Maybe you have always paid on time, but your income has dropped and you can’t keep up with all your payments anymore. Most of our clients would rather do anything than talk to us (bankruptcy attorneys), so they put off calling for months, often years. The one thing almost all our clients have in common is that they are good people who would pay their debts if they could.
Six Mistakes People Make in Managing Their Debt:
- Paying credit cards with cash advances from other credit cards.
- Refinancing their home to pay off credit cards or medical debt.
- Borrowing from their retirement benefits to make minimum payments on their credit cards.
- Cashing in their 401k or IRA accounts to pay their debts.
- Transferring property out of their name for the purpose of avoiding attachments by creditors.
- Making large payments to one creditor or repaying a debt to a relative or business associate before filing for bankruptcy.
People often feel embarrassed and helpless when they find themselves in financial distress. They may know that bankruptcy exists but are scared by it. Bankruptcy is not something to take lightly, but it is not as scary as you may think. The bankruptcy laws should be viewed as an opportunity to take voluntary action to regain control of your financial health. You owe it to yourself to at least know your options. Bankruptcy is sometimes the best way out of a bad situation and on to a better future.
Since bankruptcy wipes out your old debts, you are likely to be in a better position to pay your obligations going forward, and many people report that they are surprised by the easy availability of credit after bankruptcy. Filing for bankruptcy shows that you are taking hold of your financial future rather than allowing creditors to control you.
The Bankruptcy laws distinguish different types of bankruptcies called “Chapters.” You have probably heard of Chapter 11 which refers to bankruptcy for large corporations. Most people fall into a Chapter 7 bankruptcy or Chapter 13. Our firm handles Chapter 7 and Chapter 13 bankruptcies, please read on for more information about both.
What is a Chapter 7 Bankruptcy?
Getting rid of unsecured debt – such as credit card and medical debt – is important to most people, but not as important as getting rid of the stress in dealing with out-of-control debt on a daily basis. People frequently feel as though a huge weight has been lifted from their shoulders when they realize how Chapter 7 can answer their prayers for financial help. Even when people hear the truth about how easy it is to get relief they can hardly believe it’s true. Giving people that good news and seeing that relief sweep across their faces is what brings us so much pleasure and makes our jobs so rewarding.
The Basics of Chapter 7: Under this arrangement, a court-appointed trustee reviews your assets and debts, which have been previously reviewed by your attorney. Most of your debts are discharged after a period of several months; certain debts (if you have them) such as student loans, child support, alimony, and fines are not dischargeable. Under certain conditions IRS and State tax debt may be discharged. We can advise you during your free telephone consultation.
Protecting Personal Property: Filing for Chapter 7 does not mean that you lose all your personal possessions. Every state adopts particular “exemptions,” which, to put it simply, are lists of things that a person can keep even though they are filing for bankruptcy. There are exemptions that protect your home, vehicle, household goods and furniture, jewelry, retirement funds, life insurance plans, and claims you may have against other people. With the exemptions used in New Jersey almost all people that file for Chapter 7 bankruptcy are able to protect all of their personal property. If your personal property exceeds the exemptions allowed, then you may wish to file a Chapter 13 instead. In a Chapter 13 you keep your possessions but have to make a payment to the Court each month. It is extremely important that the exemptions are used properly since once a case is filed, you do not have the ability to “unfile” it. Using an experienced bankruptcy attorney is the best way to make sure that your property is protected. We have dedicated our careers to understanding the laws and the court decisions that interpret them.
Protecting a Home or Vehicle You Intend to Keep: Exemptions, though, do not mean that you get to keep the property for free. For example, if you want to protect your home or vehicle but still have a mortgage or a vehicle loan, the creditor needs to be paid and using an exemption does not eliminate the amount you owe. In this example, an exemption would be used to protect any equity in the property. Put simplistically, if your house is worth $200,000 and you owe $175,000 on your mortgage, we would use an exemption to protect the $25,000 of equity. Assuming that you want to keep the house, you will have to keep making your regular mortgage payments going forward. If you want to keep your house but you have fallen behind on a couple of payments, you will have to catch up on those missed payments, or consider filing a Chapter 13 if you can’t catch up on your own. If you are unable to catch up, then a Chapter 13 may be right for you. This example also holds true for a vehicle.
Getting Rid of Property You Can’t Afford and the Debt That Goes Along With It: What if you no longer want to keep a piece of property or you can no longer afford to keep a piece of property? For example, let’s say you have a home that is worth $200,000 but you owe $225,000 on the mortgage and for whatever reason you have not been able to sell the property and haven’t figured out a way to get rid of both the home and the debt you owe on it. This is frequently called being “underwater.” With Chapter 7 you can decide to “surrender” the home back to the mortgage-holder and instead of the mortgage-holder being able to come back after you for the $25,000 you still owe, that $25,000 debt would be erased. This is because once the home is surrendered, the mortgage lien goes from being secured by the home to being unsecured. Since the primary function of a Chapter 7 is to eliminate unsecured debt, the left over mortgage loan after the home was surrendered would be eliminated just like credit card and medical debt.
Stopping Creditors from Harassing and Suing You: Your case will be filed electronically from our office. The moment your case is filed you get bankruptcy protection through a Court order called the “automatic stay.” The automatic stay means that you are protected from creditors and they can no longer call you, send you letters, or otherwise harass you. Creditors cannot file a lawsuit against you, and lawsuits and collections that have already started are stopped in their tracks: garnishments, levies, foreclosures, and repossessions stop. After the case is filed, if a creditor thinks they should be allowed to continue collecting from you, they have to file an application with the Bankruptcy Court and give notice to our office. Because they must file a formal application to the Court, we can take steps to ensure you receive the protection you are entitled to.
Financial Freedom: At the end of the Chapter 7, any debts that weren’t discharged, such as alimony, child support, student loans and certain taxes will still be owed, but since the rest of your debt will be discharged, you will be left in a better position to keep up with these obligations. Rather than devoting your income to paying credit card minimums and medical bills, you will be able to focus on the things that are most important to you and your family. Discharging your unsecured debts will also mean no more “borrowing from Peter to pay Paul.” After bankruptcy you’ll be able to live on what you earn rather than falling further and further behind and looking for help to make ends meet like you were before.
Moving On: You really want to get rid of your debts and start rebuilding your credit. Filing Chapter 7 is the first step – eliminating your debt. In about five months or less you’ll be free from your unsecured debt. The second step is saving money. Without having to make credit card payments and pay medical bills, you’ll be able to use your income to pay your living expenses and will hopefully have a little something left over at the end of the day to save. Most importantly, by getting rid of your debt, your debt-to-income ratio is better, and you will be more attractive to lenders in the future.
What is a Chapter 13 Bankruptcy?
This type of bankruptcy is designed for people who are behind on their mortgage, in foreclosure, have substantial assets but not enough cash flow to pay all of their monthly bills, or earn more money than is allowed to file a Chapter 7. This procedure allows you to keep your home and assets while paying all or part of your debt through the court over a three- to five-year period. In a Chapter 13 case you keep making your mortgage and other payments, or resume making them if the mortgage company has refused to accept them.
Creating a Plan: Bankruptcy under Chapter 13 allows us to create a plan that you will pay into on a monthly basis. Initially, a Chapter 13 bankruptcy sounds much less attractive than a Chapter 7 filing: Chapter 13 requires you to pay into a plan whereas a Chapter 7 just wipes out your dischargeable debts. In some cases a Chapter 7 filing will be more advantageous. However, Chapter 13 has many benefits, such as:
- Catching up on Arrears: If you are in foreclosure it allows you the opportunity to get back on track with your mortgage company or a vehicle loan and give you up to 5 years to pay back arrears. If you can’t catch up on your secured loan debts before filing for bankruptcy, but you intend to keep the property, the Chapter 13 plan payments will catch you up.
- Exemptions: Chapter 13 bankruptcies have the same exemptions as Chapter 7 bankruptcies do. In the event that you have more property than the exemptions allow, you can file a Chapter 13 case and we can factor in to your monthly plan payment enough money to pay over to the creditors the “extra equity” (the equity that isn’t protected by the exemptions) so that rather than having to give up property, you essentially are paying them its value so you can keep it.
- Stopping Foreclosure and Repossession: The automatic stay, as discussed in the Chapter 7 information section, is also in effect immediately upon the Chapter 13 filing. Not only are you able to pay your arrears through the plan, but the creditors are also prevented from proceeding against you while you are in the plan and catching up. As long as you are making your Chapter 13 plan payments (and, if applicable, your mortgage and car payments), the creditors cannot, the creditors cannot try to collect anything other than your regular monthly payments from you.
- Excess Income: Sometimes, even though you “make a lot of money,” your income is still not enough to pay off your debts, so it seems as though Chapter 7 would be right for you. It isn’t always quite that simple. Depending on how much, and what type, of income you have, you may not be eligible to file for Chapter 7 and will have to file for a Chapter 13 instead. In the Chapter 13, using a complicated formula, your disposable income is determined, and that is paid into the Chapter 13 plan.
- The Cram-Down: In a Chapter 13 you can lower the amount you owe on a secured debt. This rarely applies to a mortgage, but it may apply to a vehicle loan. You have a secured loan when you have pledged something you own as collateral. In the basic scenario, the value of the item you are financing decreases faster than the loan is being repaid. In a cram-down you pay only the value of the item pledged as collateral, rather than the whole loan amount. You get out from under part of the loan while still being able to keep the property. For example: You have a car worth $7,000 and you owe $10,000 on the loan. In a cram-down, you will pay the creditor $7,000, and the remaining $3,000 will be treated as unsecured debt that will receive less than 100% through the plan. To cram-down property, you must have bought your vehicle more than 2 ½ years before you file your case, or you must have bought your other property more than a year before you file bankruptcy. Our office will guide you if this can be an option in your case.
- Reduce Interest Rates: In a Chapter 13 you are able to reduce the interest rate that you are paying on secured debts other than the mortgage on your property. Many people agreed to pay back car or furniture loans at an interest rate of 15 to 30 percent. In New Jersey we can reduce the interest rate to the prime rate plus 1 to 3 percent. This can mean a huge savings for you.
Upfront Costs: The cost to get into Chapter 13 is often much lower than Chapter 7, especially under the new bankruptcy law.
A Chapter 13 bankruptcy allows an individual to repay mortgage arrears and some, or all, other debts over a 3 to 5 year period. While a Chapter 13 plan is in effect, creditors cannot start or continue their collection efforts, and generally speaking they must accept what the plan pays them. Almost all individuals, or married couples, even if self employed, can receive Chapter 13 relief.
Upon the successful completion of a Chapter 13 repayment plan, the debtor receives an official discharge, which extinguishes all obligations to make further payment toward their unsecured debts, even though those creditors may not have been paid in full. In fact, many people repay their unsecured creditors no more than 5 to 10 percent of the total amount owed. Chapter 13 helps save the homes of thousands of Americans every year.
A Chapter 13 case will usually last from 3 to 5 years depending on the repayment plan approved by the Court.
The above information is meant to provide general information and introduce what may be foreign concepts. In no way do we intend to represent what will occur in your case nor can we, in such a small space, give you anything other than a simplified version of the laws of New Jersey. It is in your best interests to contact an experienced bankruptcy attorney to evaluate your circumstances.
We offer reasonable fees and payment plans. Contact us today at 973-701-1776 for your free consultation with one of our attorneys.