Important Bankruptcy Terms to Understand
Filing for bankruptcy is often an overwhelming experience, especially if you're unfamiliar with the terminology commonly used throughout the process. The Law Office of Marc G. Alster understands the uncertainty of dealing with considerable debt and aims to provide the legal support you need to work toward regaining financial security.
Located in Hackensack, New Jersey, Attorney Alster serves clients throughout northern and central New Jersey counties and strives to demystify common bankruptcy terms to help you better understand the bankruptcy process.
What Is Bankruptcy?
Bankruptcy is a legal process designed to help individuals and businesses eliminate or repay their debts under the protection of the Bankruptcy Court. There are different types of bankruptcy, each with unique features and benefits. Some of the most common types are Chapter 7, Chapter 11, and Chapter 13. Understanding these will help you choose the right path for your financial situation.
Chapter 7 Bankruptcy
CHAPTER 7 BANKRUPTCY - nonexempt and exempt assets. A Ch. 7 Bankruptcy, often referred to as "liquidation bankruptcy," involves the sale of your non-exempt assets by a bankruptcy trustee. The proceeds are then used to pay off creditors. This type of bankruptcy is typically best suited for individuals with limited income who cannot repay their debts, and who do not own significant equity in substantial assets that may not be able to be protected from a forced sale by the Ch 7 Trustee under the US Bankruptcy Code's generous "Exemptions" (see article in this website entitled "Bankruptcy Exemptions").
THE MEANS TEST. To qualify for Chapter 7 in New Jersey, debtors must file and pass a means test, which compares their income to the median income level in their state. If the income is below the median, they may qualify for Chapter 7 (see the article in this website entitled "The Bankruptcy Means Test").
HISTORICAL GOOD FAITH TEST. Debtors will not qualify for Chapter 7 Bankruptcy protection if they have more than $100 net disposable household income; this is determined by deducting the debtors' projected monthly household expenses from the debtors' projected monthly household income. If debtors fail this historical good faith test and they still want to file for Bankruptcy protection they would have to file for Chapter 13 protection, where most or all of their disposable household income would have to be paid to a Chapter 13 Trustee over a 3 to 5 year Chapter 13 plan.
The Chapter Bankruptcy Process. The Bankruptcy process generally involves the following steps:
Filing a petition with the Bankruptcy Court
Listing all your assets, liabilities, income, and expenses
Attending a meeting of creditors where the Trustee and creditors can ask questions about the debtor's finances
The goal of Chapter 7 bankruptcy is to discharge most of your unsecured debts, allowing you to get a fresh start. However, it's important to note that some debts, such as student loans, child support, alimony, and most taxes, are not dischargeable under Chapter 7 (see article in this website entitled "Chapter 7 Bankruptcy Process").
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is primarily geared toward businesses, but individuals with substantial debt and assets may also file. This type of bankruptcy allows debtors to reorganize their debts while continuing to operate their businesses.
In Chapter 11, the debtor proposes a reorganization plan that outlines how they intend to repay their debts over time. This plan must be approved by the creditors and the Bankruptcy Court.
The main goal is to restructure the company's finances to make it more viable and capable of repaying its obligations. This can help maintain jobs and allow the business to continue providing products or services to their market.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also known as a "wage earner's plan," allows individuals with a regular income or another source of funds, to develop a plan to repay all or part of their debts over three to five years. You will need to propose a repayment plan to make installment payments to creditors over the specified plan period.
This plan must be approved by the Bankruptcy Court. Unlike Chapter 7, in a Chapter 13 you may be allowed to keep their non-exempt assets and catch up on missed mortgage or car payments, as long as you are able to make the minimum required Chapter 13 Plan payments. If you have valuable assets that you wish to keep, you should consider filing for Chapter 13. It can help you avoid foreclosure and repossession, while managing your debt in a structured manner.
Discharge
A discharge releases the debtor from personal liability for certain specified types of debts. In other words, you are no longer legally required to pay any debts that are discharged.
A discharge order is a permanent injunction prohibiting creditors from taking any form of collection action on discharged debts. This includes legal actions and communications with the debtor, such as phone calls, letters, and personal contacts.
Creditors
A creditor is any person or entity to whom the debtor owes money. Creditors can be secured or unsecured, depending on whether the debt is backed by collateral.
Secured creditors have a claim against specific property (collateral) owned by the debtor, whereas unsecured creditors do not have specific property backing their claim and are often at a higher risk of not being fully repaid.
Bankruptcy Debtor
A bankruptcy debtor is an individual or business that owes money to creditors and filed for bankruptcy protection with the U.S. Bankruptcy Court. The debtor initiates the bankruptcy process by filing a petition with the Bankruptcy Court.
Debtors must provide complete and accurate information about their financial situation, including assets, liabilities, income, and expenses. Failure to do so can result in the dismissal of the case or a denial of discharge or worse. The filing of a bankruptcy petition with a material misstatement or omission concerning the debtor's financial assets, liabilities, income, and expenses, is a criminal felony subject to penalties of up to 5 years in jail.
Automatic Stay
The Bankruptcy Code's automatic stay provision is a powerful tool for debtors; providing immediate relief from creditors' collection efforts once the bankruptcy petition is filed (see article in this website entitled "Automatic Stay Provisions").
An automatic stay stops most lawsuits, wage garnishments, and collection calls, giving the debtor breathing room to reorganize their finances. However, there are some exceptions, such as criminal proceedings and certain Family Court support matters.
Proof of Claim
A proof of claim is a document filed by creditors in a bankruptcy case to indicate the amount of debt owed by the debtor. Filing a proof of claim is required by creditors in order for them to be able to receive any payments from either the distribution of the debtor's assets or from Plan payments debtor's make to the Chapter 13 Trustee. It provides a formal statement of the creditor's claim and is subject to review by the Bankruptcy Trustee.
Liquidation
Liquidation refers to the process of selling a debtor's non-exempt assets to pay off creditors. This is a key component of Chapter 7 bankruptcy and with the advice of counsel is to be avoided at all costs if the debtor has equity in any substantial assets that cannot be protected by the Bankruptcy Code's Exemptions (See other article in this website entitled "Bankruptcy Exemptions)".
Reaffirmation Agreement
A reaffirmation agreement is a contract between the debtor and a creditor that waives the discharge of a debt that would otherwise be discharged during bankruptcy.
Reaffirmation agreements are often used for secured debts, such as car loans, where the debtor wishes to keep their property. It's important to consider the long-term financial impact before entering into a reaffirmation agreement.
Bankruptcy Trustee
A bankruptcy trustee is an individual appointed by the Bankruptcy Court to oversee the case and administer the debtor's estate. A Chapter 7 bankruptcy trustee is responsible for identifying and selling non-exempt assets. The proceeds are then distributed to creditors according to the priority of their claims.
The Trustee also conducts the meeting of creditors and ensures compliance with bankruptcy laws.
Exempt Property
Exempt property refers to equity in various categories of assets that a debtor is allowed to keep during bankruptcy. While these exemptions vary by state, New Jersey bankruptcy exemptions follow the Federal Exemptions, 11 U.S. Code 522, and include items, categories of assets, such as a primary residence, vehicle, and personal belongings, depending on the type of bankruptcy being filed (See article in this website entitled "Bankruptcy Exemptions)".
Understanding what property is exempt is crucial so that debtors can protect essential assets while going through the bankruptcy process.
Non-Dischargeable Debts
Non-dischargeable debts are obligations that cannot be eliminated through bankruptcy. These typically include certain taxes, student loans, alimony, and child support. Debtors need to be aware of which debts will remain after bankruptcy to better plan their financial future.
Credit Counseling
Completion of a Credit counseling class is a mandatory requirement for individuals filing for bankruptcy. It involves an evaluation of the debtor's financial situation and education on budgeting and debt management. The feedback for most of our clients is that the class, which can be done over the phone or online, takes approximately 30 to 45 minutes to complete
Credit counseling aims to provide debtors with the tools and knowledge needed to manage their finances more effectively, and avoid future financial difficulties.
Fraudulent Transfer
A fraudulent transfer occurs when a debtor transfers property to another party with the intent to hinder, delay, or defraud creditors. This is typically done when a pre-bankruptcy debtor transfers a significant asset to a friend or relatives and receives significantly less than fair market value for the transferred asset (as opposed to receiving fair market value for the asset and paying the proceeds of sale to his/her creditors).
Fraudulent transfers can result in serious legal consequences, including the reversal of the transfer and denial of discharge. This is not legal; debtors must inform their bankruptcy attorney if any such transfers incurred at any time after they became unable to pay off their debts. It is essential to be honest and transparent throughout the bankruptcy process.
Experienced Support for Your Bankruptcy Case
Understanding bankruptcy terms is crucial for navigating the complexities of the bankruptcy process. By familiarizing yourself with these key concepts, you can make informed decisions and work towards a fresh financial start.
If you're considering bankruptcy or need guidance, a knowledgeable bankruptcy attorney like Marc G. Alster can provide the support and experience you need. Reach out to The Law Office of Marc G. Alster today.
Located in Hackensack New Jersey, Attorney Alster serves clients throughout northern and central New Jersey counties including Bergen, Passaic, Hudson, Essex, and Union as well as counties in New York such as Rockland, Westchester, Orange, and Putna