Bankruptcy Basics: Options for the “Honest but Unfortunate Debtor"


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. 

Sign Up for E-News

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.

** The information provided here is necessarily general and is not intended as legal advice or a substitute for legal advice. If you have any questions regarding this Alert, please contact Scott C. Pyfer at or Silvia F. Courtney at



Lindabury, McCormick, Estabrook & Cooper is a mid-sized general practice law firm providing quality legal services to businesses and individuals throughout New Jersey and the Mid-Atlantic region. Our attorneys provide vigorous and cost-effective counsel to help clients meet their personal and professional objectives. Learn more about all of the services Lindabury provides by visiting www.Lindabury.Law.

The opinions expressed herein are the writer's alone, and do not reflect the opinions of or anyone who works for is not responsible for the accuracy of any of the information supplied by the writer.

TAP Into Another Town's News:

You May Also Be Interested In

Sign Up for E-News


Buy a Vet ... Program Helps Formerly Homeless Veterans

May 21, 2018

UNION COUNTY, NJ — It started with a collection to help fund a Memorial Day barbecue at the Valley Brook Village veterans facility in Lyons, NJ. When the bucket collection raised $7,000 at John's Meat Market in downtown Scotch Plains, they decided to keep it going and had barbecues all summer. The program has grown ever since.

Steve Hackenberg, a Scotch Plains native, ...

Important Information from the Westfield Board of Health

May 21, 2018

To the Editor:

The Westfield Board of Health held a meeting on May 7, 2018.  

The Board discussed bicycle safety. As the weather improves and more people get outside we encourage all bicycle riders to wear properly fitted helmets. All riders under the age of 17 are required to wear a helmet under state law. Bicycle safety information for children can be found at ...

Upcoming Events


Tue, May 22, 6:30 PM

TD Bank Ballpark, Bridgewater

Somerset Patriots vs. Sugar Land Skeeters ...

Arts & Entertainment Food & Drink Sports


Tue, May 22, 7:00 PM

Westfield Municipal Building, Westfield

Westfield Town Council Meeting



Tue, May 22, 7:30 PM


Westfield Board of Education Meeting


Westfield Police Blotter: Counterfeit $100 Bills, Man Arrested in Car Burglary & More

May 16, 2018

May 8, 2018 2:23 p.m.

A business in the 200 block of East Broad Street reported receiving payment for services with a counterfeit $100 bill. The suspect made a small purchase with the counterfeit bill and received change, depriving the business of $94.24 change and $5.26 purchase. Suspect described as a black male 25-40 years of age, with facial hair wearing a black Nike wind breaker jacket ...

Westfield Area Y Flyers Track Club Takes First Place in 13 Events at NJ Striders Meet

May 22, 2018

FAIR LAWN, NJ - The Westfield Area Y Flyers Track Club took home 13 first place finishes and set eight team records at the NJ Striders Meet last weekend.


Jasmine Parran (7-8)              1500m Run 6:32.70           1st Place

Jackson Folvik (7-8) ...

Ask Maria: How can I help my son? 

Q: My son's best friend's mom just passed away. I am concerned for my son and don't know what to do for him. He is distraught. How can I help my son? 


Grief is a normal and natural reaction to the death of a loved one. No two people grieve the same, even in the family. I am certain that your son’s friend and mom are like family to your son. Losing his ...

17 Homes Sold week of May 6 to May 13 2018 in Cranford, Westfield, Mountainiside, Fanwood and Scotch Plains

Seventeen homes sold week of May 6 to May 13, 2018, in Cranford, Scotch Plains, Westfield,  Mountainside and Fanwood:*



Dog Missing from Fanwood Home

UPDATE: Reunited with owner!

ORIGINAL POST: Lexi was seen north side of Fanwood Thursday. She's 25 lbs., tall and looks like a fox.

Lexi is friendly and was wearing a collar with a tag. Call 732-259-5570 if you spot her.

IRS Grants Relief for Taxpayers Affected by Reduction of Maximum Deductible HSA Contributions

The IRS recently announced relief for taxpayers with family coverage under a High Deductible Health Plan (HDHP) who contribute to a Health Savings Account (HSA).


For 2018, taxpayers with family coverage under an HDHP may treat $6,900 as the maximum deductible HSA contribution.


The annual amount had been reduced to $6,850 for 2018 under the Tax Cuts and Jobs ...

TAPinto Featured Franchisee: Steve Lenox of TAPinto Paterson

This week's feature will focus on TAPinto Paterson's franchisee, Steve Lenox. Find out how the current owner of a public affairs firm went from a former State Director for Senator Frank Lautenberg to a proud TAPinto franchisee for New Jersey's third largest city.


Q. When did you join

I joined in September, ...

Eight Westfield Student Vocalists Accepted into 2018-2019 All-State Choruses

Eight student vocalists from Westfield High School have been accepted into the 2018-2019 All-State Choruses.

Performing with the 2018 All-State Mixed Chorus in November will be Charlotte Geary, Zachary Lemberg, Joseph Maldonado, Vincent Mora, Nicole Player, and Matthew Siroty. The Mixed Chorus will perform at the New Jersey Education Association (NJEA) Convention in November and at the New ...

‘Chambers USA 2018’ Recognizes John Schmidt Among List of America’s Leading Lawyers for Business

Lindabury, McCormick, Estabrook & Cooper is pleased to announce that John H. Schmidt has once again been recognized by “Chambers USA” in their annual list of leading lawyers for business. Chambers and Partners, which produces “Chambers USA,” is a client referral organization that researches and subjectively ranks attorneys and law firm practice groups nationwide ...

'Turning Off the Morning News' brings comic twist

‘Turning Off the Morning News’ tackles today’s issues with a comic twist

By Liz Keill

PRINCETON, N J – Despite the late night comics, no one quite captures the insanity of the political/social status world like Christopher Durang.

His latest play, “Turning off the Morning News” hit the ground running.  John Pankow as Jimmy addresses the audience, ...

SURVIVING A STROKE: Quick Medical Response Gives Mom Her Life Back

Carotid artery dissection. It’s one of the most common causes of stroke in younger adults.

And while you might not associate the word “stroke” with younger patients, the condition – if not treated immediately – could lead to paralysis and even death.

Lindsey Singh can attest to the importance of immediacy. The 31-year-old mother of two from Flanders experienced ...

Capitalist or Communist?

Karl Marx may have been the pioneer, but many other Jews were also involved in the struggle for communism, particularly in the early days of the Russian revolution. Personally, I don’t think that we have any apologies to make for this phenomenon. Having suffered unbearably under successive oppressive regimes, many of those political activists genuinely thought communism would be better ...

Stocks Can Rise in a Rising Interest Rate Environment

Investors remain concerned about the potential impact of higher interest rates on stocks. In their most recently released minutes, the Federal Reserve Open Markets Committee indicated the US economy is on solid footing and the economic conditions warrant continued gradual increasing of interest rates. This set off a sale in the stock and bond markets as investors began pricing in a fourth ...


AtlantiCast: Episode 15

On this week’s AtlantiCast, learn some important tips for controlling and avoiding diabetes from an Atlantic Health System expert, see how Atlantic Health is advancing cutting-edge research, hear what’s being done to keep health care environmentally friendly and much more!



Donn A. Snyder, 88, died at home on May 8 in Southern Shores, NC, where he was a resident for ...
Read more

New Jersey State Motor Vehicle Commission Returns to South Plainfield

May 21, 2018

SOUTH PLAINFIELD, NJ – A new state Motor Vehicle Commission (MVC) opened its doors in South Plainfield on Monday, just one week shy of a year since the borough’s former agency closed its doors. The office, located at 5000 Hadley Road, will provide in-person services to residents of the borough and the surrounding communities six days a week. 

“I would like ...