How can I File for Bankruptcy in New Jersey?
Bankruptcy is a legal proceeding that allows individuals, couples, and businesses who can no longer pay their bills or meet their financial obligations to get a fresh start. Making the decision to file for bankruptcy is not always an easy one. There is often a negative stigma associated with filing for bankruptcy. It stays on an individual’s credit report for 10 years, making it difficult to acquire a line of credit or purchase a home.
However, for individuals who are struggling to make ends meet, or have become overwhelmed with debt after losing a job, bankruptcy may be the best option. There are many factors that can cause debt troubles. Filing for bankruptcy is an option that can help someone regain control of their finances. An experienced bankruptcy lawyer can thoroughly examine a client’s finances and recommend the best legal course of action for dealing with debt.
Types of Bankruptcy
There are two types of bankruptcy: Chapter 7 and Chapter 13. Each offers a range of options and protections for the individual filing.
- Chapter 7: This is also known as liquidation bankruptcy. If someone files for Chapter 7 bankruptcy, they are asking the bankruptcy court to eliminate all debts that are eligible for discharge. In exchange, they are giving a bankruptcy trustee permission to collect, sell, and distribute any of their property that is not exempt from collection. Chapter 7 is generally for those who are in dire need of debt relief, so a debtor will likely need to qualify if they want to go this route. In most cases, the debtor will be allowed to keep the following types of property in a Chapter 7 bankruptcy:
- Equity in the home: This is also known as the homestead exemption, which protects most or all of the equity someone has in their home.
- Insurance: Oftentimes, the filer will be able to keep the cash value of their insurance policies, as well as benefits from insurance plans provided by their employer.
- Retirement plans: Retirement benefits, including pensions, profit sharing, stock bonus plans, IRAs, and 401K plans, are protected from bankruptcy, which is one of the reasons why it is so important to make these investments.
- Personal property: In most cases, the filer will be able to keep personal property, such as furniture, electronics, appliances, books, antiques, and musical instruments. They may also be able to keep jewelry if its value is under approximately $1,000.
- Automobile: If the equity in the debtor’s car does not exceed thousands of dollars, they will likely be able to keep the vehicle, particularly if they use the vehicle to commute to and from work, or to take children to school.
- Public benefits: Welfare benefits, Social Security, and unemployment insurance are protected from debt collection.
- Tools used to do a job: If the filer works in construction, or any other type of profession that requires them to use tools or instruments to do their job, they will likely be able to keep up the tools.
- Other: In some cases, a filer may be able to apply approximately $1,000 toward other property they wish to keep.
- Chapter 13: This is also known as reorganization bankruptcy. Unlike Chapter 7, when someone files for Chapter 13 bankruptcy, the goal is to pay back most or all the debt. The debtor will file a repayment plan based on the amount and type of debt they owe, their salary, and how much property they own. If someone files for Chapter 13, they will not be expected to forfeit property, since it will be used to fund their repayment plan. This option essentially reorganizes the existing debt over a period of time. Once the filer develops a payment plan, they will make one monthly payment to the trustee, who will distribute the payment to the creditors. This plan also allows the filer to catch up on mortgage and car payments. After those regular payments are made, any money that is left over will be sent to the debtor’s unsecured creditors.
What are the Steps to File Bankruptcy?
After the debtor has decided which type of bankruptcy they are going to pursue, they will need to start the filing process.
- Collect the necessary documents: The debtor will need to gather the following information in order to file their petition:
- Valid identification, including driver’s license, Social Security card, and birth certificate.
- Complete list of bank accounts.
- List of insurance policies.
- Tax returns from the past two years.
- Copy of the deed to real estate property, car registration, or proof of ownership of other valuable assets.
- Pay stubs from the past six months. If the filer is unemployed, they must provide proof of any money made, including freelance jobs, part-time jobs, and unemployment checks.
- Evidence that supports the current financial circumstances. For example, if the filer is going through a divorce, they have costly medical bills piling up, or they lost their job, they need to provide documentation that shows how this has caused them to file for bankruptcy.
- Attend a credit counseling session: As part of the bankruptcy process, the debtor will be required to attend a court-approved credit counseling session. During the session, the counselor will review finances with the debtor and help them determine whether bankruptcy is the best option. It is mandatory that a filer attends this session. If they fail to attend, their case may be dismissed.
- Contact a bankruptcy lawyer: Although hiring a lawyer is not required, it is highly recommended, particularly if there are complex financial issues involved. The success rate for people who file for bankruptcy without the assistance of a legal professional is low. An experienced lawyer knows how to navigate the complex process and ensure that all the necessary documents are available. In addition, the lawyer will be able to recommend the best legal course of action to take in terms of filing for Chapter 7 or Chapter 13.
Mistakes to Avoid When Declaring Bankruptcy
Filing for bankruptcy can be stressful and overwhelming. However, the process can go much more smoothly, and unnecessary stress can be avoided, by watching out for common mistakes, including the following:
- Making fraudulent purchases: Debtors are advised not to make purchases that may be considered fraudulent by the court or hiding assets.
- Transferring money or assets to another person’s name to keep them out of the bankruptcy estate: Oftentimes, people do not think there is anything wrong with transferring assets to their spouse or children, but this can be viewed as fraudulent by the court. In some cases, it can result in criminal charges.
- Paying off some creditors, but not others: If it appears that the filer is giving certain creditors priority over others, the bankruptcy court may consider these to be preferential transfers. Even if someone is just trying to be nice to certain creditors who may have been patient with them when they were behind on making payments, this can create more trouble in the long run.
- Using credit cards for unusual expenses: Ideally, someone should stop using credit cards entirely if they are in debt. However, if credit cards are generally used to pay for regular expenses, such as gas, food, or utility bills, the court will likely consider these acceptable transactions. However, if someone uses a credit card for expensive, non-essential items, the court will closely scrutinize these purchases.
- Filing a lawsuit against someone who owes the debtor money: A debtor should not file a lawsuit before filing for bankruptcy. Money recovered from the lawsuit will become property of the bankruptcy estate.
- Making deals that will result in receiving funds: If the filer expects to receive funds, such as a bonus from their employer, money from an inheritance, or a tax refund, the bankruptcy filing should be delayed if possible. The court uses the date of filing to determine whether any prohibited transactions were made.
Filing for bankruptcy is an effective way to protect debtors from collection efforts. However, it does not solve all financial problems. The following are things that bankruptcy can and cannot do:
- Eliminate unsecured debt: Chapter 7 and Chapter 13 can both eliminate credit card debt and other types of unsecured debt, such as personal loans, medical debt, and unsecured business debt. These are debts in which the creditor does not have a lien against a property or the right to repossess the item if the debt is not paid off. Chapter 7 has a greater capacity to eliminate debt compared to Chapter 13.
- Place an automatic stay: Once someone files for bankruptcy, an automatic stay prevents creditors from pursuing further collection efforts, either by phone calls, letters, repossession efforts, or foreclosure actions.
- Maintain certain assets: If filing for Chapter 7, the debtor is entitled to keep their exempt property, unless there is a lien on the property. They may also keep non-exempt property if filing for Chapter 13, since they are not required to sell their assets.
- Reduce secured debt: Chapter 13 allows the filer to reduce the debt of secured property and then pay off the reduced amount.
- Eliminate tax debt: If filing for Chapter 7, the debtor may not discharge state or federal income tax debts. They may be able to eliminate some of this debt if they file for Chapter 13, but it will depend on the amount and timing of the debt.
- Eliminate support obligations: Debtors are still obligated to pay spousal and child support. If they file for Chapter 13, they will likely be required to show how they will repay debts within the repayment plan period.
- Eliminate student loans: Debtors are required to repay student loans, even if they file for bankruptcy. Exceptions to this rule include being permanently disabled, or other circumstances in which repaying the loan would cause a significant hardship.
- Eliminate all debt: Whether someone is filing for Chapter 7 or Chapter 13, filing for bankruptcy may not eliminate all of the debt that is owed, including penalties for criminal action, restitution, and debts that they forgot to list in the bankruptcy filing.
What are the Most Commonly Discharged Debts?
Although not all debts will be discharged, particularly under Chapter 13, the filer can expect the following debts to be discharged:
- Credit card charges
- Medical bills
- Attorney fees
- Car accident claims, unless drunk driving was involved
- Certain tax penalties
- Collection agency accounts
- Personal loans, including those from friends, family, or employers
- Utility bills
- Some student loans
- Personal guaranteed business debts
- Social Security overpayments
- Veterans assistance loans
- Deficiency balances after repossession
- Civil court judgments
- Dishonored checks, unless they are based on fraud
- Revolving charge accounts
Will Someone Lose Their Home if They File for Bankruptcy?
It is unlikely that someone will lose their home as a result of filing for bankruptcy, as long as the equity in the property is exempt. However, even if the property is not fully exempt, the filer may be able to keep it if they pay the non-exempt value to the creditors as part of the Chapter 13 filing process. In some cases, creditors may have a security interest in certain properties, such as a debtor’s home, automobile, or other personal properties, which means that the debtor gave a creditor a mortgage on that property as collateral for the debt. The filer is responsible for making the payments on that debt, or else the creditor could obtain and sell the property. The filer can keep their property by making payments until the debt is paid or paying the creditor the value of the property that the filer wants to keep.
How Does Bankruptcy Impact a Credit Score?
Filing for bankruptcy will have an impact on a consumer’s credit score, although it may not be as bad as they fear. If a person’s credit score has already been impacted by mounting debt and late payments, filing for bankruptcy may actually help their credit. Bankruptcy stays on one’s credit score for 10 years, but it puts the debtor in a better position to pay new bills and allows them to work on improving their credit over time.
What is the Procedure for Debt Collection?
If someone has accumulated unpaid debts, the original creditor will try to collect the debt from them. If these efforts get no response, the creditor may send the debt to a third-party debt collector. The debt collector then becomes the new owner of the debt and has the rights of the original creditor to the balance owed. If the third-party debt collector is unable to collect payment from the debtor, the debt may be sent to a debt collection law firm. The debtor will likely be sent a letter notifying them about this action and demand payment. The debtor will have 30 days to dispute the debt. If the debt is still unpaid, the debtor may face a civil lawsuit.
If a client received a letter notifying them that their debt was sent to a law firm, it is in their best interest to consult with a bankruptcy lawyer who can handle all communications and negotiations with the collection law firm and ensure that the debtor’s legal rights are protected. If a settlement cannot be reached, the lawyer for the collection firm will file a lawsuit, and the debtor will have a limited time to respond. Failure to respond to the legal complaint within the specified amount of time can result in a default judgment being brought against the debtor.
If the court rules in favor of the creditor, they can take steps to collect on the judgment. The bankruptcy lawyer will file motions, respond to requests made by the creditor’s lawyer, and ensure that the appropriate legal action is taken within the statute of limitations. If the court rules in favor of the creditor, the creditor may pursue the following actions to collect the money:
- Ask for a lien in unexempted real estate that the debtor owns.
- Arrange for the debtor’s wages to be garnished.
- Sell their property.
New Jersey Bankruptcy Lawyers at Ellis Law Assist Clients Struggling with Debt
If you or someone you know is in need of debt relief, you are urged to contact the New Jersey bankruptcy lawyers at Ellis Law as soon as possible. The bankruptcy process can be complicated and overwhelming, particularly when you are already dealing with financial stress. We will closely review your financial records and determine whether bankruptcy is the best option. If so, we will walk you through every step of the filing process, address all your questions and concerns, and set you on a path to financial recovery. To schedule a free consultation, call us today at 732-308-0200 or contact us online.
Located in Freehold, New Jersey, we serve clients throughout East Brunswick, Toms River, Middletown, Jersey City, Neptune, Hudson County, Union County, Essex County, and Ocean County, as well as Brooklyn and New York, New York.