According to ValuePenguin.com, the outstanding consumer debt in the United States is $3.9 trillion. Roughly 38% of all households have some credit card debt. For those families that carry a balance from month to month, their average balance is $16,048. When obligations get out of control for virtually any reason, consumers need to consider all of their options to make their finances more manageable. One of those options is to file for bankruptcy.
Bankruptcy is a legal process based on federal law. Although exemptions and certain procedural aspects vary from state to state, the process is essentially the same throughout the country. Bankruptcy allows debtors to forgive all or a portion of their debt if they qualify. This debt “forgiveness” is referred to as a “discharge.” Once you complete the bankruptcy process, the debts that are eligible are discharged, and you do not have to pay them.
It may sound too good to be true—but it isn’t! The government understands that those who are deep in debt may end up living off government benefit programs; bankruptcy allows you to get your finances back on track, with the government paying very little in the long run. It is a win-win for everyone, except your creditors.
Types of Bankruptcy
There are several types of bankruptcy available. Businesses, for example, may qualify for a different kind of bankruptcy compared to individuals. States or local governments have their own unique bankruptcy. Family farmers and fishers are also eligible for a specific type of bankruptcy that is tailored to their needs.
Most individuals will qualify for one of three types of bankruptcy. The variety of bankruptcy that you file is labeled based on a chapter of the bankruptcy code.
Each type of bankruptcy has unique benefits and drawbacks. Based on your financial situation, you may only qualify for one form or another, regardless of which chapter you would like to use. Your bankruptcy attorney will help you determine which type of bankruptcy is right for your specific situation.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is by far the most common form of bankruptcy. It is the form that most people think of when they consider bankruptcy—it is a liquidation. The trustee, a representative of the government, will gather your assets, value them, and sell them to pay off your creditors.
While this may seem frightening and unfair at first blush, you should note that the trustee will only sell your “non-exempt” assets. Your exempt assets are those things that are so basic to your life that you would simply have to purchase them again if you sold them all to pay your creditors. These items generally include:
· Cemetery Plots
· Health Aids
Claiming your exemptions is extremely important in this process; otherwise, you may end up losing these vital items.
You may have debt that is secured by specific property, such as your vehicle or home. In those situations, you have the choice of either allowing the debt-holder (usually the bank or financing company) to take the property to satisfy the debt or making arrangements to continue paying on the debt. You can sometimes set aside liens on your property that impair your exemption as well.
The timeline on a Chapter 7 bankruptcy is quick. You can often have your “fresh start” or “discharge” within just a few months of filing. Individuals like this quick process because it allows them to move on with the lives, with far less debt, much faster.
Chapter 13 Bankruptcy
Not everyone qualifies for Chapter 7 bankruptcy. If you have a regular source of income, you may be more likely to be eligible for Chapter 13 bankruptcy.
In Chapter 13 bankruptcy, you do not liquidate your assets. While you can sell some of your property to pay creditors, the focus is really on devoting your income to a structured payment plan. You will work with your bankruptcy lawyer to develop a plan that commits your disposable income for a specified period (up to five years). If your disposable income does not pay your creditors in full over that time, then the remaining debt that you owe is forgiven.
Chapter 13 bankruptcy essentially forces creditors to accept a payment plan that works for your budget. Those who file Chapter 13 like that it creates an option that will work for their budget, whether the creditor likes it or not. They also enjoy that they do not have to do a complete liquidation. However, Chapter 13 takes significantly longer than Chapter 7 bankruptcy; it is a commitment. You only reap the rewards of keeping up with your payments once you are completely done with your plan.
Eligibility for Chapter 7: The Means Test
To encourage debtors to pay back their creditors through Chapter 13, the legislature made some significant changes to the bankruptcy code in 2005. In particular, they changed the qualifications for those who can file Chapter 7. You must now go through a “means test” to determine which Chapter you can submit.
To put it simply, the “mean test” considers your current monthly income. Then, it subtracts all of your ongoing monthly expenses. If you have any income left over, you likely will not qualify to file Chapter 7. Instead, you must commit to a Chapter 13 plan for some amount of time. In some situations, a debtor may choose not to file bankruptcy at all if he or she does not qualify for Chapter 7.
Chapter 11 Bankruptcy
Certain high-income individuals may qualify for Chapter 11 bankruptcy. However, Chapter 11 is usually better-suited for business reorganizations. Nonetheless, some individuals like the flexibility that Chapter 11 bankruptcy provides.
Chapter 11 bankruptcy is very similar to Chapter 13 in that it allows the debtor to create a payment plan to pay off his or her debts over time. The major difference between these two types of bankruptcy is how the plan of reorganization is developed. In Chapter 11, you can do more creative things with assets and payments than you can do in Chapter 13. This type of flexibility is useful for individuals who also own businesses or have large investment assets.
Not every debt can be discharged (or forgiven) in bankruptcy. The government has determined that there is such a strong policy interest in paying certain obligations that bankruptcy cannot help you avoid them. Examples of nondischargeable debts include:
· Most tax obligations (federal or state)
· Domestic support obligations (child support or alimony)
· Government-imposed fines, restitution, and penalties
· Debts obtained by fraud
· Debts related to driving while intoxicated
· Court fees
Student loans are a hot topic in relation to bankruptcy. While these obligations are technically dischargeable, it is extremely difficult to qualify to discharge these debts. The debtor must go through a separate, stringent test to determine if he or she can keep on his or her student loan obligations. In most situations, student loan debts will remain even after obtaining your discharge on other liabilities.
Talk to a New Jersey Bankruptcy Attorney for More Information
An experienced bankruptcy attorney can walk you through the bankruptcy process and help you determine whether bankruptcy is the right choice for your situation. Call to schedule a consultation with our team today!
Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.