New Law Will Make Bankruptcy More Appealing for NJ Residents Struggling with Debt

Living in New Jersey can be very expensive, and sometimes the costs of residing in the garden state can become overwhelming. When past due debts begin to pile up, filing for bankruptcy may provide many with a way to get a fresh start on their finances. Unfortunately, as the law stands today, filing for bankruptcy in New Jersey often requires the sale of one’s property as a means to pay creditors back. However, that law may be changing soon.

The best way to avoid having one’s assets sold off in a bankruptcy proceeding is by exempting the property from the process. Exempt property does not count toward one’s total assets and therefore does not need to be sold off or included in calculating a repayment plan. 

This all sounds great, but there is a catch. Currently, both the state and federal exemptions for bankruptcy proceedings have a cap on the amount that can be exempted, and that cap is low by modern standards. This is especially so in New Jersey where everything is generally more expensive when compared to the rest of the country.

The New Jersey Senate recognized this shortfall in a new bill proposed by Senator Nellie Pou. The bill, which passed the Senate unanimously, would greatly increase the amount of property bankruptcy filers may exempt from the proceedings. If the bill is signed into law, these changes could greatly decrease the monthly payments a filer makes under a bankruptcy payment plan, or prevent them from having to sell off certain assets to pay back creditors. 

This could dramatically reshape bankruptcy law in New Jersey and make filing worthwhile for many people who wouldn’t benefit from filing under the existing law. As the Covid-19 pandemic continues to wreak havoc on the economy and experts predict a wave of new bankruptcies, this bill could provide relief for thousands of New Jerseyans.

Exemptions in the New Bill vs. Current Law

Bankruptcy in the United States is governed by the federal bankruptcy code. However, New Jersey provides its residents with an alternative set of exemptions that they may use when filing. When choosing exemptions, the filing party must choose either the state or federal set; they cannot mix and match from both options. 

Under the existing New Jersey bankruptcy law, a person filing for bankruptcy may exempt only $1,000 in a personal bank account and $1,000 in personal property. Personal property includes any kind of property other than real estates, such as cars, jewelry, or electronics. This also includes household goods, such as furniture and TVs. All other income and assets the individual filing for bankruptcy has been subject to the proceeding and will be factored into the payments the filer must make to creditors under the repayment plan in Chapter 13 or the assets added to the bankruptcy estate and sold off to pay creditors in Chapter 7.

The new bill, S-2423, would increase the exempt amount in a personal bank account to $5,000 and the exempt amount of personal property to $10,000. Even more importantly, the bill would establish a $340,000 homestead exemption, allowing a homeowner to exempt up to $340,000 of home equity from the bankruptcy proceeding. Finally, any federal coronavirus emergency payments to a debtor would be exempt as well.

The New Exemptions in Practice (Chapter 13 Plan)

To help illustrate what the new exemptions would look like in practice, we’ll start by using a hypothetical Chapter 13 bankruptcy proceeding. In a Chapter 13 bankruptcy, a repayment plan is developed by calculating a person’s disposable income and the value of his or her assets, and then paying to the bankruptcy trustee a monthly amount equal to the greater of the income or assets over the course of the repayment plan. 

Chapter 13 is normally used by people with a steady income who want to repay debt over time. A Chapter 13 repayment plan lasts 3 to 5 years and the amount that must be paid every month is based on the person’s disposable income or the value of their assets. A person filing for bankruptcy may choose between either the state exemptions or the federal exemptions with no mixing-and-matching between the two. Currently, the federal exemptions allow for a $25,150 homestead exemption.

Disposable income is calculated by subtracting a debtor’s monthly expenses from all of their monthly income. A debtor’s monthly expenses are the amount needed to support the debtor and their dependents, like food, shelter, transportation, and childcare. 

In this example, the debtor makes $5,000 per month in income and has expenses of a $2,000 mortgage payment, $1,000 for food, $500 for car payments, and $1,000 in childcare and medical expenses. This person has $5,000 in income and $4,500 in expenses, leaving a disposable income of $500 per month. 

Our example debtor’s assets include a paid-off $20,000 car and $200,000 in home equity, for a total of $220,000 in assets. Finally, we’ll assume they have $220,000 in total debt. Under a Chapter 13 repayment plan, assets are divided up monthly over the length of the plan in order to determine the amount the filing party will be required to pay back on a monthly basis. In this case, we’ll say the debtor is on a five-year (60 month) plan. 

First, let’s see how the debtor does with the federal exemptions. The federal exemptions include a $25,150 homestead exemption, which the debtor can deduct from the value of his home equity. They could also use the $4,000 motor vehicle exemption available under federal law.

Using Federal Exemptions

Monthly Length of Term
Disposable Income $500 $30,000 ($500 * 60 months)
Assets $3,180.84 ($190,850/60) months) $190,850 ($220,000-$25,150-$4000)

Under the federal exemption, the debtor would have to pay based on the value of their assets, not their disposable income. This is because their assets are more valuable than their disposable income over the five years of the plan, which makes sense – if the filing party has assets that are valuable enough to offset their debts it’s only fair that they use the value of these assets when repaying creditors.  In this example, when we include the homestead exemption and motor vehicle exemption, they’d have $190,850 in assets subject to the plan, which means their monthly payments are $3,180.84 (total amount of assets divided by 60 months).

Now let’s try again using  New Jersey’s existing exemptions. Under the existing exemptions, the debtor can only exempt $1,000 in personal property and nothing in home equity, so their assets would come out to $219,000.

Using Current NJ Exemptions

Monthly Length of Term
Disposable Income $500 $30,000 ($500 * 60 months)
Assets $3,650 ($219,000/60 months) $219,000 ($220,000-$1,000)

In total, the debtor ends up paying $3,650 per month based on their assets, as this amount represents the higher total value between their income and assets. That means they’ll have to pay $219,000 over the five years of the plan. Under existing New Jersey law, the lack of a homestead exemption means they’re better off filing with the federal exemptions. As it stands, the current New Jersey exemptions are so low that anyone with equity in their home who is considering filing for bankruptcy will effectively be forced to use the federal exemptions.

Now let’s see how this would look using the exemptions proposed in the new bill, which include a $340,000 homestead exemption. Under the new exemptions, the debtor can exempt up to $10,000 in personal property and up to $340,000 in home equity — much more than the federal homestead exemption. Using these new exemptions, our hypothetical debtor can exempt the entire value of their home equity and $10,000 of the value of their car, meaning only $10,000 of assets would be subject to the plan.

Using Proposed NJ Exemptions

Monthly Length of Term
Disposable Income $500 $30,000 ($500 * 60 months)
Assets $167.67 ($10,000/60 months) $10,000 ($220,000-$200,000-$10,000)

Clearly, the homestead exemption makes a significant difference. In this scenario, the debtor only has to pay $500 per month based on their disposable income. Over the life of the plan, this works out to just $30,000. In practical terms, paying with income instead of assets means the debtor won’t have to sell their home or car to meet the requirements of the repayment plan, highlighting how much of a difference this new bankruptcy law could make to many New Jersey residents with high debts and significant equity in their homes.

The New Exemptions in Practice (Chapter 7)

The new exemptions will also prove beneficial in a Chapter 7 bankruptcy proceeding. In Chapter 7, the debtor turns over his or her non-exempt assets to a bankruptcy trust. The trust is then divided up among the creditors in exchange for the discharge of any remaining eligible debts at the completion of the proceeding. The debtor can use exemptions to shield some assets from being included in the bankruptcy estate. These exemptions are the same as the ones used to decide which assets in a Chapter 13 bankruptcy are excluded when calculating a repayment plan.

Let’s use another hypothetical debtor to demonstrate how this works under the existing New Jersey exemptions, the federal exemptions, and the newly proposed New Jersey exemptions. In this example, the debtor owes $200,000 to various creditors and has $100,000 in home equity, $10,000 in household goods, a paid-off car worth $10,000, and $10,000 in the bank.

Under the current federal exemptions, a debtor can exempt $25,150 in home equity, household goods up to a total of $13,400, a motor vehicle worth up to $4,000, and other personal property up to $1,325. Here are the assets our hypothetical debtor would have before and after filing Chapter 7 bankruptcy with the federal exemptions.

Using Federal Exemptions

Assets Assets After Bankruptcy
Home Equity $100,000 $25,150
Household Goods $10,000 $10,000
Car $10,000 $4,000
Bank Account $10,000 $1,325

So, in total, after filing Chapter 7 bankruptcy, this debtor gets to keep $40,475 worth of assets by using the federal exemptions. This means the debtor would have to sell their home; the homestead exemption isn’t large enough to cover all the equity in the home, so it would be sold and the debtor would only receive the cash value of his or her equity. With the amount of home equity this debtor has, Chapter 13 is likely a better option than 7. Additionally, the debtor would lose their car because the $4,000 motor vehicle exemption isn’t enough to cover all its value, meaning they’d have to find a much cheaper car or start riding public transit.

Under the existing New Jersey exemptions, there is no homestead exemption. A debtor can only exempt $1,000 in personal property and $1,000 in the bank. Here’s what the same debtor would be left with after filing for Chapter 7 under existing New Jersey law.

Using Current NJ Exemptions

Assets Assets After Bankruptcy
Home Equity $100,000 $0
Household Goods $10,000 $1,000
Car $10,000 $0
Bank Account $10,000 $1,000

Clearly, this debtor would be much better off filing with the federal exemptions than the existing New Jersey exemptions. As in the example above, the debtor’s home and car would be sold, but this time, the debtor would keep none of its value. Additionally, the loss of all but $1,000 worth of household goods could mean the loss of prized possessions and family heirlooms.

What about the proposed exemptions? Those include a $340,000 homestead exemption, exemptions for all ordinary household goods, $10,000 in personal property, and up to $5,000 in a personal bank account.

Using Proposed NJ Exemptions

Assets Assets After Bankruptcy
Home Equity $100,000 $100,000
Household Goods $10,000 $10,000
Car $10,000 $10,000
Bank Account $10,000 $5,000

Once again, the homestead exemption makes a significant difference here. In total, the debtor would get to keep $125,000 in assets after filing for Chapter 7 under the proposed New Jersey exemptions. Most importantly, the debtor would keep their house and belongings because the entire value of these assets would fit within the exemption. The debtor could also use the proposed law’s exemption for $10,000 worth of personal property to save his or her car.

Keeping an Eye on the Bill

The new exemptions haven’t been signed into law yet. However, the bill passed the New Jersey Senate with a unanimous 38-0 vote. If the Assembly passes it and the governor signs it, these new exemptions will make bankruptcy dramatically more useful to New Jerseyans in a time when they need it most. 

Bankruptcy is a complex process with many possible outcomes that will depend on the timing and finances of the person or persons considering filing. Our attorneys are experienced in dealing with bankruptcy and they’ll be able to help you determine the best way forward, based on your specific financial circumstances. We can help you decide whether it makes sense to file right away or to wait for the new exemptions to go into effect. Call us today to schedule a free consultation with one of our experienced attorneys.

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