Is Bankruptcy the Right Solution for Your Financial Woes?

Are you drowning in credit card debt, student loan debt and other financial problems? Living paycheck-to-paycheck while debts keep getting larger? If so, you may be considering filing for bankruptcy. For individual debtors, the U.S. Bankruptcy Code offers two types of bankruptcy to New Jersey residents: Chapter 7 and Chapter 13.

In a Chapter 7 bankruptcy, liquidation of certain assets of the debtor are surrendered to the bankruptcy court and sold by a bankruptcy trustee, with the proceeds divided amongst the debtor’s creditors. The debts are then discharged, meaning that the debtor is no longer obligated to pay them. In a Chapter 13 bankruptcy, the debtor pays the bankruptcy court his or her disposable income for a period of three to five years. This money is distributed to the debtor’s creditors. At the conclusion of the three- to five-year period, the remaining debt is discharged.

Bankruptcy is designed to give debtors a fresh financial start, but this does not mean it is the solution for every tough financial situation. Before you file for bankruptcy in New Jersey, consider the following:

• What type of debts do you have? Bankruptcy laws do not allow for certain debts to be discharged. These include tax obligations, court-ordered restitution or judgments, child support obligations, alimony and most student loans. If your debt problems are caused by these types of debts, bankruptcy may be of little use to you.

• Are you working, and if so, how much do you make? In New Jersey, debtors who make over a certain amount of money each year are ineligible to file for Chapter 7 bankruptcy. This means these debtors will need to file under Chapter 13 and pay the bankruptcy court their disposable income towards a repayment plan over a three- to five-year period.

• What property do you want to keep? If you are behind on your mortgage payment, car loan or any other secured obligation, a Chapter 13 bankruptcy may allow you to keep these items while paying back the past-due amount owed over the three- to five-year period. In a Chapter 7 bankruptcy, secured property (like a home or car acting as collateral for a loan) may be returned to the creditor unless it is covered by an exemption.

• Do you want the state or the federal exemptions? Exemptions (or exempt property) are properties or assets that bankruptcy laws declare cannot be seized by the bankruptcy court. In New Jersey, a debtor can choose to take exemptions outlined by state law or those provided under federal law. The choice you make can affect your overall financial situation as well as what property you emerge from bankruptcy with.

These are but a few of the issues that should be considered before filing bankruptcy in the Garden State. Bankruptcy law can be complicated, so debtors who are confused about the bankruptcy process should consider reaching out to a New Jersey bankruptcy attorney for help. 

For more information on this area of law, see our bankruptcy overview.