When you file for bankruptcy, the goal is to either discharge your debts or come up with a plan of reorganization that will set you on course to pay them. You may also be wondering whether your assets are at risk. One of our experienced attorneys can explain what will happen to your debts and assets when filing for a Chapter 13 bankruptcy in New Jersey.

What Assets Are Covered in a Chapter 13 Bankruptcy?

When you file a Chapter 7 or 13 bankruptcy petition, it must include a complete listing of all your assets, liabilities, income, expenses, and truthful answers to all questions in the Statement of Financial Affairs. You sign a petition under penalty of perjury, which means if you get caught intentionally hiding assets or income, you could get prosecuted for bankruptcy fraud.

There are certain assets that are not “property” of the bankruptcy estate – meaning they are fully exempt and cannot be touched by a trustee in a Chapter 7 bankruptcy, and have no impact on your plan of reorganization in Chapter 13. Those assets include retirement accounts like a 401k, IRA, or 403(b). Any kind of ERISA-qualified retirement plan is fully exempt from the reach of creditors.

You could have $500,000 in a 401k and still file a Chapter 7 bankruptcy to wipe out all your debt because the $500,000 cannot be touched. It is not even looked at as an asset of the estate.

Home Foreclosure in a Chapter 13 Bankruptcy

The minute someone files for Chapter 13 bankruptcy, the automatic stay goes into effect, which prevents a foreclosure action from continuing. The automatic stay stops all creditors from continuing collection activity against you.  In a Chapter 7 bankruptcy, the automatic stay may initially, and briefly, stop the foreclosure case but will not stop the mortgage company that is foreclosing from continuing their foreclosure action and ultimately proceed with a sheriff’s sale. If you are in Chapter 13 and want to keep your home, you can propose a plan that says you will resume your mortgage payments and pay the arrears back over time.

Debts That Are Not Dischargeable Under Chapter 13 Bankruptcy

If you have debts that are not dischargeable, you can choose to pay those debts back over time in a Chapter 13 bankruptcy.

Any income taxes from within the three years prior to filing their bankruptcy are called priority taxes, and they cannot be discharged. You would file a Chapter 13 and pay back those taxes over time.

Student loans cannot be discharged either but the automatic stay prevents student loan creditors from trying to collect money while you are in bankruptcy.

It is not uncommon for people to file Chapter 13 bankruptcy when they have significant student loans, paying what they can afford while keeping the student loan companies at bay. When they come out of Chapter 13, they still owe the loan, but their salary may have gone up and they can work out a payment plan moving forward.

Do I Still Pay Monthly Bills Under Chapter 13?

If you file a Chapter 13 bankruptcy, you will still make your monthly mortgage payment to keep your house, auto loan and lease payments, as well as your utilities, real estate taxes, and car insurance, just like you would if you did not file bankruptcy.

Eliminating or Reducing Interest on Debt Payments

If you are delinquent on your income taxes, the IRS or State of New Jersey can charge you penalties and interest until it is paid. When you file a Chapter 13 bankruptcy, you will be responsible for the interest and penalties that have accrued up to the point of filing the petition. After filing, the taxing agency is not permitted to charge you any further interest or penalties. If you file for Chapter 13, any interest in penalties that otherwise would have accrued after filing will be dischargeable.

The Bankruptcy Code says you must have purchased your vehicle at least two and a half years prior to filing for bankruptcy before you can cram it down. However, there is case law that can help. Let’s say you are only one year into the loan and are paying a high 20% interest rate because you had bad credit when you took out the car loan. We could cramdown the interest and say you will pay the full amount of the loan back over the life of the plan but will lower it down to the market rate interest.

The Supreme Court has said you can take it down to market rate plus 1% to 3%, to account for the fact that this is going to be a higher risk. In many situations, we will take it from a 10 to 15% rate down to a 4.5 or 5% rate. This amounts to a lot of savings over time on the interest. This also helps you put more of your monthly income toward other obligations like your mortgage.

Modifying Mortgages

While there are limitations, there are some significant potential benefits you can explore with mortgages in a Chapter 13 bankruptcy. You cannot modify a mortgage and your interest unless the mortgage company has taken additional collateral in addition to the residence itself. It is generally only done if someone has a multifamily house where they have taken additional “collateral”.  In those situations, we may be able to adjust the interest rate or the total amount due within the bankruptcy, but that is harder to do and those circumstances do not arise that often.

Ask a New Jersey Attorney to Assist in Managing Debts and Assets for Chapter 13 Bankruptcy

Whenever someone comes to Gillman, Bruton & Capone for a potential bankruptcy filing, we will give them all their options. In order for us to even determine what Chapter you are eligible for, we need all those documents up front—pay stubs, tax returns, copies of your bills, credit reports—which will allow us to do the Means Test and provide you with the best bankruptcy options.

Call us today and learn how your debts and assets will be affected in a new Jersey Chapter 13 bankruptcy.