If you are struggling with major debt, Chapter 7 bankruptcy is one of the most effective yet formidable financial tools available to US citizens. Many who have experienced financial hardship or unmanageable debt have benefited from bankruptcy. The most common form of bankruptcy for individual consumers is Chapter 7 bankruptcy. It is sometimes referred to as "liquidation" bankruptcy because it can involve liquidating or selling off your assets in order to pay off creditors. However, most folks do not lose any property through Chapter 7. If you are considering an NJ Chapter 7 bankruptcy, Veitengruber Law can help. Here are some benefits and drawbacks of Chapter 7 bankruptcy. We hope these facts can help you determine if this is the right choice for you.
Benefit #1:
Hit instant pause on collections attempts and foreclosure proceedings.
One of the most significant benefits of bankruptcy, including Chapter 7, is that it stops the clock on other legal proceedings like collections or foreclosure. The moment your case is filed, collections efforts must cease. Collections agencies and creditors must pause all collections actions. This will pause phone calls, letters, and wage garnishments. Similarly, you will enter the automatic stay period on foreclosure, repossession, or eviction. These legal processes cannot proceed until the bankruptcy case has been resolved or dismissed. Often, this allows enough time to come up with a more agreeable path out of these situations if they are not resolved via bankruptcy.
Con #1:
Your income can exceed the eligibility requirements.
Those eligible for Chapter 7 must pass the means test. The means test determines if your household makes more or less than the NJ state average. If your household makes less than the average, you qualify for Chapter 7 bankruptcy. If your household makes more than the average, you must examine your expenses to determine if you have "disposable" income. This is income above your total expenses. If you are determined to have too much disposable income, you will not be eligible for discharge under Chapter 7 bankruptcy. In that case, you could be eligible for Chapter 13 bankruptcy instead.
Benefit #2:
Bankruptcy discharge is permanent debt relief.
Chapter 7 bankruptcy is the total discharge of all eligible debts. Credit cards, personal loans, medical bills and other debts will be eliminated. You will no longer be obligated to pay these debts, instantly freeing up your income to go towards other expenses. You also cannot be contacted by collections for these debts in the future.
Con #2: Not all debts can be discharged under Chapter 7 bankruptcy.
Some types of debts cannot be discharged through Chapter 7 bankruptcy. Alimony, child support, tax debts, and most student loans are often exempt from being discharged during bankruptcy. In some circumstances, bankruptcy courts will allow student loans to be discharged if you prove that paying back student loan debts would cause undue hardship. If your debt issues center around any of these kinds of debts, Chapter 7 bankruptcy will likely be unable to help.
Benefit #3: You are likely to keep most—if not all—of your property.
The myth that you will lose your house, your car, and other valuable property through bankruptcy is one of the top concerns listed by those afraid to file for bankruptcy. But even under Chapter 7 bankruptcy, 95% of those who file will keep all of their belongings. Federal and state property exemptions allow Chapter 7 filers to exempt specific property from entering into the bankruptcy estate. In New Jersey, filers can choose federal or state exemptions based on which set of exemptions will benefit them the most, but you cannot mix and match exemptions from both.
Federal and state exemptions include protections for your personal property, including your home, car, qualifying personal items, and investments or savings up to a certain amount. However, if you choose to protect your home or car, you still owe money on these items. You will resume regular payments on this property after the bankruptcy case. However, you often do not need to sacrifice these possessions to get your debt discharged.
Con #4: You can lose nonexempt property.
There will be property not covered under bankruptcy exemptions. The bankruptcy trustee can utilize high-dollar items to be sold to pay down debts. This is typically not the case with most Chapter 7 bankruptcy filings, as most people who qualify for Chapter 7 do not have the disposable income to purchase such items. Some nonexempt property can include secondary properties like vacation homes, secondary vehicles, valuable collections, savings and investments not covered under exemptions, and even expensive musical, sporting, or other equipment unrelated to the individual's profession. The ultimate purpose of Chapter 7 bankruptcy is to give creditors some return on their investments while giving the filer a fresh financial slate—not to leave them utterly destitute with no possessions.
Sometimes, it is not in the individual's financial best interest to exempt these possessions even if they qualify. In that case, these things can be liquidated to pay down debts.
Benefit #5: Quick processing for reasonable fees.
The process from initial filing to discharge can take between four and six months on average. This quick processing means you get rid of your debts and begin working towards rebuilding your credit as soon as possible. You must pay a case filing fee of $245, a $75 administrative fee, and a $15 trustee surcharge. You must also pay attorney fees if you work with a NJ bankruptcy attorney. However, working with an attorney makes it more likely that your filing will proceed quickly and smoothly, giving you a better chance of discharge.
Con #5: Your credit report will take a temporary hit.
Your credit will take a dip after getting a Chapter 7 bankruptcy discharge. If you were able to maintain your monthly payments and keep your credit score relatively high before filing for bankruptcy, you would likely notice a much bigger dip than those who were already losing points on their score due to late payments and default. You may also notice your interest rates rise in the initial years after bankruptcy. But while a Chapter 7 bankruptcy will stay on your credit report for up to ten years, filing for bankruptcy is often better for your credit score in the long run than languishing under years of unmanageable debt.
As soon as your debt is discharged, you can begin working to improve your credit score immediately. A secured credit card is a great way to do this. Bankruptcy filers who focus on rebuilding their credit are often able to get a loan or even a mortgage within a few years of discharge.
Veitengruber Law is an experienced New Jersey bankruptcy law firm. We can work with you to determine if Chapter 7 bankruptcy is the correct choice for you. Do not spend another day stressed out over your financial future. Call us today for your free consultation.