFECTIVE. HOWEVER, WE WILL NOT KNOW FOR SURE UNTIL AFTER THE PRESIDENT SIGNS THE BILL INTO LAW. IF THE LAW CONTAINS THIS WINDOW, THEN YOU SHOULD IMMEDIATELY CONSULT WITH A BANKRUPTCY ATTORNEY REGARDING YOUR OPTIONS. IF YOU WAIT TOO LONG, YOU MAY HAVE NO CHOICE BUT TO FILE A CHAPTER 13.
THE CURRENT LAW PROVIDES YOU MANY BENEFITS THAT YOU MUST DISCUSS WITH A BANKRUPTCY ATTORNEY. EVEN IF YOU DO NOT WANT TO FILE, CALL AN ATTORNEY FOR INFORMATION. WE WILL BE HAPPY TO SPEAK WITH YOU BRIEFLY OVER THE PHONE AND GIVE YOU SOME HELPFUL SUGGESTIONS.
Note that the law is continually evolving and changes regularly. This website is not meant to be a comprehensive statement of any area of the law, but is intended only to afford some familiarity with basic terms and concepts in New Jersey. You should consult a lawyer for more detailed information. All materials on this website are the property of Drazin and Warshaw, P.C., copyright 2001, and are not to be used without written permission