What Happens When You File
for Bankruptcy in New Jersey

Bankruptcy laws are federal laws. The bankruptcy laws are located in a federal law book that is called the bankruptcy code. Bankruptcy courts are part of the federal court system, which is separate from the state courts. In New Jersey, there is one bankruptcy court in Trenton, Camden and Newark.
The bankruptcy courts are located in the federal court buildings, where all federal cases are handled.

Federal bankruptcy laws are granted power over all state courts. Therefore, if a debtor who files for bankruptcy protection in New Jersey owns real estate in three separate states, the bankruptcy court has control of the property in all states. Sometimes a bankruptcy court will temporarily send a dispute back to the state court for the resolution of an issue, such as child support payments.

In general, bankruptcy deals with personal and business debt, in addition to controlling the actions of creditors regarding the debt. For example, bankruptcy may allow a debtor to avoid eviction because of the nonpayment of debt, but not as a result of playing load music.

Bankruptcy can help a person with the following:
permanently eliminate debt; avoid utility shut off; save house from foreclosure; save an auto from repossession; stop residential eviction actions; eliminate all or partial tax debt; ease support or alimony payments; stop debt
collection; possibly stop any action that is a result of having not paid a debt; stop a creditor from taking property; immediately stop a creditor from suing someone.

Someone that files for bankruptcy protection is called a debtor. Typically, a debtor will file a chapter 7 case for the purpose of eliminating all unsecured debt, such as credit card debt or personal loans.

Chapter 13 cases are typically filed for the following reasons: save a house from foreclosure; save a car from repossession; eliminate most unsecured debt because the debtor did not meet the chapter 7 criteria. The portion of the unsecured debt that is not paid, is eliminated in a chapter 13.

Typically, a person will file for chapter 11 bankruptcy protection for the same reasons as a chapter 13. However, the person does not meet the chapter 13 criteria because the amount of debt is substantial. Also, a corporation or limited liability company must file a chapter 11 case to reorganize, as they are unable to file a chapter 13. Chapter 11 cases also help businesses with financial issues, continue to operate.

All bankruptcy chapters deal with all of the debtor’s debts and creditors and not just the one debt or creditor that is their major concern. For example, someone may want to file for the sole purpose of avoiding auto repossession, due to payment arrears. However, the bankruptcy laws apply to all of the person’s debt and creditors and not only the auto finance issues.  

A person named a trustee is appointed to administer each case. The responsibilities of a chapter 7 trustee are different than chapter 13 and chapter 11 trustees.

In general, the main criteria for a chapter 7 discharge (elimination of debt), is that the debtor’s household income is less than the household’s necessary and reasonable expenses. 

Only the cost of living expenses may be used in the analysis’, such as: food, clothing, mortgage payments, car payments, utilities, transportation, etc.  Payments on unsecured debt, such as credit card debt may not be used as an expense.

The debtor must be in the red each month and unable to pay back any money to his creditors. If the debtor has disposable income, he will not be permitted to file a chapter 7. A debtor that has disposable income could file for  chapter 13 protection and pay back a portion of his debt, while also eliminating a portion of  his debt.

The first criterion deals with the value of a debtor’s personal property and real estate. If a person owns real estate or personal property with a substantial amount of equity (value in excess of liens), the trustee may be permitted to sell that property or real estate. This criterion applies the bankruptcy exemptions that are explained above.

Prior to filing, the debtor and her attorney must confirm the actual value of real estate and personal property, to avoid the trustee’s sale. If there is a concern that the value of the property is too high, the debtor may file a chapter 13 to pay back some money to the unsecured creditors and avoid the chapter 7 trustee’s possible sale of the property. 

Please note that a debtor will still obtain a chapter 7 discharge, if the trustee sells property and pays the sale’s proceeds to creditors. 

As I explained, the sale of property by the trustee is very unusual, when a competent lawyer does his job. Generally, the debtor keeps his house and automobile, through the bankruptcy case.

The second criterion is called the “Currently Monthly Income Test” (CMI) or the “Means Test”.  The following is an explanation of the “Means Test”. If the total gross income (income prior to taxes and employment deductions) of the debtor’s household is less than the average gross income of the same size household in New Jersey, the criterion is satisfied. 

The analysis uses the household income for the six months prior to the bankruptcy filing. For example, if the debtor is filing in November, the analysis includes the pay stubs covering the first pay of May and the last pay of October.

Let’s use a household of three people that includes a husband, wife and one child as an example. The husband and wife both work and there total gross income for the six months prior to the bankruptcy filing is $40,000. $40,000 times 2 is $80,000, which reflects the yearly amount that is applied. The present Census Bureau Median Family Income of a Family Size of three, in New Jersey, is $111,046.00. The criterion is met, as $80,000.00 is less than $111,046.

If the debtor’s household’s gross income is more than the average (median) gross income of the same number of household members, initially, the debtor does not meet the “Means Test” criterion. Therefore, if the household income of our example totaled $120,000.00, initially, the debtor would not meet the criterion because $120,000 is more than $111,046. 

However, the debtor may still satisfy the “CMI” analysis if the debtor’s household’s average monthly net (take home) income, for the six months prior to the filing is less than their reasonable, but necessary expenses that are needed to live. 

The IRS determines the amount that may be used for each expense, based on the number of individuals in the household. This means that the amount used for each expense is limited to the amount allowed by the IRS.

In other words, if the debtor’s household’s gross income is above New Jersey’s average, the second part of the second criterion is applied as follows.  Add the total net (take home) monthly income of the husband and wife for the prior six month period. Divide that figure by six to obtain the joint net monthly income. Thereafter, subtract all of the IRS allowable monthly expenses from the average monthly net income. 

If the expenses exceed said average monthly net income, the debtor meets the “CMI” criterion. In the event that the difference is an amount that is more than $1.00, the debtor does not meet the chapter 7 criterion. In this scenario, the debtor may possibly file a chapter 13 and pay back a portion of their unsecured debt.

If the debtor’s projected future monthly household net income for the months after the filing is less than the household’s actual necessary and reasonable expenses, for the same time period, this third criterion is met. 

In other words, the debtor’s household’s projected future income must be in the red each month. The reasonability of each expense is somewhat based on the IRS figures. The debtor may not use payments on unsecured debt as a reasonable and necessary expense. 

If the net income is more than said expenses, the debtor does not meet this criterion and cannot file a chapter 7 case. If the debtor is capable of paying back some debt, the debtor must pay back the amount of their disposable income in a chapter 13 case.

Please note that the income and expenses may be the same for the second and third criteria. Also, both the second and third criteria must be met in order to receive a chapter 7 discharge. If the debtor’s income and expenses do not meet either criterion, the debtor may not file a chapter 7.

The most likely reasons a person may file a chapter 13 instead of a chapter 7 are the following. A debtor can save a house from foreclosure and/or an auto from repossession. A debtor with disposable income, that does not meet the chapter 7 criteria, may eliminate all or a portion of their unsecured debt in a chapter 13. 

Additionally, based on the substantial amount of equity of any property, the debtor may know that a chapter 7 trustee will sell his property. This person may file a chapter 13 to avoid the sale of the property and pay back only a portion of his debt. 

The chapter 13 criteria is basically the same as a chapter 7. However, the information is applied differently.

 The debtor must include all of their debts and assets on the petition in every case, no matter the reason for the filing. The debtor must make monthly trustee payments (plan payments), through a plan, for a period of 36 to 60 months. The total amounts that are due to each creditor is paid over the total number of months of the plan. The debtor’s case is completed after the last trustee payment is made 36 to 60 months from the filing date.  

The same basic pre-bankruptcy counseling is required. Also, the same documents are required. The main difference between the chapters is that a bankruptcy plan must be drafted and filed with the court. The plan reflects the amount of the monthly trustee payment and the total number of months of the plan. The plan directives must comply with the bankruptcy code, which incorporates the debtor’s income, expenses, assets and debts.

In New Jersey, the trustee’s request that the initial trustee payment commence on the first of the month after the petition is filed with the court. In addition to making the monthly trustee payments, the debtor must also make direct monthly payments to certain creditors, such as the mortgage company. The first payment that is due to the mortgage company, after the filing, is the date on which the payment typically comes due after the filing.

After the filing, the court sends notices to each creditor. Every creditor should file a proof of claim with the court that reflects the total amount due, the arrears amount and the classification of the debt. Debt classification is explained above.

The chapter 13 trustee’s responsibilities are mainly the following. Review all of the debtor’s documents, petition, asset valuations, income, expenses, creditors’ objections and proofs of claim. 

The trustee must ensure that the debtor’s plan reflects the appropriate monthly payment amount and the proper amount that must be paid to each creditor. The trustee must also ensure that the debtor is paying, at least, his monthly disposable income into the plan and that the number of plan months are accurate.  

The trustee’s office receives the debtor’s monthly payments and makes disbursements to the creditors per the plan and the bankruptcy laws. The trustee administers all aspects of the case from beginning to its completion. 

If the debtor falls behind with her trustee payments, the trustee handles the matter. In New Jersey, if the debtor falls behind with creditors’ payments, such as mortgage payments, the mortgage company’s attorney handles the matter.

The trustee may require additional documents and object to certain aspects of the petition and plan. The trustee may also require the debtor to amend the plan and/or any part of the bankruptcy petition. 

About one month after the bankruptcy filing, the debtor and his attorney must appear at a “Meeting of Creditors” (341A Hearing). This hearing is similar to the chapter 7 “Meeting of Creditors”. However, the trustee is seeking information for different reasons. 

The trustee is reviewing the documents to make determinations regarding her responsibilities as explained in the above. Like the chapter 7 hearing, the chapter 13 hearing allows the debtors’ creditors to appear, although their appearance is very unlikely. This hearing lasts about 10 minutes. 

About three months after the filing, there is a second hearing called a “Confirmation Hearing”. From the date of the bankruptcy filing until the “Confirmation Hearing”  the debtor’s attorney will be required to review all proofs of claim and perform numerous tasks to prepare for the “Confirmation Hearing” and the Confirmation of the case. 

The debtor’s attorney may need to file motions and/or complaints with the court to resolve various issues. Also, the creditors and the trustee may file various documents with the court to object or resolve certain issues.

At the “Confirmation Hearing”, the court confirms all aspects of the debtor’s plan, which includes, the monthly payment amount, the number of months of the plan, and the amount each creditor will receive from the trustee, etc. The final confirmed terms are set forth in a court order.  Various issues may be handled before the judge at the hearing. Please note that it is typical for the hearing to be postponed.

After confirmation through the completion of the plan, various issues may occur that may need resolution by the debtor’s attorney. Near the end of the case, the attorney will be required to prepare documents to close out the case. The attorney may also need to finalize certain matters, such as eliminating liens. After the last payment, the trustee’s office audits the case for completion, which takes about three months. Thereafter, the debtor receives the order of discharge and the case is complete.

A chapter 7 case has three criteria to determine if a debtor will be approved for a discharge. A chapter 13 uses the same three criteria to determine the amount that must be paid to unsecured creditors, through the plan.

The first criterion is similar to the first chapter 7 criterion. However, a chapter 13 trustee will never sell any of the debtor’s personal property or real estate. Similar to a chapter 7, each piece of the debtor’s personal property and real estate must be valued. 

The same chapter 7 exemption analysis, that is explained above, is applied to determine if each piece of property is completely exempt. 

Based on the first criterion, if all property is completely exempt, the debtor need not make any additional payments to unsecured creditors, based on their property values, only. However, if any property is only partially exempt, at least, the total “unexempt” amount of each property must be paid towards the total unsecured debt. This exemption analysis is explained above. 

Basically, this means that if the debtor owns real estate or personal property that can be sold for a substantial amount of money, the debtor will be required to pay a portion of their unsecured debt. In other words, based on this first criterion, the debtor must pay to the unsecured creditors, at least, the amount that a chapter 7 trustee would have received, if the debtor filed a chapter 7 case.

Assume for example, the total unsecured debt is $50,000 and the total amount of “unexempt” equity that is added together from all property is $10,000.00.  In this scenario, based on this criterion, only, the total amount that must be paid towards the $50,000, through the bankruptcy plan, is $10,000.00, spread out over the life of the bankruptcy plan.

The “Means Test” is basically the same as the chapter 7 “Means Test”. However, the application of the result is applied differently. The analysis is mainly used in determining the amount that must be paid toward the total unsecured debt, through the bankruptcy plan. 

The analysis is also used to determine if the debtor is required to make monthly trustee payments to the creditors for 36 or 60 months. Please review the “Means Test” explanation detailed above.

In the event that the debtor’s household’s gross income is less than the average income of the same size in New Jersey, the debtor will meet this criteria. This will result in the debtor only having to pay a trustee payment for only 36 months. However, the debtor may wish to extend their plan beyond 36 months for various reasons.

If the debtor’s household’s gross income is more than Jersey’s state average, the debtor must make trustee payments for 60 months, in any and all circumstances. 

If the debtor’s household’s gross income is more than the state’s average, for the same size household, but the IRS’s allowable expenses exceed the monthly net income, the debtor need not pay any funds to the unsecured creditors, based on this criterion, only.

Like that chapter 7 criterion, if the debtor’s household’s gross income is more than the state’s average, the second part of the analysis is applied. In the event that the debtor’s household’s IRS’s allowable expenses is less than the average net monthly income for the six months prior to the filing, the result is a positive amount.

This positive amount reflects the debtor’s household’s monthly disposable income, based on this second criterion, only. This figure is also the monthly amount that must be paid towards the unsecured debt, only, on a monthly basis, through the debtor’s 60 month bankruptcy plan.

The debtor includes his projected household’s average net monthly income for the coming year. The debtor subtracts from this figure, the necessary and reasonable monthly expenses, that are appropriate for the number of household members. Although the debtor need not use the same expense amounts as the “Means Test”, the court may look to the IRS figures to determine reasonability. 

The debtor has the option of saving their house from foreclosure by paying the total mortgage arrears through the bankruptcy plan, while making future direct payments to the mortgage company. Also, the debtor has the option of saving their auto from repossession by curing their automobile finance arrears through the bankruptcy plan, while making future direct payments to the finance company. The debtor may wish to surrender their house or auto and eliminate the debt, if possible. There are many other additional options for the debtor.

“Priority Debt” is a specific type of debt that must be paid through the bankruptcy plan, in any and all circumstances. As explained above, “Priority Debt” includes, but is not limited to: child and spousal support arrears and various types of federal and state taxes.

The debtor’s chapter 13 monthly plan and trustee payment is explained as follows.

The following is one example.

Let’s assume that the debtor’s mortgage arrears are $10,000.00. If the debtor has a 60 month plan, the portion of the monthly trustee payment representing mortgage arrears is $167.00. If the same debtor has child support arrears of $15,000.00, the portion of the monthly trustee payment apportioned to child support is $250.00, for 60 months.

For this same example, the debtor has a total of $80,000.00 of unsecured debt. The debtor may be required to pay none, some or all of his unsecured debt. The total amount that must be paid towards the unsecured debt is the greater amount resulting from the above three criteria. 

In this same example, let’s assume that the total “unexempt” equity of all the debtor’s property is based on an automobile, with $2,000.00 available after all exemptions are applied. This means that based on the first criterion, only, the total amount that must be paid towards, the unsecured debt, pro rata, is $2,000.00. $2,000.00 requires a monthly payment of $33.00 for a 60 month plan. 

If the result of the “Means Test”, which is the second criterion, reflects disposable income of $150.00, the total amount that must be paid towards unsecured debt, pro rata, under the second criterion, in a 60 month plan, is $9,000.00. 

We will assume that the debtor in the example has monthly disposable income of $600.00, as a result of their projected future income and expenses.

The amount of the monthly trustee payment is explained as follows. The monthly $167.00 payment for the mortgage arrears plus the $250.00 monthly for child support arrears is $417.00. 

The additional monthly amount that must be paid towards unsecured debt, pro rata, is the greater of $33.00 monthly, $150.00 monthly or the projected future disposable income of $600.00. These figures represent the results of the three criteria.

After subtracting the required monthly amount of $417.00, that is dedicated to the mortgage and child support arrears from $600.00, the balance is $183.00. Therefore, the monthly payment that is required to be paid towards the unsecured debt under the third criterion is $183.00.

In this example, since $183.00 is the most amount that must be paid to the unsecured creditors, regarding the above referenced three criteria, $183.00 is the amount that will be paid towards the unsecured debt each month. 

This means that $10,980.00 will be paid towards the unsecured debt, pro rata, over the 60 month plan. At the completion of the plan, the unsecured debt amount of $69,020.00 will be eliminated. Please note that there is no general requirement that any unsecured is paid.

As explained above and in the example, it is mandatory that all priority debt and the $10,980.00 be a paid towards the unsecured debt. However, the amount that is paid towards mortgage arrears, through a plan, may be included to save their house from foreclosure. 

If the debtor wishes to include mortgage arrears in our example, the monthly trustee payment will increase in the amount of the total arrears divided by the number of months of the plan. Even though the mortgage arrears payment is optional, the funds paid towards the arrears may be used to reduce the amount due towards the unsecured debt, in certain situations. 

Saving an automobile from repossession, in a chapter 13 case, as a result of payment arrears, is analyzed the same as curing mortgage arrears.

As explained above, a debtor may be required to make monthly trustee payments for only 36 months. However, the debtor has the option of extending the number of months through their plan, past 36 months. A debtor may extend their plan from 37 to 60 months, for the purpose of lowering their monthly payments. The amount of months needed to pay $10,000.00 is less money monthly, over a period of 50 months, as compared to 36 months.

The bankruptcy laws allow numerous variations of the creation of plans.  There are options as to how mortgage arrears, auto payment arrears and other issues are handled. A debtor may wish to pursue a mortgage loan modification, as well. 

Who can file a bankruptcy petition?

The general requirements to file for bankruptcy protection are very limited. A person must meet one of the following: reside in the U.S.; maintain a domicile in the U.S.; own a place of business in the U.S.; own property in the U.S.A domicile is location that one uses as their permanent home.

How is Bankruptcy Different in New Jersey?

Although bankruptcy laws are federal laws, the judges may still need to apply state law. For example, the term “lien” is used in the bankruptcy laws. However, a lien may mean something different in New Jersey, than another state. Therefore, if the lien was entered in New Jersey, the bankruptcy court judge must apply the meaning of lien under NJ. law.

A debtor that files a bankruptcy case in New Jersey may apply federal exemptions or our state exemptions. However, other states may only allow a debtor to use their state exemptions and not the federal exemptions. 

Each state has exemptions which differ from other states. No state may permit a debtor to use a mix of state and federal exemptions. If a state allows a person to apply federal or state exemptions, the debtor must chose only one.

In virtually every NJ. bankruptcy case, the federal exemptions are more beneficial than the state exemptions. However, in certain circumstances regarding pension issues, the NJ. exemptions may be more beneficial.  

Each judge may decide the same bankruptcy laws differently. For example, years ago there was a difference of opinion regarding the application of a bankruptcy law that determined whether a person may save their house in a chapter 13 case. 

The bankruptcy law allowed a debtor to save their house, if they filed their bankruptcy petition prior to the sale of their house. One judge determined that the house is sold at the sheriff’s sale. The judge across the hall determined that the house is sold when the deed is recorded with the county, sometime after the sheriff’s sale. 

Consequently, a person filing a bankruptcy petition after the sheriff’s sale and before the deed was recorded may only save their house if the case was assigned to a certain judge.

The process of a trustee and the court may be different from state to state and court to court. In New Jersey, future regular monthly mortgage payments of a chapter 13 debtor are paid directly to the mortgage company and not by the trustee. In other states, the regular monthly mortgage payments are disbursed by the trustee. 

Also, the court procedures regarding the manner in which hearings are handled in the Trenton, Camden and Newark bankruptcy vicinages are different . Furthermore, trustee’s requirements and procedures are different.

The average monthly income for each state that is applied on the “Means Test” is different in each state. The average household income in New Jersey is either the highest in the nation, or one of the highest. The debtor will benefit from living in a state with a higher average state household income. A debtor with the same income may not meet the “Current Monthly Income” test if they live in Alabama, instead of New Jersey.  

If you want to learn more about how bankruptcy works in New Jersey, read the first page of this website at Manchel New Jersey Bankruptcy Law. You can also click on the drop-down menu at the top of the first page and hover over the text “Chapter 7 & Chapter 13 Info”.

You may contact Robert Manchel, Esq., at (866) 503-5655, to discuss your bankruptcy options.