The federal Bankruptcy Code is designed to provide a “fresh start” to a broad range of individual debtors (including spouses, who can file joint bankruptcy petitions). As the United States Supreme Court recognized almost 80 years ago, the bankruptcy process “gives to the honest but unfortunate debtor . . . a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). This “opportunity” is made available to debtors by the bankruptcy discharge, which prohibits creditors from taking action against a debtor who has been relieved of personal liability for specific debts. The filing of a bankruptcy petition also provides a temporary “breathing spell” known as the “automatic stay,” which stops lawsuits, foreclosures, garnishments and most types of collection activities against a debtor.
The Bankruptcy Discharge
A bankruptcy discharge means that a debtor is no longer legally required to pay certain pre-petition debts. The discharge is a permanent injunction or order prohibiting a debtor’s creditors from taking any form of collection action on discharged debts, including legal action and communications with a debtor. While a debtor is no longer personally liable for discharged debts, a consensual lien or encumbrance against specific property to secure payment of a debt (such as a mortgage) generally remains unaffected by the discharge (unless action is taken to avoid that lien), and a secured creditor (such as a mortgage lender) may enforce its right to recover property secured by such a lien. For example, a lender who holds a mortgage on a debtor’s home would be permitted to foreclose the mortgage if there is a default under the mortgage and the lender does not otherwise agree to modify or restructure the terms of the loan.
Unless creditors sue to prevent the discharge, a debtor will usually receive a discharge. An individual debtor can be denied a discharge in a Chapter 7 or 13 bankruptcy proceeding for, among other reasons, failure to provide requested tax documents; failure to complete “an instructional course concerning financial management” after having filed the bankruptcy case; transfer or concealment of property with intent to hinder, delay or defraud creditors; destruction or concealment of books or records; perjury and other fraudulent acts; failure to account for the loss of assets; or, having previously obtained a bankruptcy discharge in an earlier case that was commenced within certain time frames.
In addition, some debts to certain creditors are deemed non-dischargeable. Among the more common types of non-dischargeable debts are certain types of tax claims; debts for spousal support, child support or alimony; debts for willful and malicious injury to person or property; debts to governmental units for fines and penalties; debts for most educational loans (including guaranties of the educational loan debt of a non-debtor student); and, debts for certain fees that relate to a condominium unit.
Chapter 7 - Liquidation
While there are different types or “chapters” of bankruptcy cases available under the Bankruptcy Code, the most common types of bankruptcy cases that are filed by individuals and business entities are under Chapter 7, Chapter 13, and Chapter 11.
Chapter 7 bankruptcy, sometimes referred to as a liquidation, contemplates an orderly, court-supervised procedure by which a Chapter 7 trustee (a court-appointed representative of a debtor’s unsecured creditors) can take control of property of the debtor’s estate (the debtor’s assets and property interests, as of the date on which the case is filed). However, the Chapter 7 trustee is generally permitted to seek control of a certain item of property only if its value exceeds the amount that is due to a secured creditor (like a mortgage lender or vehicle lender), if any, plus the amount of the “exemption” provided to a debtor by law. Almost all property potentially qualifies for exemption in many Chapter 7 cases, known as “no asset” cases, so that in those instances there would not be an actual liquidation of any of that debtor’s property.
An individual debtor in a New Jersey bankruptcy case is entitled to retain property that is designated as exempt under New Jersey state law or under the Bankruptcy Code (the debtor chooses one or the other). Under New Jersey state law, all wearing apparel and household furnishings up to $1,000 in value, and generally all assets held in qualified retirement accounts, are exempt. Under Bankruptcy Code Section 522(d), a broad range of property interests are exempt, up to specified dollar amounts. Those amounts are readjusted every three (3) years, and the next readjustment will occur on April 1, 2013. As of today, Bankruptcy Code Section 522(d) provides the following exemptions:
- A debtor’s aggregate interest in the debtor’s residence property (whether real property or personal property), not to exceed $21,625 in value;
- A debtor’s interest, not to exceed $3,450 in value, in one (1) motor vehicle;
- A debtor’s interest, not to exceed $550 in value in any particular item or $11,525 in aggregate value, in household furnishings, household goods, wearing apparel, appliances and the like which are held primarily for personal, family or household use;
- A debtor’s aggregate interest, not to exceed $1,450 in value, in jewelry held primarily for personal, family or household use;
- A debtor’s aggregate interest in any property, not to exceed in value $1,150, plus up to $10,825 of any unused amount of the exemption for the debtor’s residence;
- A debtor’s aggregate interest, not to exceed $2,175 in value, in any implements, professional books, or tools of the trade of the debtor;
- An unmatured life insurance contract owned by a debtor, other than a credit life insurance contract;
- A debtor’s aggregate interest, not to exceed $11,525 in value, in any accrued dividend or interest under, or loan value of, any unmatured life insurance contract owned by a debtor as to which the insured is the debtor or an individual of whom the debtor is a dependent.
- A debtor’s professionally-prescribed health aids;
- A debtor’s right to receive various benefits such as social security benefits, unemployment compensation, veterans’ benefits and/or disability benefits; alimony, support or separate maintenance payments to the extent reasonably necessary for a debtor’s support or for support of a dependent; and/or a debtor’s right to receive payment under a pension, profit sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for support of a debtor or a debtor’s dependent, with certain restrictions particularly if such plan or contract was established by an “insider” which employed the debtor;
- A debtor’s right to receive payment under a crime victim’s compensation law and, to the extent reasonably necessary for the support of a debtor or a debtor’s dependent, certain payments received on account of wrongful death, under a life insurance contract or on account of personal bodily injury or compensation for loss of future earnings; and,
- A debtor’s retirement funds, to the extent that those funds are in a fund or account that is exempt from taxation under Sections 401, 403, 408, 408A, 414, 457 or 451(a) of the Internal Revenue Code.
Individual debtors must meet a “means test” to qualify for Chapter 7 relief. If a debtor’s income exceeds certain thresholds, based on family size, a debtor is ordinarily not eligible to file a Chapter 7 bankruptcy case (and would therefore be required to file a Chapter 13 or Chapter 11 case), although adjustments can be made for certain monthly expenses. In New Jersey, as of November 1, 2012, an individual debtor with income below the following amounts (in gross annual income) and with the following “family size” would automatically be eligible to file a Chapter 7 case:
- One person: $ 59,906
- Two people: $ 68,284
- Three people: $ 83,292
- Four people: $101,682
Chapter 13 – Adjustment of Debts of an Individual with Regular Income
An individual with regular income and with substantial assets, such as a home, could consider filing a Chapter 13 bankruptcy case, rather than a Chapter 7 case. Chapter 13 is available to some debtors who do not qualify for, or who choose not to proceed under, Chapter 7 bankruptcy relief. Under Chapter 13, a debtor is required to propose a plan that provides for monthly payments of disposable income to creditors during a specific time period, usually sixty (60) months.
One benefit of a Chapter 13 case can be that a debtor remains in possession of property of the estate while making payments to creditors, through a Chapter 13 trustee, based on the debtor’s anticipated income and expenses during the repayment period. However, unlike a Chapter 7 debtor, a Chapter 13 debtor does not receive a relatively quick discharge of debts, and must complete the payments required under the plan before a discharge is issued.
Subject to readjustment that will be effective April 1, 2013, a debtor under a Chapter 13 bankruptcy case must have “non-contingent, liquidated, unsecured debts of less than $360,475, and non-contingent, liquidated, secured debts of less than $1,081,400.” If an individual has debts that exceed those ceilings for unsecured and/or secured debt and seeks bankruptcy protection, that individual would be required to file a Chapter 11 case rather than a Chapter 13 case.
Chapter 11 - Reorganization
Chapter 11 is ordinarily used by commercial enterprises that desire to continue operating a business and repay creditors through a court-approved reorganization plan. However, as noted, individuals also can be Chapter 11 debtors. Under an approved plan, a debtor could reduce indebtedness by repaying part or all of some obligations and by discharging other debt. The debtor could also terminate burdensome contracts and leases, recover assets, and restructure operations to attain profitability.
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