Some of the Differences Between Chapter 7 and Chapter 13 in New Jersey

When your financial health has seen better days and you need relief from debts you can no longer manage, you start thinking about filing for bankruptcy. You know bankruptcy offers some form of debt relief in New Jersey, but you may unsure which type of bankruptcy will help you the most.

Generally, it is always a good idea to speak with a New Jersey bankruptcy attorney. An attorney specializing in bankruptcy can help you decide between the types of filings, as all financial situations are different and the bankruptcy that best serves your needs can only be determined by a careful examination of your specific circumstances.

Chapter 7 Bankruptcy

The first type of bankruptcy filing often used by private individuals in Chapter 7. Broadly speaking, Chapter 7 will best work for people with a large amount of debt, limited income and few, if any assets. While often referred to as "liquidation" - meaning any assets you have will be liquidated (sold by the bankruptcy trustee) and the proceeds will be divided and paid out to your creditors - most people who file a Chapter 7 have no assets, as defined by the bankruptcy code, and therefore nothing to liquidate.

The majority of Chapter 7s are classified as "no asset" for this reason. A Chapter 7 bankruptcy will allow you to discharge the majority of your debts, and obtain a "fresh start" financially. There are some debts you generally cannot discharge, like school loans, some taxes and most child/spousal support payments.

Means Test

A Chapter 7 bankruptcy does require the use of a "means test" to determine your eligibility to file. The test is based on the median income in your state combined with calculations tied to your income and expenses. As every state is different, a New Jersey bankruptcy attorney can assist with these calculations.

The Chapter 7 bankruptcy process typically lasts about six months, after which you receive your discharge. However, you can only receive a discharge under Chapter 7 every eight years, and only debts incurred prior to filing can be discharged, so you need to be certain that this is the proper solution for your current problems before you commence.

Chapter 13 Bankruptcy

Filing a Chapter 13 bankruptcy is more complex than in Chapter 7, and serves a different economic situation. Sometimes called "reorganization" or a "wage earners plan," a Chapter 13 bankruptcy is designed to allow a person to rebuild their economic position over a period of years, usually three or five years.

A percentage of your unsecured debts (think credit card debt) can be discharged and assets like a home or car can be maintained by payments through a Chapter 13 plan. The Chapter 13 plan functions like a budget, where you lay out your expenses and income for the life of the plan.

Behind On Your Mortgage?

A Chapter 13 bankruptcy is often used by a borrower who has fallen behind on their mortgage payments and is being threatened with a foreclosure. If you still have sufficient income to afford your mortgage payments, a Chapter 13 bankruptcy can be helpful, as you can pay the arrears through the plan, spread out over five years.

Because you can discharge a percentage of your unsecured debt, eliminating that debt can often free up enough of your income to resume making your mortgage payments and pay for your arrears.

A Chapter 13 bankruptcy can provide the breathing room for you to recover from a temporary setback and regain your economic well being. However, every situation is different, so speak with an experienced bankruptcy attorney to see which type of bankruptcy would work best for you.