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

12eb59fc372fd29b47ac_newScott.jpg
19e51e6c743272a4f61b_silvia11.jpg
12eb59fc372fd29b47ac_newScott.jpg

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 spyfer@lindabury.com or Silvia F. Courtney at scourtney@lindabury.com

 

 

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 TAPinto.net or anyone who works for TAPinto.net. TAPinto.net 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

Westfield

Union County Democratic Committee Elects New Chair

February 22, 2018

CLARK, NJ – The vote for the Union County Democratic Committee (UCDC) chairmanship came to a conclusion Wednesday night when 748 committee members from the county’s 21 municipalities descended on the Gran Centurions in Clark to vote for their new party leader.

State Senator Nick Scutari won with a 412-341 victory over Fanwood Mayor Colleen Mahr in a battle that had become ...

Mayor Brindle’s Update

February 15, 2018

The following are highlights from the update that Mayor Shelley Brindle gave at Tuesday night’s town council meeting.

I first want to congratulate Nick Calello and David Went for their promotions to patrol officers in the Westfield Police Department. I’d also like to welcome and congratulate new Patrol Officer Fortunato Riga, who joins the police department this week upon his ...

Upcoming Events

Carousel_image_248cea245b872fb9c722_resolve_house

Fri, February 23, 12:00 PM

Resolve, Scotch Plains

Free Teen Anxiety Group (Ages 14-17) at Resolve

Carousel_image_cb76d129f430419a337a_sjhsfishfry

Fri, February 23, 5:00 PM

Catanzaro Dining Hall at Saint Joseph High School, Metuchen

Friday Night Lenten Fish Fry

Food & Drink

Westfield Police Blotter: Man Steals 60 Pairs of Pants from Downtown Store & More

February 21, 2018

February 14, 2018 10:53 p.m.

Officers Gill and Weiss arrested Luis Murillo, age 30, of Rahway, NJ, for two outstanding warrants out of Westfield Municipal Court ($500) and Woodbridge Municipal Court ($500) pursuant to a motor vehicle stop in Scotch Plans Township. Subject was transported to headquarters, processed and released after posting requisite bail.

 

February 15, 2018 5:24 ...

Giving Back: Learn How to Help Victims of Sexual Violence

February 22, 2018

Every year since 1984, trained volunteers with the Union County Rape Crisis Center have helped victims of sexual violence through the emotional, medical and legal aftermath of trauma. New volunteers are welcome to join the next series of training classes beginning on Thursday, March 22.

No previous experience in crisis counseling is necessary.

“Over the years our Rape Crisis Center ...

‘Month of Hope’ at Wilson School

Inspired by the HOPE Week Initiative introduced in 2009 by the New York Yankees, Mr. Joseph Malanga, principal of Wilson School and a fan of the American League professional ballclub, declared January the “Month of Hope” at Wilson.

Malanga called on the school’s faculty Acts of Kindness Committee to choose the charitable organizations to be recipients of the weekly donation ...

AtlantiCast

AtlantiCast: Episode 12

On this week’s episode of AtlantiCast, decade of excellence makes headlines, as Atlantic Health’s place on Fortune Magazine’s 100 Best Companies to Work For List leads off the newest episode of AtlantiCast. Also on this week’s show, check out the newest “hybrid” operating room at Morristown Medical Center and find out how Atlantic Health is helping local ...

Would the Stock Market Affect Your Home Purchase?

"Fasten your seatbelts; it's going to be a bumpy night." ("All About Eve.") While most people misquote this as "It's going to be a bumpy ride," the actual quote works better for the movie. Bette Davis delivers this with the classic style that made her one of the most loved actresses of her generation.

Well for the stock market it’s been a wild bumpy ...

Good News in NJ for Veterans

Beginning in the 2017 tax year, New Jersey will give an additional $3,000 exemption for military veterans. You are eligible to claim this exemption NJ state income tax return if you are a military veteran who was honorably discharged or released under honorable circumstances from active duty in the Armed Forces of the United States on or before the last day of the tax year.

 

The ...

Sinai or Sanctuary?

 

 

And in the beginning, G‑d was homeless, and so G‑d asked His people to set Him up with some digs. Where does it say that? Well, nowhere, actually. But it does say that G‑d instructed Moses to tell the people, “They shall make for Me a Sanctuary, that I may dwell among them.”

Now the question is, was G‑d really homeless? ...

How to Talk with Kids About the Florida Shooting

February 13, 2018

The tragedy of the Florida school shooting is devastating, leaving 17 killed and 15 injured. Our children can easily identify with what occurred yesterday. It will be the topic of conversation today in schools everywhere. School administrators are doing all they can to provide support and guidance. The shootings affect children, teachers, and school personnel. The school shooting ...

Love Craft Beer But Hate the Tour? State Assembly Moves to Make it Easier for You to Belly Up to the Bar

Good news is a brew for New Jersey craft beer advocates. In February 2018, the New Jersey Assembly’s Agriculture and Natural Resources Committee paved the way for the introduction of Bill A2196, which would remove a current licensing rule requiring breweries and distilleries to provide a tour of their facilities before serving alcoholic beverages to consumers. Currently, breweries holding a ...

'What Stays' exposes family secrets and lies

‘What Stays’ exposes family secrets, resentment and lies

By Liz Keill

SUMMIT, NJ – In an original play by Laura Ekstrand and Jason Szamreta, the Dreamcatcher Repertory Theatre has provided an enlightening, funny and heart-felt view of family foibles.

Ekstrand has said that the germ of the play came from conversations with the ensemble members of the troupe, based on ...

Is FAANG Long in the Tooth?

Investors love to rally around a stock story. Today it’s all about the FAANG stocks. Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google (GOOG) are a major reason why the S&P 500 rallied so much in 2017. Mr. Market is convinced the FAANGs are impervious to a sell-off. “Its different this time” is ringing loud and clear, but will the outcome really be that ...

Imagine a Chatham Toboggan Ride from the Top of Fairmount Avenue to Main Street

Did you know….
there was a time when Chatham kids could ice skate from downtown Chatham all the way to Florham Park? And that a toboggan ride could last from the top of Fairmount Avenue down to Main Street and beyond?

Those were the days!

This was back in the early to mid-1900s. The Passaic River meandered through grassy meadows and woods on the north side of Chatham. The marshy ...

Obituaries

Kathleen Marie Christian (nee Helmstetter), age 73 of Surf City, NJ, passed away peacefully at home ...
Read more

Cops Called for Two People Shouting Racial Slurs During ‘Black Panther’ in Sparta

February 21, 2018

SPARTA, NJ – Sparta police were called to the New Vision Sparta Theater on Sunday night after a drunken woman and her boyfriend interrupted a screening of the movie “Black Panther” by shouting racial slurs, according to a witness and police.

Former New Jersey Assembly candidate Michael Grace was in the theater when two people started yelling racial slurs including ...