The Most Common Types of Consumer Bankruptcy in PA and NJ

Chapter 7 Bankruptcy

What is a Chapter 7 bankruptcy?  A Chapter 7 bankruptcy, sometimes referred to as a liquidation, is the most common form of bankruptcy filing.  This type of bankruptcy accounts for approximately two-thirds of all consumer bankruptcy filings.  A Chapter 7 bankruptcy will result in a discharge of all unsecured debts which include credit cards, medical bills, most personal loans, and utility bills.  If you file a Chapter 7 bankruptcy, you may keep your car and your home (provided that you do not have the exceeded amount of equity in those items) and you will continue to make payments on your mortgage and/or car loan.  A Chapter 7 bankruptcy is different than other types of filings because the debtor does not make a monthly payment to the Trustee.  The Bankruptcy Trustee, who is appointed, collects all non-exempt property, sells the assets, and distributes proceeds from the sale to appropriate creditors; however, in a great majority of cases, all of your property is exempt under bankruptcy law, meaning you keep all of your property.  The reason there is rarely a liquidation is because the federal bankruptcy laws provide that most of your personal property including a certain amount of equity in real estate, automobiles, household goods, retirement accounts and bank accounts, are exempt from the process.  Under Pennsylvania bankruptcy law, you may select either the Federal exemptions or State exemptions.  While the Federal exemptions are chosen by most people since they provide a greater level of protection of assets, in some instances, it is appropriate for people to take the Pennsylvania exemptions.

A Chapter 7 bankruptcy may be appropriate for you under the following circumstances:

  • You have primarily unsecured consumer debts.
  • You have either limited equity in your home, you are a renter, or your home is owned as husband and wife and the unsecured debt is primarily in only one party’s name.
  • You have a moderate or modest income.
  • You have little or no money left after paying your necessary living expenses.
  • You do not have significant liquid assets.

There are many advantages to a Chapter 7 bankruptcy as compared to other types of bankruptcy.  In a Chapter 7, there are no monthly payments to be made.  In addition, a Chapter 7 bankruptcy is less costly than a Chapter 13 bankruptcy, and you will receive a Chapter 7 discharge at the end of the process which only takes approximately three to five months from the filing date.  Also, if you decide to file a Chapter 7 bankruptcy, you will in most cases immediately stop making payments to all unsecured creditors and will be under the protection of the bankruptcy law.  The filing of a bankruptcy, whether it is a Chapter 7, 11 or 13, produces an Automatic Stay which immediately stops all action on the part of creditors.  Even though there were significant changes in the bankruptcy laws effective October 17, 2005, most individuals who would have considered filing a Chapter 7 bankruptcy under the old law would still qualify under the post-October 17, 2005 changes.

Chapter 7 Bankruptcy Income levels in New Jersey and Pennsylvania

It’s based on the median incomes for the states. So, there’s a presumption if you’re above a certain income that you don’t qualify for Chapter 7, but that’s not absolute because they do give credits for certain things, such as mortgage payments for child support. So, for example, a household of one in Pennsylvania, your approximate income is up to $45,000 to still qualify for a Chapter 7. New Jersey’s higher. It’s approximately 60,000 because it’s statewide; it’s not based on where you live in the state.

For example, a family of four in Pennsylvania, the median income allowed is a little over 80,000 and then in New Jersey it’s a little over 100,000. It goes to 102,000. Again, you can still qualify, potentially, for Chapter 7 with incomes above those levels, if you have certain credits, which you’re entitled to, such as a car payment or child support or a mortgage payment.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy permits individuals to keep all of their property while making a monthly payment to creditors out of their future earnings or income.  A repayment plan, also known as a Chapter 13 Plan, must be approved by the Court.  In most cases, a majority of unsecured debt is discharged, and payments are made on arrearages on secured loans such as mortgages, car loans, or tax debts.  A written Plan is created providing anywhere from 36 to 60 months payments to the Trustee who then distributes the payment to creditors per the Plan.  At the end of the Plan, you will receive a discharge from the Bankruptcy Court.  Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy is ideal for any individual who is behind on secured payments and is unable to bring the accounts current without the filing of the petition.  Unlike attempting to negotiate with a secured creditor outside of bankruptcy, the Chapter 13 Plan forces the creditor to accept payment on the arrearages over either a 36 or 60 month period of time.  A Chapter 13 bankruptcy may also be appropriate in a case where your monthly income is significantly in excess of your monthly living expenses (excluding payments to unsecured creditors such as credit card payments).  Like a Chapter 7 bankruptcy, a Chapter 13 provides an automatic stay which will prevent all creditors from taking any further action once the case has been filed.  Likewise, if you fikle a Chapter 13 bankruptcy, pursuant to the Automatic Stay, all creditors will cease communication with you.

A Chapter 13 bankruptcy may benefit you under the following circumstances:

  • You are behind on your payments for property that you want to keep in a bankruptcy.  For example, you are behind on your mortgage or car payments.  In this instance, the arrearages may be put in the Plan so your original payment amount will stay the same.  In certain circumstances, you may place your whole loan in the Plan and reduce the total amount repaid on a car loan.  This is known as a cramdown, which is based upon a number of factors including the value of your car.
  • If you have tax debts that are not dischargeable in a bankruptcy.  Under limited circumstances, certain federal and state income taxes may be able to be discharged in a bankruptcy.  However, in most cases, federal and state income taxes may need to be repaid, and a Chapter 13 allows you to repay the taxes over a 36 or 60 month period.  In addition, most, if not all, of the penalty will be forgiven under the Plan.
  • If you have significant credit card unsecured debt, such as credit cards or medical bills but your income is too high to qualify for a Chapter 7 bankruptcy.  In that instance, often a Chapter 13 Plan will provide relief in that it will significantly reduce your payment to unsecured creditors.
  • If you have non-exempt property that you want to keep.  If, for example, the value of your home is significantly more than what your remaining mortgage or home equity loans total, or you have a significant amount of liquid assets, you would have to give up that property if you filed a Chapter 7 bankruptcy.  However, in a Chapter 13 bankruptcy, you would be able to keep the property and pay back those unsecured creditors who filed Proof of Claims in the bankruptcy over a 36 to 60 month period, interest and penalty free.  Remember, like a Chapter 7, a Chapter 3 bankruptcy will stop all mortgage foreclosure actions, utility shut-offs and any law suits or other legal action on the part of any creditors.

Remember, it is important to speak with a qualified professional prior to determining whether a Chapter 7 or a Chapter 13 bankruptcy is appropriate for you.  At Young, Marr & Associates, no legal advice will be given except by a qualified bankruptcy attorney who can best assess your situation and determine the appropriate remedies available.  You can contact one of our experienced attorneys to discuss whether a Chapter 7 or a Chapter 13 bankruptcy is right for you.  This is a free consultation and legal advice will only be given by one of our experienced bankruptcy attorneys.

When Considering Bankruptcy, Do Married Couples Have to File Jointly?

No, It can certainly be both spouses filing. Often times, it can be only one of the spouses filing because maybe all of the debt, or most of the debt, is in that one party’s name. The other situation is sometimes, again, depending on the state they’re in, such as Pennsylvania, equity in a home can be fully exempt as long as only one of the parties is filing and all the debt is in that party’s name. So, sometimes there’s some strategy that goes into deciding if it only makes sense for one party to file.

However, in all circumstances, total household income is counted in determining whether someone qualifies. So, even if one party’s filing, when they’re looking at the numbers for purposes of qualifying, whether someone qualifies, they do take into account total household income, which would include both spouses. That, by the way, was changed recently. In 2005, there were some significant changes made to the law and that was one of them.