CHAPTER 7 FREQUENTLY ASKED QUESTIONS
WHAT IS A DEBTOR?
A debtor is someone who owes money to someone else.
WHAT IS A CREDITOR?
A creditor is someone who is owed money by a debtor.
WHAT IS CHAPTER 7 BANKRUPTCY?
Chapter 7 bankruptcy is otherwise known as liquidation bankruptcy or straight bankruptcy. The bankruptcy court assigns a trustee to oversee the case. The trustee is responsible for collecting all of the debtor’s property that is not exempt, and to sell or otherwise liquidate this property. The money obtained from the sale is used to pay creditors based upon certain priorities. The Federal bankruptcy laws are commonly applied in New Jersey Chapter 7 bankruptcies, often resulting in cases where the debtor does not lose any property. These are considered “zero asset” cases, and are often the intended result when an experienced bankruptcy attorney consults with prospective Chapter 7 clients on how to handle a debt crisis. The bankruptcy court issue is a discharge order for all remaining debt, which means that the debtor is no longer responsible for paying back the listed debts. There is a variety of issues that have to be dealt with in many Chapter 7 cases. Through my free consultation, you can see how I propose to deal with your potential Chapter 7 case, or other course of action that I may recommend.
WHAT ARE BANKRUPTCY EXEMPTIONS?
While the concept of Chapter 7 involves the liquidation of a debtor’s property, certain property is exempt from liquidation. The simple concept is that bankruptcy is not intended to leave the consumer with absolutely nothing left. The majority of New Jersey Chapter 7 consumer cases use the exemptions provided by the United States Bankruptcy Code. New Jersey law provides for exemptions, but often they are not as good as the Federal bankruptcy exemptions. The following or a list of commonly used Federal bankruptcy exemptions:
| TYPE OF PROPERTY | INDIVIDUAL | JOINT |
|---|---|---|
| Equity in real estate (limited to residence) | $21,625.00 | $43,250.00 |
| Wild Card (only applicable to the extent not used to exempt residential real estate equity) | $10,825.00 | $21,650.00 |
| Wild Card (Aggregate Interest in Any Property) | $1,150.00 | $2,300.00 |
| Motor Vehicle | $3,450.00 | $6,900.00 |
| Household Goods and Furnishings | $11,525.00 | $23,050.00 |
| Jewelry | $1,450.00 | $2,900.00 |
| Tools of Trade-Books and Equipment | $2,175.00 | $4,350.00 |
| Life Insurance Policy With Cash Value | $11,525.00 | $23,050.00 |
| Personal Injury Compensation Payments | $21,625.00 | $43,250.00 |
These exemptions are accurate as of early 2011. In addition there are unlimited exemptions available for the following items:
- Life Insurance Policy – Unmatured
- Health Aides
- Government Benefits: Social Security, Unemployment, Public Assistance
- Veterans Benefits
- Disability, Illness or Unemployment Benefits
- Alimony and Child Support
- Pensions
- Crime Victims Compensation
- Wrongful Death Payments
- Life Insurance Payments Needed for Support
- Lost Earnings Compensation Payments
- Certain Retirement Accounts Defined by the Internal Revenue Code
I offer a free consultation to all prospective bankruptcy clients, and in this consultation I will be able to advise you as to the applicability of the available exemptions to your situation.
WHO QUALIFIES TO DO CHAPTER 7 BANKRUPTCY?
Any individual who legally resides in the United States may file for Chapter 7 bankruptcy. Individuals who do business in the United States our own property in the United States may also be eligible to file for Chapter 7 bankruptcy.
IF I AM MARRIED DOES MY SPOUSE HAVE TO DO CHAPTER 7 BANKRUPTCY WITH ME?
Someone who is married may elect to do Chapter 7 bankruptcy individually or jointly with his or her spouse. In certain situations it is better to do an individual Chapter 7 bankruptcy, and in other situations it is better to do a joint Chapter 7 bankruptcy with your spouse. I will evaluate your particular situation and recommend the best type of Chapter 7 bankruptcy filing for you.
WHAT DOES IT COST TO DO CHAPTER 7 BANKRUPTCY?
In 2011 the Court filing fee is $299.00. In addition you will pay approximately $70 to $100 for required credit counseling and financial management. My legal fee plus out-of-pocket costs for Chapter 7 bankruptcies is between $1200.00 and $1600.00 depending on the complexity of the case. I believe these fees and costs are less expensive than most bankruptcy attorneys will charge.
CAN I PAY THE COSTS TO DO CHAPTER 7 BANKRUPTCY IN INSTALLMENTS?
I accept payment plans wherein you can retain certain services for payment of $300.00 or more to start. For this payment I will do my best to temporarily stop the creditors from harassing you. Thereafter, you must make regular payments on till the total amount is paid in full. Your Chapter 7 bankruptcy will not be filed on till the total amount due is paid in full.
WHAT IS CREDIT COUNSELING?
In accordance with the new bankruptcy laws that came into effect in October of 2005, you are not eligible to file for bankruptcy until you complete credit counseling from an approved credit counseling agency. Many of these agencies will conduct the credit counseling by telephone or online, and it will generate a Certificate of Credit Counseling which must be filed with the Bankruptcy Court along with your Chapter 7 bankruptcy case. In addition, you will also be required to complete a Debtor Education or Financial Management Course, prior to the issuance of your Discharge of Debtor. Typically, you go back to the same credit counseling agency to complete the second part. The cost of credit counseling is approximately $70 to $100.00.
WHAT IS THE AUTOMATIC STAY?
The automatic stay is a provision in the United States Bankruptcy Code that prohibits creditors from making or continuing any attempts at collecting debts. The automatic stay is effective immediately upon the filing of a bankruptcy case, and in most cases lasts until the case ends with the Order discharging the debts of the debtor. The automatic stay will stop wage executions, bank account levies, collection lawsuits, repossessions, foreclosures, nasty letters and harassing telephone calls that are routinely made to debtors. Creditors that violate the automatic stay provision are subject to punishment. With the exception of a few usually unintended situations, all creditors respect the automatic stay and will stop their attempts at collecting debts.
WHAT IS THE MEANS TEST?
The means test was developed and implemented with the changes to the United States Bankruptcy Code that went into effect in October of 2005. It is intended to prohibit individuals who make a substantial amount of money from filing bankruptcy. Since its implementation, the large majority of people who have consulted with me for Chapter 7 bankruptcy have qualified immediately under the first and easiest part of the means test. The first part of the means test states that a debtor qualifies to do Chapter 7 bankruptcy if the debtors’ gross income for the six months immediately prior to the filing of a bankruptcy is less than the state median income for a debtor’s family size. As of the beginning of April, 2011 to state median income in New Jersey is as follows:
| One person household | $59,060.00 |
| Two person household | $70,680.00 |
| Three person household | $85,573.00 |
| Four person household | $101,106.00 |
| Five person household | $108,606.00 |
| Six person household | $116,106.00 |
| Seven person household | $123,606.00 |
| Eight person household | $131,106.00 |
In the event you operate a business, or are otherwise a 1099 independent contractor, you may be able to deduct expenses from your gross in order to establish your income for the means test calculation.
In the event your income is above the state median income, you may still be able to qualify to do bankruptcy by qualifying under the second part of the means test. This is a more complicated test which takes into account your gross income, and then allows you to deduct expenses based upon standard IRS allowances. You are allowed to modify some of these allowances, and add other deductions in order to see whether you will qualify. I offer to my prospective clients a free service of analyzing their financial situation to see if they qualify, at no charge.
IF I DO CHAPTER 7 BANKRUPTCY, WILL I LOSE MY HOME?
If you file for Chapter 7 bankruptcy, you will be able to keep your home if you are not behind in your mortgage payments, and the equity you have the home will be low enough so that the trustee will not be willing to sell it to satisfy your debts. Chapter 7 bankruptcy will not fully protect you from foreclosure if you’re behind in mortgage payments. In addition, you are allowed to exempt up to $21,625.00 of equity for an individual and $43,250.00 for a joint filing. These exemption numbers are effective in the beginning of 2011. Your bankruptcy attorney is allowed to calculate your equity by first obtaining an appraisal or other legitimate market analysis of your property, giving its present market value. From there you deduct the balances on all outstanding mortgage loans, and a 10% cost of sale, to come up with your equity. If your equity is below your allowed exemption, the trustee will “abandon” the property, which is a declaration that the trustee finds insufficient equity to warrant the sale of the property to pay off your debts. The trustee may also abandon the property if there is some equity above your allowed exemption, but this will be made on a case-by-case basis, and becomes more risky with higher equity values. I will properly advise you of your situation so that you will feel comparable knowing that you will not lose your home. In addition, if your situation is more risky, I will be careful to fully advise you of the risks of pursuing a Chapter 7 bankruptcy instead of Chapter 13 or another avenue.
CAN I GIVE UP MY HOME BY DOING CHAPTER 7 BANKRUPTCY?
It is possible and in certain situations advisable for a client doing a Chapter 7 bankruptcy to give up their home or other real estate. This is called “Surrender”. Many people in this situation have a home or other real estate in which there is little or no equity, or where they are substantially behind in the their mortgage payments. These people also found that the home or other real estate has become too expensive for them, and may be an important factor in their financial difficulties. For any or a combination of these reasons, it may be advisable for them to give up the ownership of their home or other real estate. In Chapter 7 bankruptcy the debtor can declare to surrender the home or other real estate to their mortgage lender. This declaration will usually be followed by a State foreclosure proceeding, to properly take title to the debtor’s home or other real estate away and vest it in the mortgage lender. The debt that is owed to the mortgage lender will be fully discharged through the Chapter 7 bankruptcy, and the debtor can move on to a new home with a lower monthly cost, achieving a fresh start that is contemplated by the bankruptcy laws. The debtor may remain responsible for maintenance of the property and association dues until foreclosure. I consult fully with my clients on a prospect of surrendering their homes in Chapter 7 bankruptcy.
WILL I LOSE MY CAR IN CHAPTER 7 BANKRUPTCY?
Most people will not lose their car in a Chapter 7 bankruptcy. As of the beginning of 2011, an individual is entitled to exempt up to $3,450.00 of equity in one automobile. I have found that the majority of people who consult with me for Chapter 7 bankruptcy either have sufficient exemptions to cover the equity they have in their automobile, or otherwise have no equity in their automobile. Many people finance their automobiles with little or no money down, and this results in them having automobiles with values that are less than the amount owed on their loans. Therefore, it is possible to lose a car if your equity far exceeds the available exemption amounts, but in practice I find that it is a rare occasion where someone will lose their automobile.
CAN I GIVE UP OR SURRENDER MY CAR IN CHAPTER 7 BANKRUPTCY?
Automobiles are routinely surrendered to creditors in a Chapter 7 bankruptcy. In many situations, a debtor will have an automobile that has no equity because the loan balance is greater than the value of the automobile. Surrendering the automobile in this situation through Chapter 7 bankruptcy will allow the debtor to discharge their car loan debt, sometimes saving them hundreds of dollars each month. This is often an effective planning tool for the future, where the debtor feels that the car loan payments are a contributing factor to his or her debt problems. The debtor usually obtains a replacement automobile which cost significantly less than the one surrendered.
HOW DOES CHAPTER 7 BANKRUPTCY AFFECT AN AUTOMOBILE LEASE?
Automobile leases are considered to be Executory Contracts for purposes of Chapter 7 bankruptcy. The automobile is not considered an asset of the debtor, and therefore there is no analysis done of any potential equity. The automobile lease is listed on the bankruptcy as an Executory Contract, and the debtor makes an election to either assume or reject the lease. By assuming the lease, the debtor is stating that he or she wishes to continue with the lease. If the debtor elects to reject the lease, the debtor will have to surrender the automobile to the lease finance company, and can use Chapter 7 bankruptcy to discharge any amounts that may be claimed as owed in accordance with the terms of the lease.
WHAT IS A REAFFIRMATION AGREEMENT?
People seeking to keep automobiles that are financed should file a “Reaffirmation Agreement”, with the Bankruptcy Court. A Reaffirmation Agreement is a document that is routinely accepted by all automobile finance lenders. It is an agreement in which the debtor and creditor agree that the debt will survive the Chapter 7 bankruptcy. Without this agreement, the Chapter 7 bankruptcy would discharge the debtor’s obligation to pay the loan, but the creditor would be entitled to repossess the secured car. In exchange for the debtor’s agreement to honor the loan after bankruptcy, the creditor also agrees to honor the loan after bankruptcy. The main problem with Reaffirmation Agreements is that if the debtor has financial problems in the future, they will risk a repossession, along with the resulting negative credit reporting that would be done to the persons credit report.
Reaffirmation Agreements are generally approved by the Bankruptcy Court if the debtor’s
income and expenses, as shown on the bankruptcy petition, demonstrate that the debtor can afford to pay the continuing payments, and the interest rate and basic terms of the loan are reasonable. Also, the debtor’s attorney is required to make a representation on the Reaffirmation Agreement stating that in his or her opinion the debtor can afford to make the continuing payments. If both of these requirements are not satisfied, the Bankruptcy Court will require a hearing to permit the debtor to explain why their Reaffirmation Agreement should be approved.
I provide a very careful analysis of the financial situation for all of my clients, in order to effectively determine whether a Reaffirmation Agreement is in the best interest of my client.
WHAT IS A CHAPTER 7 DISCHARGE?
At the end of your Chapter 7 case you receive an order from the Bankruptcy Court which is entitled “Discharge of Debtor”. This Order effectively wipes away or discharges all of the dischargeable debts listed on your Chapter 7 petition. It may be used in the future along with a copy of your Chapter 7 petition to demonstrate to a creditor that the creditors that was discharged.
ARE ALL DEBTS DISCHARGED THROUGH CHAPTER 7 BANKRUPTCY?
Certain debts are excluded from the discharge and they include debts incurred through fraud, theft or embezzlement, or debts related to criminal acts, including willful injury to someone else or driving while impaired. Other debts that are not dischargeable include criminal fines and penalties, support obligations, student loans, and debts impose through divorce decree or property settlement. Older tax obligations are dischargeable under limited circumstances, which must be analyzed by a bankruptcy attorney. Other than these exclusions, all of the debts listed on your Chapter 7 bankruptcy petition are discharged.