Bankruptcy is a big deal. It’s a powerful, complex and, for most people, a very confusing concept. Bankruptcy in New Jersey is especially complex in 2021 due to new laws and regulations related to the pandemic. We’ve created this guide to make it easier for you to understand the most important bankruptcy concepts, from a “10,000 foot view”, so you can more easily consider whether it’s right for you or your company.
Venues: Federal versus State Court
Bankruptcy courts are federal courts that have the exclusive right to oversee bankruptcy cases. State courts have no jurisdiction over bankruptcy cases. However, there are alternatives to bankruptcy in New Jersey, primarily a state law assignment for the benefit of creditors, which companies should consider instead of Chapter 7 liquidation.
Roles: Debtors, Creditors, and Trustees
Debtors are the people and companies that owe money and seek protection in bankruptcy court. Creditors are people and companies that are owed money from debtors and who file claims for payment in bankruptcy court. Trustees are people appointed to oversee and monitor bankruptcy cases and, in the case of Chapter 7 liquidation, to sell assets where they can in order to generate funds for creditor claims.
Chapters: Liquidation versus Reorganization
First, you need to understand that there are two (2) main kinds of concepts for bankruptcy in New Jersey. Liquidation is where a trustee sells your exposed assets, if any, to realize value for creditors. Reorganization is where you use your future income, or sell your own assets, to realize value for creditors. This is the first distinction to understand.
Next, you should consider the three (3) main chapters of bankruptcy in New Jersey. For individual debtors, Chapter 7 is their main option for liquidation, and Chapter 13 bankruptcy is their main option for reorganization. Chapter 7 cases may take about 3-6 months to complete. Chapter 13 cases require a 36-60 month plan of reorganization. Note that Chapter 13 is only available to people, and companies cannot file a Chapter 13 case.
For companies that intend to stay open and operating, Chapter 11 reorganization is their main option. Chapter 11 takes between 6-9 months to confirm a plan, and that plan can propose payments over up to 60 months. While companies that are shutting down can technically file Chapter 7, they should really consider using a New Jersey state law assignment for the benefit of creditors. An assignment has many advantages over Chapter 7 bankruptcy for those kinds of companies.
Liquidation Analysis: The Foundation of All Bankruptcy in New Jersey
Cases of Bankruptcy in New Jersey take many shapes and forms. If you really want to understand how bankruptcy works, you need to understand the core concept of a “liquidation analysis.” This phrase means that every debtor’s bankruptcy case must prove that, at very minimum, creditors will receive at least as much as they would in Chapter 7 liquidation case. This analysis takes into consideration the value of all of the debtor’s property, less a number of deductions including mortgages and exemptions, and arrives at a net equity figure. The figure that comes from this analysis generally guides how each case of bankruptcy in New Jersey plays out, including in Chapter 13 and Chapter 11 bankruptcy cases for both individuals and companies.
Means Test and Debt Limits: Bankruptcy Prerequisites
Individuals hoping to liquidate in a Chapter 7 must pass the “means test”. This requires a comparison of your last 6 months of household income against the median household income of your household size for your county. Some people who would otherwise qualify for Chapter 7 may need to use Chapter 13 due to their ineligibility under the means test. However, it can be a fact sensitive analysis, so bankruptcy attorney assistance is highly recommended.
Individuals hoping to reorganize in Chapter 13 must have debts under the “debt limits”. These are caps on the amount of unsecured debt and secured debt that may be reorganized in a Chapter 13 case. There are even certain debt limits that apply to Subchapter V bankruptcy, which is a kind of Chapter 11 case. In either instance, reorganization in Chapter 13 or Subchapter V may be out of reach for some debtors.
Exemptions: The “Deductions” of the Bankruptcy World
At its core, exemptions represent the concept that the law doesn’t want people to be destitute. Exemptions exist under both state and federal law. These are certain amounts of property that debtors are allowed to keep, and that their creditors cannot touch. In New Jersey, state law exemptions are almost nonexistent. As a result, most people who file for bankruptcy in New Jersey elect to claim the federal exemptions available to them. Creditors and trustees can object to exemptions, so it’s very important to understand how they work, and which kinds of exemptions apply to which kinds of property interests.
The Automatic Stay: The Temporary Injunction
Bankruptcy in New Jersey aims to freeze all creditor collection action at the very start of the bankruptcy case. This is so the bankruptcy petition can be a “snapshot” of the debtor’s financial situation. The automatic stay is an automatic order entered by the bankruptcy court when a debtor files a case. The automatic stay prevents the continuation or the commencement of most creditor actions, such as foreclosures, lawsuits, wage garnishments, etc. Exceptions apply to criminal actions, some aspects of matrimonial actions, and other actions that are not stayed by the commencement of a bankruptcy case. Also, the automatic stay does not apply in certain instances where debtors have filed previous cases.
Discharge: The Permanent Injunction
When most people think about the benefit of bankruptcy, they think about “wiping away” their debts and starting fresh. This concept is embodied by the discharge order. This is a federal order entered by a bankruptcy court. This order states that all debt owed by the debtor as of the date of the filing of the petition that can be wiped, is wiped away. There are certain exceptions to discharge, and debts that are not wiped away are called nondischargeable. Alimony and certain taxes are examples of non dischargeable debts. It’s crucial to understand, before you file bankruptcy, which debts are dischargeable, and which are not.
Bankruptcy in New Jersey with Middlebrooks Shapiro
Bankruptcy in New Jersey is difficult enough. Having an experienced attorney to guide you through the whole process makes the bankruptcy experience less stressful and more efficient. Middlebrooks Shapiro specializes in Chapter 7 bankruptcy, Chapter 13 bankruptcy, the New Jersey Assignment for the Benefit of Creditors, and more. If you are ready for a fresh start, schedule a consultation with one of our expert bankruptcy attorneys.
