Many people who decide they want to file for bankruptcy have to make a choice between filing Chapter 13 or Chapter 7. You may find that you are technically eligible for either option. The experienced team at Gillman, Bruton & Capone can assist with comparing Chapter 13 bankruptcy and Chapter 7 bankruptcy in New Jersey, and determine which option is right for you.
There are many reasons why someone in New Jersey who was otherwise eligible for a Chapter 7 bankruptcy should still file a Chapter 13. If you are delinquent on your mortgage, for example, a Chapter 7 does not allow you to reorganize that debt. A Chapter 13 bankruptcy allows you to stop a foreclosure action, including a sheriff sale, that may be pending and propose a plan in which you resume mortgage payments and catch up on your delinquent payments over a period of up to 60 months. You can also propose to obtain a loan modification or sell the property, if that is what you desire, without the pressure of a pending foreclosure or sheriff’s sale.
If you owe certain state and federal taxes, called priority taxes, the tax debt cannot be discharged in a Chapter 7 case. However, if you file Chapter 13, you can propose to pay back those “priority” taxes over a period of time up to 60 months, and also potentially discharge other non-priority tax debt like penalties, older tax debt and interest, that the taxing authorities would otherwise be able to collect from you even if you completed a Chapter 7 bankruptcy.
Another reason to file a Chapter 13 bankruptcy is if your car gets repossessed. If you want to get the car back, it is harder to do that in a Chapter 7 bankruptcy. In a Chapter 13, you may be able to get your car back if it has not yet gone to auction.
You might even have a vehicle that you overpaid for. If the purchase was more than two and a half years before you filed the bankruptcy, you can do a “cramdown” on the vehicle. The Bankruptcy Code allows you to pay back less than what you paid for if the vehicle has lost its value over the years, and the remaining value will be treated as unsecured debt which you can discharge.
A Chapter 7 bankruptcy offers a shorter time period to get a discharge of debt but it is not always the best fit for someone because of other factors such as whether you owe mortgage arrears or taxes. Another major question is whether there is any “non-exempt equity” in assets as a Chapter 13 bankruptcy will take longer but it could give you peace of mind without having to worry about a trustee liquidating assets.
The phrase “non-exempt equity” means the value of assets you own which may not be covered or protected by the exemptions – protections – in the Bankruptcy Code.
In some cases, even if you qualify for a Chapter 7 bankruptcy discharge, you may not want to file that case if you have assets which may be subject to liquidation – or sale – in a Chapter 7 case. Since this bankruptcy is called a “liquidation”, if you own real estate or other assets which are valued beyond what the law protects, it is likely not in your best interests to file a Chapter 7. In a Chapter 13 bankruptcy, while you may have to pay back something to your creditors, you will be able to keep your property. In Chapter 13, you can still have the option to reduce your debt significantly, eliminate interest, and have a fixed payment plan to let you emerge debt free.
Let’s say you are married and own your residence, with $65,000 of non-exempt equity and we can only exempt a little over $50,000 of that equity. It is not a ton of non-exempt equity—perhaps only 10 to 15 thousand dollars—but it may be enough for a trustee to try and sell.
It could be preferable for you to not even take that chance, and to just file the Chapter 13 bankruptcy, keep your property, and pay back what you can afford.
Generally, keeping assets is the main reason why someone in New Jersey would choose Chapter 13 bankruptcy over Chapter 7, if they are eligible for both. Our attorneys can give advice based on those parameters.
Chapter 13 allows you to cure arrears on a mortgage. If you file a Chapter 7 bankruptcy and have arrears on your mortgage, you will get a discharge of your personal obligation on the mortgage note, but that is all you will get. Chapter 7 is not going to give you the ability to catch up on those missed payments.
Ultimately, you get your discharge from the Chapter 7 bankruptcy and the mortgage company can continue with their foreclosure action. At some point, you may still lose your house at a sheriff’s sale. With a Chapter 13 bankruptcy, it will stay the foreclosure action, but in the plan of reorganization you can propose to secure those arrears on the mortgage and pay them out over time. This will allow you to keep your home.
There are pros and cons to both a Chapter 13 and Chapter 7 bankruptcy filing. You deserve to have experienced guidance when you make these important decisions about your future. Call us for a free case evaluation and learn the differences between Chapters 13 and 7 bankruptcy in New Jersey.