New Jersey Bankruptcy Options

by Beverly Bird

The United States Bankruptcy Court governs 94 separate districts. States with larger geographical areas often have several districts to call their own, but the nearly 9 million potential debtors in New Jersey have only one. However, the district includes three courts: Trenton, Newark and Camden. Individual New Jersey debtors typically opt for Chapter 7 or Chapter 13 bankruptcies. Both can ultimately erase liability for your debts.

Federal Law

Federal law governs bankruptcy, so most of the rules are the same regardless of where you live. However, individual state laws intersect with federal law in two important areas: your income and what property you may keep. Your income determines whether you're eligible for Chapter 7 or must file Chapter 13 instead. The property you can retain after filing for bankruptcy depends on the exemptions available in your state and whether your state allows you to use federal exemptions instead. New Jersey does allow you that choice.

Chapter 7

Chapter 7 bankruptcy involves the sale of your assets by a trustee, who then apportions the proceeds among your creditors. If you have no assets, or you can protect them through the use of exemptions, your creditors don't get anything. The court will discharge the debts anyway, relieving you of any responsibility for paying them. If this sounds too good to be true, it might be, depending on how much you earn. If you have sufficient income to pay your debts, you're not eligible for Chapter 7. You must earn less than New Jersey's median income rate to qualify. If you're single with no dependents, New Jersey's median income is $60,322, as of 2012. For a family of two, the median income increases to $67,503. If you earn more than the applicable amount for your family size, you'll have to pass a means test to prove that your budget each month is such that you have virtually no disposable income left over after meeting necessary expenses.

Chapter 13

If you don't qualify for Chapter 7, you can often file for Chapter 13 protection instead. In this case, you would give your extra income to your trustee each month, after paying your regular bills. The trustee gives this money to your creditors through a court-approved plan that typically lasts three to five years. You can roll delinquent mortgage and auto payments into the debts you're repaying and keep the collateral if you also keep up with your current payments. Your unsecured creditors, such as credit card companies, usually receive payment last. If they don't receive all of what you owe them through your plan, Chapter 13 bankruptcy discharges these debts anyway. Some debts aren't dischargeable in either Chapter 7 or Chapter 13, however, including most student loans and family obligations, such as alimony or child support. You would still owe these after you finish your Chapter 13 plan.

Effect of Exemptions

Exemptions are an important part of bankruptcy. They let you save property from sale by the trustee in a Chapter 7, and they affect your payment plan under Chapter 13. For example, with a Chapter 13 bankruptcy, if you want to keep an asset worth $20,000, the law requires you to give $20,000 to your creditors through your payment plan. If you use an applicable $8,000 exemption, however, you only have to pay your creditors $12,000 through your plan. The more money you must give your creditors, of course, the higher your monthly payment will be.

New Jersey Exemptions

New Jersey is particularly stingy with exemptions; the state doesn't allow you to protect much at all. However, you do have the option of using federal exemptions instead. For example, New Jersey has no homestead exemption, but the federal exemption allows you to protect up to $21,625 in home equity, as of 2012. Federal law allows you to exempt up to $11,525 in household goods and furnishings. New Jersey limits you to $1,000.