Qualifying For a Chapter 7 Bankruptcy

With the October 2005 amendments to the Bankruptcy Laws, you may wonder whether you qualify for a chapter 7 bankruptcy in New Jersey. Many people think they have "too little" or "too much" debt which makes them ineligible. Chapter 7 bankruptcy relief, however, is available irrespective of the amount of debt.

To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity. Most individuals that qualify for a chapter 7 bankruptcy will choose that option because it provides a "clean slate" immediately. Several factors that will influence your ability to file a chapter 7 bankruptcy include:

1. Ownership of Property

New Jersey does not have a homestead exemption. This means that your property is not exempt from attachment by creditors. If you have too much equity in your property, there will be a forced sale. However, New Jersey allows individuals to choose between the state exemptions and Federal exemptions for exempting certain property. We typically recommend the federal set because it provides for larger exemptions. The federal exemptions allow individuals to exempt $21,625 for real property (including co-op and mobile home) and $43,250 for joint (husband and wife).

We will recommend that you obtain an appraisal to determine how much equity you have in the property (if you do proceed with the filing, the bankruptcy trustee will require a recent appraisal to determine the value of the property). If you have more equity than allowed by the federal exemptions, we recommend that you choose an alternative to a chapter 7 bankruptcy unless you do not have an intention to keep the property. A chapter 13 bankruptcy will be an option you can explore.

2. Previous Bankruptcy Filings

Under the new bankruptcy laws, if you have filed a chapter 7 bankruptcy in the previous 8 years, you cannot file again. In other words, you have to wait 8 years between filings. We have seen countless cases dismissed because individuals are unaware of this requirement. The judge has absolutely no discretion or leeway in providing an exception to this rule.

Our firm utilizes the NJ PACER system to do a thorough search on previous filings by our clients. Statistically, most individuals that are filing for a chapter 7 bankruptcy in NJ are doing so for the first time.

3. Assets

As mentioned above, New Jersey allows individuals to select the federal exemption set to keep their assets. Even the federal set of exemptions has limitations. If you have assets that are valued at more than the exempt amount, we will have to determine if you can keep those assets.

4. Income

The 2005 amendments to the Bankruptcy Laws have provided for a "means test". If an individual's income is above the state's median income, they are subjected to an income based test. This test will compare the income to debt and determine whether their is a presumption of abuse. If there is a presumption of abuse, it can only be rebutted by "special circumstances". As a general rule, an individuals average monthly income for the 6 months preceding the filing of the chapter 7 bankruptcy must be less than the New Jersey's median income.

Statistically, most individuals have income that falls below the state's median income and therefore are not subject to the means test. Currently the median family income in New Jersey is the following:

Family Size of 1: $59,060

Family Size of 2: $70,680

Family Size of 3: $85,573

Family Size of 4: $101,106

5. Individuals, Partnership, Corporation

Although a partnership and corporation can file a chapter 7 bankruptcy, it should be noted that these entities cannot receive a chapter 7 discharge. One of the primary purposes of filing a chapter 7 bankruptcy is to discharge the debt to obtain a fresh start. Unfortunately, this is not available to partnerships and corporations.

6. Residency/Domicile

Under the new bankruptcy law, the Congress wanted to prevent individuals from "forum shopping". In other words, Congress did not want individuals moving to another state that has more lenient bankruptcy laws (provides for more exemptions). As a result, the new law has residency/domicile requirements.
Specifically, if an individual has not been domiciled in a state for 2 years prior to the filing of the chapter 7 bankruptcy, the individual must choose the exemptions of the state in which they were living for the better part of the 180 day period prior to 2 years before your filing date.

7. Credit Counseling and Financial Managment Course Requirements

The 2005 amendments to the Bankruptcy Laws require individuals to obtain two certifications which acknowledge the completion of informational courses. The ultimate goal of these courses is to provide individuals with knowledge about alternatives to bankruptcy and how to avoid financial difficulty in the future. The first course must be taken within 180 days prior to the filing of the bankruptcy petition from an approved credit counseling agency. The second course must be taken and the certificate of completion filed within 45 days after the date first set for the Section 341 meeting. The failure to complete these courses will result in the case being closed or dismissed without a discharge.

The debtor may file a motion for exemption of this requirement for one of the following reasons:

a. incapacity, disability, or mental illness; or

b. debtor in active military duty in an active combat zone

We recommend the following courses:

Pre-Filing Credit Counseling Course: debtorcc.org
Pre-Discharge Debtor Education Course: debtoredu.com

8. Misc

An individual cannot file under chapter 7 or any other chapter if during the preceding 180 days a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court, or the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.