Postend on October 27, 2022

What Is the Difference Between New Jersey Bankruptcy Chapter 7 and Chapter 13?

Difficult financial situations like job loss, divorce, business problems, and illness can be made worse by the existence of debt. It is easy to be overwhelmed with debt, especially in circumstances where a source of income is not readily available. It is even more stressful trying to find ways to seek relief from this financial crisis when you have creditors hounding your every move and seeking to acquire your assets for repayment.

Even with careful planning, when the unexpected happens, you can still find yourself in financial difficulty. Seeking debt relief through filing bankruptcy can be a viable option. If you find yourself in the position of having to file bankruptcy, it is important to consult with an experienced New Jersey bankruptcy attorney.

Bankruptcy is defined as a legal process initiated by those who cannot repay their debts in order to seek relief from some or all of the debt. Filing for bankruptcy can either discard the debt or facilitate repayment through the creation of a payment plan. Aside from debtors being able to start fresh after availing of debt relief, bankruptcy also allows creditors to obtain repayment depending on the kind of bankruptcy filed.

A bankruptcy petition can be filed by individuals, by spouses, and by corporations, or other entities. Under the US Bankruptcy Code, all petitions for bankruptcy are handled at the federal level. 

The Bankruptcy Code allows for different types of bankruptcy, each referred to by its chapter in the Code. Two of the most common types available to common people, that is, individuals and small businesses are Chapter 7 and Chapter 13 Bankruptcy.

Chapter 7 Bankruptcy 

Chapter 7 Bankruptcy is commonly referred to as liquidation bankruptcy. The court assigns a bankruptcy trustee to sell any nonexempt assets owned by the debtor to be used to repay all or some amount of debt.

To file and complete the Official Bankruptcy Form and petition the court for Chapter 7 bankruptcy, the debtor must submit the following details to the court:

  • A list of their creditors and how much the debtor owes each one
  • The debtor’s source and amount of income
  • An inventory of all of the debtor’s property
  • A list of their monthly living expenses

The debtor would also have to pass a means test. The purpose of the means test is to ensure that the debtor is not abusing Chapter 7 bankruptcy law to avoid paying their debts, even though they can afford it. The Chapter 7 Means Test in New Jersey takes your average household income for the last six months and compares it to the median income of households of a similar size in the state. If you fall below the threshold, you can proceed with filing for Chapter 7 bankruptcy. 

If you don’t meet the requirements, the Bankruptcy Court will look more closely at your income and expenses. The court can also convert your case to Chapter 13 bankruptcy if you have a significant amount of disposable income left over each month that you could otherwise use to pay debts.

What Happens After Filing Chapter 7 Bankruptcy?

Filing a petition for Chapter 7 Bankruptcy automatically stays any collection orders or lawsuits from creditors to the debtors. The expected timeframe to get your debts discharged is 6 months after the conclusion of your debt counseling, as required by the court.

The court will assign a bankruptcy trustee responsible for discharging the debtor’s nonexempt assets. Nonexempt assets may include a vacation home, any valuable collections, and jewelry, among others. Exempt property is assets considered necessary for living. This usually includes a primary residence, tools of a trade, personal possessions, and a car (provided that it is not in equity).

Any funds gathered from the sale of nonexempt assets will be used to pay off a portion of the debtor’s unsecured debt (ie. credit card bills, medical bills, etc.). In New Jersey, it is possible to protect certain nonexempt assets from liquidation and bankruptcy trustees can also forego selling nonexempt assets if they are not worth much in value or would be too difficult to sell.

It is important to remember that not all debt can be discharged through bankruptcy. Debt from child support, income taxes, alimony, and federal student loans are not dischargeable under the US Bankruptcy Code.

Chapter 7 will remain on your credit score for 10 years from the date the petition was filed. You will also be unable to file another Chapter 7 bankruptcy for 8 years after a prior discharge or Chapter 13 for the next 4 years. Due to this, it is important to get the help of a qualified New Jersey bankruptcy attorney to evaluate your financial situation. Your bankruptcy attorney should help you in exploring your options before applying for bankruptcy and assist in preparing your requirements in petitioning the Bankruptcy Court.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy, or a wage earner’s plan, refers to the reorganization of the debtor’s finances under the supervision of the court. In a Chapter 13, debtors must draft and adhere to a plan to pay outstanding creditors within 3 to 5 years. The plan must allow repayment to the creditors of at least equal to what they will receive if a different kind of bankruptcy was petitioned. A debtor may also be required to use 100% of their disposable income to repay the debts, if necessary.

A Chapter 13 bankruptcy is the common option for those who make an income higher than the median income for the state. As of June 2022, New Jersey allows for a combined debt limit of up to $2.75 million for both secured and unsecured debt.

The list of requirements submitted to the Bankruptcy Court in Chapter 13 is similar to Chapter 7 aside from the additional submission of a repayment plan. Instead of being in charge of the liquidation of the debtor’s assets, in Chapter 13, the court-assigned bankruptcy trustee is only assigned to collect a monthly debt payment.

As there is no liquidation of assets involved in Chapter 13, a debtor can avoid the foreclosure of their home and keep their assets.

What Happens After Filing Chapter 13 Bankruptcy?

Like in Chapter 7, however, all forms of legal action and collection efforts from creditors will be halted once Chapter 13 is filed. The trustee will act as an intermediary between the debtor and the creditor and while under Chapter 13 protection, creditors will have no direct contact with the debtor. 

Chapter 13 allows debtors more wiggle room in terms of repaying their debts. Even though there is no debt discharged in Chapter 13, debtors have more time to find alternative sources of income and may be able to keep their assets instead of liquidating them like in Chapter 7. These conditions apply as long as the debtor can meet the monthly payments. 

When completed, Chapter 13 bankruptcy remains on your credit report for up to 7 years from the filing date. The monthly payments required by the court are mandatory and monitored by the court.

Side By Side Comparison: Chapter 7 Vs. Chapter 13

Chapter 7Chapter 13
Type of BankruptcyLiquidationReorganization of finances
Who can file?Individuals, spouses, and business entitiesIndividuals and spouses only (sole proprietorships included)
Cost to file$338.00 (Inclusive of $78 Misc. Administrative and $15 Trustee Fee)Can be waived depending on circumstances$313.00 (Inclusive of $78 Misc. Administrative Fee
EligibilityMust pass a means testNo Chapter 7 discharge for the past 8 years or Chapter 13 in the past 6 yearsNo dismissed Chapter 7 or 18 petition from the last 180 daysCannot have more than  $2.75 million secured and unsecured debt combined (New Jersey)Must have regular income and have up to date tax filingsNo Chapter 13 filing from the past 2 years or Chapter 7 from the past 7 yearsNo dismissed Chapter 7 or 18 petition from the last 180 days
How long it takes to receive a debt dischargeThree to six monthsUpon completion of repayment plan (3 to 5 years)
How long the bankruptcy affects a credit report10 years from filing date7 years from filing date
BenefitsIf the debtor is eligible, Chapter 7 is one of the quickest ways to get debt reliefHalts collection orders and lawsuits to debtor from creditorsAllows debtors to schedule repayments to creditors while retaining assetsHalts collection orders and lawsuits to debtor from creditors
DrawbacksNonexempt property assets can be sold by a bankruptcy trusteeDoes not apply for secured debt (foreclosures, repossession, etc.) and undischargeble debt (alimony, federal student loans, child support, etc.)The court can require the use of up to 100% of the debtor’s disposable income in debt servicingRepayment plan can be challenging for some debtorsDoes not apply for undischargeble debt (alimony, federal student loans, child support, etc.)

Determining the Bankruptcy Type for Your Financial Situation

While bankruptcy can sound like a great solution to debt, it should be noted that bankruptcy should only be explored as a last resort. Having a bankruptcy on your credit score can greatly affect your finances for the foreseeable future.

If you are considering filing for bankruptcy, it is important to seek the advice of a qualified New Jersey bankruptcy attorney. A bankruptcy attorney will be able to determine your best option and strategy when filing for bankruptcy. Your attorney should be able to determine if the benefits of filing for bankruptcy outweigh the costs in your situation.

At Straffi and Straffi Attorneys At Law, we provide qualified legal counsel and representation to those seeking to file bankruptcy in the Toms River, New Jersey area. We understand the importance of starting afresh. We can help you explore your options and navigate the complicated process of petitioning for bankruptcy. 

To learn more about our services, contact Straffi and Straffi Attorneys At Law today to speak with a qualified New Jersey bankruptcy attorney.

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