Ford Flower Hasbrouck & Loefflad 

This article is intended to give general information only.  It is not intended to give legal advice to any person on a specific case or controversy, and does not create an attorney-client relationship.  The Law Firm of Ford Flower Hasbrouck & Loefflad is licensed to practice law in the State of New Jersey only.  The information set forth in this article is intended for New Jersey residents only.  If you are considering filing bankruptcy you should consult an experienced bankruptcy attorney in your state or jurisdiction.

CHAPTER 7 BANKRUPTCY

Chapter 7 is the most basic form of bankruptcy.  It is commonly referred to as a “liquidation” bankruptcy.  However, this title is somewhat misleading.  For most people, all of their assets will fall within the bankruptcy exemptions.  Consequently, none of their property will actually be “liquidated”.  In other words, they would be able to keep all of their property including their homes, cars, furniture, jewelry, bank accounts, retirement accounts, insurance policies, and most other property.  

This article is intended to give a basic overview of filing for bankruptcy protection under Chapter 7.  If you are considering filing bankruptcy, you should consult with an experienced bankruptcy attorney about all of your options.

BANKRUPTCY DISCHARGE.  Most people file for bankruptcy in order to obtain a bankruptcy “discharge”.  A bankruptcy discharge is a court order relieving you from the legal obligation to pay certain debts.  The purpose of a bankruptcy discharge is to allow people facing financial hardships to obtain a “fresh start”.  The idea is that by granting a bankruptcy discharge, people will return to being productive members of society without the burden of carrying overwhelming amounts of debt. 

DO I QUALIFY TO FILE UNDER CHAPTER 7.  In order to qualify to file a Chapter 7 bankruptcy, you must pass the “means test.”  There are four ways to pass the means test:

1. Your household income falls below the state median average for a family of your size.  In New Jersey, the median household income for a family of four is $103,786.00 per year as of April, 2013.  If there are four people in your household and your household income falls below this threshold, then you are presumptively eligible to file for bankruptcy protection under Chapter 7.

2.   Your monthly household income is less than your average monthly expenses based on certain IRS guidelines.   In order to qualify to file a Chapter 7 bankruptcy under this provision, the bankruptcy code allows you to deduct your average monthly expenses for your mortgage, car loans, and other regularly incurred expenses from your income.  In addition, the IRS publishes guidelines for food, clothing, household maintenance, personal care expenses, and other variable household expenses which can be deducted from your income.  If your expenses are higher than your income, you are eligible to file for bankruptcy protection under Chapter 7.

3.   Your monthly household income less your average monthly expenses would not allow you to pay back at least $7,475.00.  In other words, if your household income exceeds your household expenses by $7,475.00 or less based on the guidelines set forth above, than you are eligible to file for bankruptcy protection under Chapter 7.

4.   Your monthly household income less your average monthly expenses based on the guidelines set forth above would not allow you to pay back the lesser of 25% of your total unsecured debt or $12,475.00. 

You should not attempt to determine your eligibility for filing a Chapter 7 bankruptcy on your own.  You should consult with an experienced bankruptcy attorney to determine if you meet the requirements of the means test.

WILL I BE ABLE TO KEEP MY PROPERTY:  The Bankruptcy Code provides very generous exemptions which you can use to protect your assets in bankruptcy.  Most bankruptcy filers will be able to keep their homes, cars, furniture, jewelry, bank accounts, retirement accounts, insurance policies, and most other property.  If you own assets that do not fall within the bankruptcy exemptions, you may want to consider filing under Chapter 13.

WHAT KINDS OF DEBTS CAN BE DISCHARGED IN BANKRUPTCY:  Almost all debts are dischargeable in bankruptcy with a few notable exceptions.  The most common debts discharged in bankruptcy are credit card debts, medical bills, utility bills, personal loans, pay-day loans, etc.

WHAT DEBTS ARE NOT DISCHARGEABLE IN BANKRUPTCY:  The following debts are generally NOT dischargeable in a Chapter 7 bankruptcy:  Domestic Support Obligations (child support and alimony); other debts arising from a divorce or separation; intentional injury to the person or property of another person; criminal fines, penalties or restitution orders; personal injury caused by a DUI offense; debts arising from the commission of a fraud.  For more information regarding some other non-dischargeable debts, you should consult with an experienced bankruptcy attorney.

WHAT ABOUT INCOME TAX LIABILITIES:  What surprises most of our clients is that income tax debts are dischargeable in bankruptcy if you meet certain qualifications.  The qualifications are as follows:

1. The tax returns must have been due more than 3 years ago, including any extensions.  For example, income tax returns for 2009 were generally due by April 15, 2010 (or October 15, 2010 if you applied for an extension).  So, in order to discharge income tax debts for 2010, you must file for bankruptcy after April 15, 2013 (or October 15, 2013, if you applied for an extension).

2.   The tax returns must have been actually filed more than 2 years before filing for bankruptcy protection.  For example, if you owe income taxes for 2009, but did not file your returns until 6/01/2012, you would need to wait until after 6/01/2014 to file for bankruptcy protection.

3.   The taxing authority must have assessed the taxes due at least 240 days prior to your bankruptcy filing.  For example, if you were selected for audit, you must wait at least 240 days after the taxing authority completes the audit and issues a final assessment before the taxes would be eligible to be discharged.

One last caveat to discharging tax liabilities is that you cannot void a tax lien.  For example, if you owe income taxes to the IRS, and the IRS has recorded a lien against your home, you may discharge the underlying liability if you meet the above qualifications, but you CANNOT remove the lien.  Accordingly, at the time you sell your home, the taxes will need to be paid.

If you owe income tax debts, you should NOT try to determine whether these liabilities may be discharged on your own.  You should consult with a qualified bankruptcy attorney.

WHAT ABOUT STUDENT LOANS:  Student loans are generally NOT dischargeable in bankruptcy unless the loans pose an “undue hardship.”  It is extremely difficult to prove that student loans pose an “undue hardship.”  In order to prove “undue hardship,” a debtor must meet the Brunner test.  To meet the Brunner test, a debtor must demonstrate the following:

1. The debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off the student loans;

2.   Additional circumstances exist indicating that the debtor’s state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and

3.   The debtor has made good faith efforts to repay the loans.

The most difficult part of the Brunner test is showing the debtor’s “state of affairs is likely to persist for a significant portion of the repayment period.”  For the most part, only debtors who are permanently disabled, are elderly, or are suffering from some other extraordinary circumstance are able to meet this part of the test. 

1. The Law Firm of Ford Flower Hasbrouck & Loefflad is a debt relief agency.  We assist people in filing for bankruptcy protection under the United States Bankruptcy Code.  Before making your choice of attorney, you should give this matter careful thought.  The selection of an attorney is an important decision.