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Determining If a Chapter 7 or Chapter 13 Bankruptcy Is Right For You

A New Jersey bankruptcy can be a helpful solution for a person struggling with debt. A New Jersey debtor can file for Chapter 7 liquidation or Chapter 13 reorganization. Each has its own benefits. Both provide relief to New Jersey debtors by wiping out their debts, thereby providing bankruptcy’s “fresh start.”

Chapter 7 Benefits

In New Jersey a Chapter 7 liquidation is relatively quick. Most people can get a discharge several months after filing for bankruptcy protection. This means that upon the completion of a Chapter 7 bankruptcy the court will order that debts are discharged and an individual can have a “fresh start.”

The discharge of all unsecured debt is the primary benefit of a Chapter 7 proceeding. Credit card debt is the most common examples of unsecured debt. However, in a Chapter 7, you can lose your property if you have a large amount of equity.

Chapter 13 Benefits

The primary benefits of Chapter 13 are paying less than the full amount of the debt you owe (because most of the debts will be eliminated or reduced) and stopping the foreclosure of a home or repossession of a car and, instead, allow time to prepare a plan to repay the outstanding delinquency, allowing you to keep your property while making payments on a reasonable schedule and reducing your debts. Thus, New Jersey debtors can file for Chapter 13 and keep their home and car repaying delinquencies, being able to catch up on a reasonable schedule and reduce or eliminate many other debts with the Chapter 13 plan. Typically, plans last anywhere from three to five years. Monthly payments are made to a bankruptcy trustee, who then distributes it to creditors. This helps a person to get caught up over time. Debts are discharged when all plan payments are made.

New Jersey home owners can have a second or, even a third mortgage on their primary residence reclassified as unsecured debt, and discharged upon completion of the plan. In order to do that, the home’s fair market value must be below the outstanding balance on the first mortgage. The fair market value must be determined by a licensed real estate appraiser.

Eligibility

Aside from determining the benefits of the different proceedings, debtors must also determine which proceeding they are eligible for.

Eligibility for a Chapter 7 bankruptcy is determined by a “means test.” A debtor is not eligible to file for a Chapter 7 bankruptcy if her income is too high. Monthly income is calculated by averaging the last six months before filing and comparing it to the state’s median income. A person can file for Chapter 7 bankruptcy protection if monthly income is equal to or below the state’s median. If, however, monthly income exceeds the state’s median a second part to the means test must be examined to qualify for a Chapter 7 bankruptcy.

In New Jersey cases filed between November 1, 2011 and April 30, 2012 the median income is as follows:

• For a household of 1: $60,322.00;
• For a household of 2: $67,503.00;
• For a household of 3: $84,896.00; and
• For a household of 4: $101,957.00.

The second part of the test requires an individual to determine if there is “disposable income” left after paying “allowed” monthly expenses. Allowed monthly expenses include reasonable health insurance, food, clothing, rent or mortgage payments, utilities, and transportation costs. A person can be eligible for filing for Chapter 7 protection, if there is no disposable income.

If a person does not meet the means test, they are not eligible for Chapter 7. Instead they must file for Chapter 13 bankruptcy protection.

On the other hand, any individual is eligible to file for Chapter 13 protection if the individual’s unsecured debts are less than $360,475 and secured debts are less than $1,081,400. The amounts are periodically adjusted to reflect change in the consumer price index.

People who have previously filed for bankruptcy and obtained a discharge or had the bankruptcy filing dismissed may be limited to when they can file again. For example, debtors can file for a Chapter 7 only once every eight years unless they previously filed for Chapter 13, in which case debtors can file for Chapter 7 after six years.

Chapter 7 or Chapter 13

Individuals who qualify for both a Chapter 7 or Chapter 13 should typically file for Chapter 7 protection unless they own a home with multiple mortgages and the value of the home is less than what is owed on the first mortgage.

If you are overwhelmed by debts or have questions regarding bankruptcy filings, our attorneys can help. McLaughlin & Nardi’s New Jersey’s attorneys regularly represent people and companies negotiate debts and file for bankruptcy protection. Our attorneys have extensive experience representing debtors and creditors in various proceedings, including bankruptcy matters. To learn more about what we can do to help, please contact our lawyers by e-mail or at (973) 890-0004.