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New Jersey Bankruptcy Exemptions and Law
In the Garden State, a combination of federal and state laws control our everyday lives. For example, we pay income taxes to both the federal and state government. Similarly, a combination of the federal Bankruptcy Code and the New Jersey Annotated Statutes constitute bankruptcy's procedural and substantive laws.
Bank-offered payment deferrals and grace periods are mostly marketing gimmicks. As soon as they are able to do so, creditors do not hesitate to take adverse action against distressed borrowers. These adverse actions include:
- Wage garnishment
- Creditor harassment
- Collection lawsuits
Bankruptcy's automatic stay immediately halts all these adverse actions. Typically, Section 362 of the Bankruptcy Code kicks in the moment debtors file their voluntary petitions, and it stays in effect until the judge closes the case.
That being said, there are a few rules to follow and loopholes to close. For example, the automatic stay only applies to creditors and other parties who receive actual notice of the filing. Many of the aforementioned adverse actions, such as foreclosure, involve auction houses, repo men, and other third parties. All these entities must receive notice. So, a bankruptcy lawyer often must do some additional legwork to satisfy this requirement.
Furthermore, bankruptcy discharges unsecured debts. Unsecured debts are obligations that involve no collateral. Examples include:
- Credit cards
- Signature loans
- Medical bills
- Revolving credit accounts
- Payday loans
The line between secured and unsecured debts is sometimes a little fuzzy. HELOCs (Home Equity Lines of Credit) are a good example. Assume Marlon owes $180,000 on a house that is worth $200,000. So, he takes out a $20,000 home equity loan. If his home's value drops to $180,000, the house's value is not high enough to secure both loans. Therefore, a bankruptcy judge could reclassify the HELOC as an unsecured debt. If that happens, the obligation is dischargeable, and Marlon may not have to repay this loan.
This strip-off is just one example of the advanced bankruptcy options which only a New Jersey bankruptcy lawyer can unlock.
There are a few options you can choose for bankruptcy depending on your family's unique situation.
As mentioned above, bankruptcy discharges unsecured debts. Chapter 7 bankruptcy eliminates them in as little as nine months. Also as discussed above, Chapter 7 stops adverse actions, even if a foreclosure sale is imminent. Furthermore, Chapter 7 protects certain property from liquidation (sale).
Procedurally, most of these matters are somewhat straightforward. After debtors file their voluntary petitions, trustees review identification, and financial documents to look for signs of identity or bankruptcy fraud. If there are no red flags of fraud, most Chapter 7 judges sign discharge orders without requiring hearings.
Other people stop paying home mortgages and other secured debts when money is tight. Or, they overuse payment deferrals and dig themselves into deep financial holes. Chapter 13 bankruptcy is designed for families like these.
The trustee has a much bigger job in Chapter 13. In addition to spotting fraud, the trustee helps families set up a monthly repayment plan. This plan lasts thirty-six or sixty months, largely depending on the debtor's income. Each month, you make a debt consolidation payment. When the repayment period ends, all your secured obligations are current and the judge discharges your unsecured debts. That's the essence of a fresh financial start.
Financial and personal honesty aren't the only qualifications for bankruptcy. There are a few others, and some of these requirements are unwritten.
Furthermore, some qualifications apply to everyone. For example, everyone must complete two financial education classes. Other qualifications are Chapter-specific.
Chapter 7 Requirements
Written and unwritten requirements usually determine financial need. That's what the means test does. Four-person households in New Jersey must earn less than $132,708 a year. As of late 2020, that's the average income for that family size in the Garden State. This figure changes frequently. If you earn more, you might still qualify for Chapter 7, based on your actual income and expenses.
As for the unwritten requirements, Chapter 7 debtors should be unable to pay their unsecured obligations. So, if your income/expense information in Schedules I and J shows a monthly surplus, the trustee might question your financial need to file Chapter 7. Many trustees point you to other options, such as Chapter 13 or non-bankruptcy debt negotiation.
Chapter 13 Requirements
Chapter 13 petitioners must deal with a debt ceiling. As of 2021, you must owe less than $1.3 million in secured debts and $400,000 in unsecured debts. Once again, these figures change every few months. Also once again, if you are over these limits, a bankruptcy lawyer can usually offer other options.
Chapter 13 has the opposite unwritten requirement of a Chapter 7. To prove they can make the monthly debt consolidation payment, debtors must have disposable income. If the payment becomes a problem later, perhaps due to a permanent change of financial circumstances, a bankruptcy lawyer might be able to arrange a hardship discharge or a plan modification.
When Monopoly players file bankruptcy, they instantly lose all their property. Many people think a real-life bankruptcy must do the same thing. But the Monopoly rules do not include property exemptions. These exemptions prevent the trustee from seizing your property, liquidating it, and distributing the money among your creditors.
New Jersey lets debtors decide between federal and state exemptions. Since the exemptions in federal law are so generous, most debtors in the Garden State use this slate. Some highlights include:
- Homestead exemption: Federal law protects up to $25,150 of home equity. If you have paid off less than half the loan, you probably have little equity. Mortgage loans are amortized (interest first). Furthermore, a bankruptcy lawyer might use some loopholes, such as a tenancy of the entirety, to expand this exemption amount.
- Motor vehicle equity: These same principles apply to the $4,000 motor vehicle equity exemption. Unless you've paid off more than half the loan, you probably have little equity in the vehicle. Used cars have very low financial values, so the equity limit usually isn't an issue. Some loopholes are available as well, mostly the as-is cash value rule.
- Personal property: This rule also applies to the $18,000 exemption which shields furniture, electronics, jewelry, tools of the trade, and other household goods. There's a difference between the as-is cash value and fair market value. Karl's wedding ring might have a $5,000 fair market value, but a pawn shop might give him $500 for it.
- Private benefits: Insurance payments and policy equity are exempt up to $13,400. Personal injury settlements are exempt up to $26,000. Spousal and child support receipts are completely exempt, as long as they're reasonably necessary for support.
- Public benefits: These same protections apply to VA disability, unemployment compensation, Social Security, and other public benefits. On a related note, 401(k)s, pension plans, and other retirement accounts are exempt up to $1.3 million.
- Wildcard exemption: The federal exemptions also apply to $1,325 worth of cash in a bank account, boats, and other property which is otherwise nonexempt. You may also add up to $12,575 of the unused homestead exemption to the wildcard exemption.
Married couples who file joint bankruptcies may generally double the amounts in the federal exemptions.
Another set of exemptions is listed in various New Jersey laws. Generally, they aren't as broad as the federal exemptions, but they are appropriate in some cases. These exemptions include:
- Personal property ($1,000)
- Public pension plans, like teacher retirement plans (unlimited)
- Social Security, workers' compensation, and unemployment benefits (unlimited)
- Wildcard exemption ($1,000)
For the most part, debtors cannot cherry-pick items in these lists. They must stick with one slate or the other one. Retirement plans are the biggest exception. IRAs and other private accounts might still be exempt under federal law.
The mootness doctrine often comes up in bankruptcy cases. In general, here's how it works. Assume Lee and Rod each claim they own an expensive car. They cannot agree, so Rod files a legal action. Before the judge hears their dispute, someone steals and dismantles the car. At that point, it doesn't matter who owned the car, since the car is gone. The point is moot.
Now assume Lee and Rod file a joint bankruptcy. They list $1,000 in a savings account, which the written exemptions do not shield. The trustee claims the money is nonexempt and demands it. But before the judge hears the dispute, Lee and Rod spend the money on living expenses. At that point, it doesn't matter who owned the money, since the money is gone.
There are other examples as well, such as the aforementioned tenancy of the entirety. If Rod files individually and Lee is a tenant, the trustee cannot touch their house. It's illegal to seize one person's property to pay another person's debt.
Contact a Dedicated Attorney
A New Jersey bankruptcy lawyer stops creditor harassment, protects your property, discharges debts, and delivers a fresh start. If that sounds good, reach out to an attorney today.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.