Chapter 7 bankruptcy involves the liquidation of all your assets except those that are exempt from the bankruptcy settlement. Exempt property usually includes cars, some household furnishings, clothing,real estate, life insurance and pensions. Exemption amounts vary from state to state; however, in NJ as a general rule, the Federal Exemptions are preferrable to the NJ exemption. If you own real estate under the Federal Exemptions, today, March of 2009, the exemption amount of equity is $20,400 for one person or $40,800.00 for a husband and wife. If the debtor does not own real estate, he or she is entitled to what is called a "wild card" exemption of over $10,000.00 to be used on any assets even if not exempt.

Under a Chapter 7 a trustee is appointed to liquidate all of your non-exempt property. This means that they either sell or turn your property over to the creditors. The court then issues a discharge wiping out all of your dischargeable debt. The law allows you to file a Chapter 7 bankruptcy once every eight years.

Bankruptcy filings in NJ today are done electronically over the internet. After completing the application which is about 50 pages long, the petition is uploaded for filing.  A filing fee of $299.00 is charged by the Court; however, if your income is low enough, you might qualify for a waiver of the filing fee by petitioning the Court. In order to file today,it is necessary for the Debtor to also complete a debt counselling session prior to filing. The Debtor under the new changes must also satisfy the means test. In plain language, if your income is too high and your expenses are too low, you may not be permitted to file a Chapter 7 and must look to Chapter 13 where some if not all of your debt is paid.

A Chapter 13 bankruptcy is also called a wage earner plan. For example,you are behind on your mortgage payments by 3 months because you were ill and could not work. You are now back to work and have the income to pay your mortgage, but the bank has started a foreclosure and refuses to allow you to reinstate your loan.  A Chapter 13 bankruptcy is a court-ordered and approved repayment plan to your creditors. This plan allows you to use your future income to pay back your debts such as the arrears on your mortgage over a 3-to-5 year period without losing any property. Once you make all of your payments your debts are discharged by the Court.  Just as in a Chapter 7, there are three types of debt. A secured debt such as a mortgage loan on your house must be paid in full under Chapter 13 (other secured loans such as an auto loan can have the principal reduced by the Court if the Debtor can prove that the car has lost value. This is called a "cram down". There are proposals before Congress to permit the Bankruptcy Court to "cram down" a mortgage loan secured by the Debtor's primary residence but this is not the law as of this date, March of 2009). The second debt is a priority debt such as income taxes, student loans and child support. As a general rule, these debts also must be paid back in full. The third type of debt is unsecured debt which covers everything else. Under a Chapter 13, the Court can approve a plan which pays back substantially less than 100% of unsecured debt.

The procedure to file a Chapter 13 is the same as a Chapter 7. The means test still must be completed but is used to determine whether the Debtor has to file a plan which is repaid in 3 years versus one repaid in 5 years. The counseling/educational requirements are also the same. The filing fee is $275.00 for a Chapter 13. The same petition is filed except that a proposed Chapter 13 Plan also must be filed.

Again, the Debtor appears before the Chapter 13 trustee for examination at a 341a Session. The main difference from a Chapter 7 examination is that the trustee will examine the Debtor's petition and plan for feasibility to assure that the Debtor has the income and means to make timely payments under the plan.

After the 341a Session, the Debtor or Debtor's attorney makes an appearance in Court to see if there are any objections to the plan. If the plan is approved, the Debtor continues to make payments to the trustee until the plan is paid in full.