Chapter 7 Bankruptcy

Chapter 7 is generally the simplest and quickest form of bankruptcy and is available to individuals, married couples, corporations and partnerships. A trustee (appointed by the court) sells some of your property and the profits are distributed to creditors according to federal law.

A bankruptcy starts with the filing in bankruptcy court of the official petition and a lengthy document called a "Statement of Financial Affairs." This statement contains extensive schedules requiring a detailed list of all your debts, including:

• All priority debts (including taxes)
• All "secured" debts (including home mortgages and auto loans) that have property as "collateral"
• All unsecured debts of any kind

Other information that must be provided on the Statement ofFinancial Affairs includes:

• The names and addresses of the creditors
• A list of all assets, including real estate and all forms of personal property
  

It is extremely important that the Statement of Financial Affairs be completed accurately. Debts that are not listed in the statement will not be discharged at the completion of the bankruptcy proceeding. Failing to list assets in an attempt to hide them from creditors may result in serious consequences, including the denial of discharge or charges of bankruptcy fraud.

Creditors are immediately prevented from trying to collect on your debts through what is called an "automatic stay." The stay is designed to preserve your property and to give you a break from litigation.

Anyone you owe – or anyone who wants to continue collection proceedings during the bankruptcy process – must show the bankruptcy judge, after a hearing, that there is "cause" to be allowed to continue with collection action (for instance, by showing that the property might deteriorate in value during the bankruptcy process).

The trustee takes control of any property you do not get to keep. From the sale of your property, the trustee pays the expenses of the administration of the case, and then gives any remaining money to creditors with allowed claims, according to the priority of the claims (with claims that are "secured" by property being paid first). Any wages you earn after you file the case are yours, beyond the reach of creditors who had claims on the date you filed for bankruptcy.

After the bankruptcy is filed, you must appear at the "first meeting of creditors" (also called a "341" meeting). The trustee can ask you questions under oath about your property and debts. Creditors can also question you on those subjects, but seldom do.

Generally, the only responsibility you have after the 341 meeting is to cooperate with the trustee in providing any requested information.

Creditors have 60 days after the 341 meeting to convince the bankruptcy court you shouldn't be allowed to jettison your debts.

The trustee may review your income and expenses to see if you have enough money left after your current living expenditures to pay something to creditors.

What Can I Keep?

You can choose one of two "exemption schemes" in New Jersey, whichever best suits your circumstances.

Under the first exemption scheme, from federal bankruptcy laws, you can keep:

• Your home, if you do not have more than $18,450 in equity in the house (today's value less costs of sale less payoff balances on all liens and mortgages)
• Your motor vehicle, if you do not have more than $2,950 in equity in the vehicle (today's value less costs of sale less payoff balances on all liens and mortgages)
• Animals, crops, furnishings, clothing and musical instruments, up to $475 per item and $9,850 total
• Jewelry, up to $1,225 in value
• Health aids
• Unemployment, disability, veterans', workers' compensation and social security benefits
• Alimony and child support needed for support
• ERISA-qualified pension benefits
• Life insurance payments for someone who is dependent on the debtor, which are needed for support
• Life insurance contracts, except credit insurance policies
• Tools of your trade, up to $1,850 in value

If you choose the second exemption scheme, under New Jersey bankruptcy laws, you can keep:

• Goods and chattels, shares of stock or interest in any corporation, up to $1,000 in value
• Clothing
• Household goods and furniture, up to $1,000 in value
• Burial plots
• ERISA-qualified pension benefits
• Public employees' pensions
• Crime victims' compensation, aid to the aged and/or disabled, workers' compensation and unemployment compensation
• Property of a business partnership
• Annuity contract proceeds, up to $500 per month
• Fraternal benefit society and health or disability benefits
• Disability or death benefits for military personnel
• Disability, death, medical or hospital benefits for civil defense workers
• Groups life or health policy proceeds
• Life insurance proceeds if a clause in the policy prohibits the proceeds from being used to pay the beneficiary's creditors
• Life insurance proceeds or avails if you are not the insured
• 90% of earned but unpaid wages if your income is less than $7,500 per year; if your income is over $7,500 per year, the judge will decide how much of your wages to exempt
• Wages or allowances received by military personnel

A bankruptcy does not wipe out voluntary liens, like mortgages and deeds of trust, or tax liens. So the lender still has the right to foreclose if you do not pay. If you pay, everyone is happy. Remember, the lender does not want the property; it wants you to pay regularly on the loan. Foreclosure is a last resort for the lender if it concludes it can't get the owed money any other way.

If you still owe money on the car, you can choose to reaffirm the debt to the secured lender by continuing to make the agreed-upon payments. You can also "redeem" the car by buying it from the secured creditor in a single payment for its present value.

If you choose, you can surrender the car and be free of any obligation to pay for it.