Can I File for NJ Bankruptcy if I Don’t Live in the Home?

The homestead exemption is used in bankruptcy proceedings to protect the equity of a debtor’s home. Many people going through bankruptcy are worried about how they will keep their home, or if it is even possible to do so. The good news is that as a New Jersey resident, there are ways for you to protect your home even though there is no homestead exemption under NJ law.

Under Chapter 7 bankruptcy, NJ does offer a list of exemptions that can help you protect your property, but nothing specifically concerning your house. However, in New Jersey, you can opt to use the federal exemptions instead of the state exemptions. You must use only exemptions from either federal law or New Jersey law and you cannot mix and match.

If you are a New Jersey resident who opts to use the federal bankruptcy exemptions, you will be allowed to use the federal homestead exemption. Under the federal guidelines, you can exempt up to $23,675 in equity in your home (for married couples this doubles to $47,350). This exemption applies to real property in NJ, which can include your home, condo, co-op, mobile home, or even burial plots.

You can calculate your home’s equity by subtracting your outstanding mortgage balance from the overall value of your home. For example, if your home is valued at $250,000 and you have a mortgage balance of $230,000, then you have $20,000 in home equity. Since this is below the exemption limit of $23,675, you could use the homestead exemption to shield your home from being sold to pay off your debts.

Here are some rules to keep in mind when using the homestead exemption:

1.   You Must Keep Up With Monthly Mortgage Payments

If you opt to use the homestead exemption, you will need to be able to keep making on time and in full monthly mortgage payments. The homestead exemption will protect your home from being included in your bankruptcy estate, but it cannot protect you from foreclosure after bankruptcy.

2.   Homestead Exemptions Apply to Principal Residence ONLY

You cannot use the homestead exemption to protect an investment or vacation property. You must live on the property for the majority of the year in order for it to count as a homestead. Specifically, the law is defined as “one parcel or item of real or personal property that the person or a dependent…uses as a residence.” Because the definition of “residence” is not defined in federal exemption laws, the details matter. Every court will decide on the applicability of the law on a case by case basis.

3.   What if my home exceeds the federal homestead exemption?

If your home only slightly exceeds the homestead exemption limit, it is unlikely a bankruptcy trustee will attempt to sell your home since the costs associated with selling the home would likely be more than the potential dividend. The trustee would likely let it pass or allow you to negotiate for a cash buyout.

On the other hand, if your home equity significantly exceeds the homestead exemption, you will need to re-evaluate your options with a bankruptcy attorney. If your home does end up selling in order to use your non-exempt home equity to pay off debts, you are entitled to a check for the federal exemption amount ($23,675). If you want to keep your home in this situation, it may make more sense to file for Chapter 13 bankruptcy.

Bankruptcy exemptions are meant to help those struggling to maintain their assets while getting rid of debt and finding a new path forward. Veitengruber Law can advise which set of exemptions are right for you and help you find ways to protect your home and your other assets. If you’re feeling unsure of which exemptions are the best way to go, give us a call and we will help you!

Is My Workers’ Compensation Settlement Safe from Creditors?

Carrying workers’ compensation insurance is a requirement for employers in every state except Texas. This type of insurance is a safety net, in a way, that protects employers from being sued and potentially having to pay out large sums of money in the event of an accident or injury in the workplace.

If you’ve been injured at work and have received a workers’ compensation settlement, you may potentially still be out of work due to your injury. In many cases, even with a workers’ compensation settlement, workplace injuries lead to financial strife.

Extended time off work in order to heal or to receive surgery obviously means no wages earned during that time. Sure, your workers’ “comp” will definitely help, but it will not replace your entire income. This frequently leads to missed mortgage or other important payments. Ultimately, you may decide to file for bankruptcy in order to get rid of the past due debts that have accrued.

If I file for bankruptcy in NJ, will I be able to keep my workers’ compensation settlement money?

This is a pressing question for anyone in this particular situation. After all, the money you received as a result of your workplace accident may have been the only thing keeping you above water. The answer to the above question is almost an unequivocal “YES.”

When a person files for bankruptcy in any state, there are state “exemptions” – assets that are protected from liquidation or distribution to creditors to pay back some of the debts owed. Other examples of NJ bankruptcy exemptions include social security disability benefits, life insurance benefits (usually), retirement benefits and unemployment compensation.

Also on that list of exemptions in New Jersey is workers’ compensation settlement funds. To be clear, anything listed as exempt cannot be taken from you if you file for bankruptcy.

Although safe from creditors, any monies received as part of your workers’ comp settlement must be carefully kept in a designated account into which you only deposit money paid to you for workers’ compensation.

The reason it is so important to keep your exempt cash assets in their own account is because of a funny word that bankruptcy judges don’t like to see: commingling. Now, even though commingling may give you mental images of a long-past dinner party where you didn’t know anyone, in financial terms (at least in terms of bankruptcy in NJ), it means certain death.

Not yours, mind you, but if you allow your exempt monies to commingle with funds you receive from other sources, you’ll cause your protected settlement money to lose its exemption status, and you’ll have to say goodbye to it. If you want to keep your workers’ comp settlement, take every precaution to ensure that it lives in its own private bank account with absolutely NO funds from any other source.

How will anyone know if I have allowed my funds to commingle?

Granted, it may feel like you can simply tell the bankruptcy trustee that you’ve kept your money separated by source, even if there have been times when it was just easier to allow commingling to occur. Know this: if you fail to keep your workers’ comp funds completely separate, the trustee WILL find out about it. Every deposit made into every account you own will be scrutinized. You will need to keep a detailed paper trail that clearly shows the origin of every single cent kept in all of your bank accounts.

While you do have to be extremely careful in order to protect your exempt assets in bankruptcy, as long as you follow the rules, you’ll be able to keep all of your New Jersey workers’ compensation money.

Image credit: Anthony Easton

Can I Transfer Nonexempt Assets Before Filing for Bankruptcy?

During a Chapter 7 bankruptcy proceeding in New Jersey, your non-exempt assets will be liquidated (sold) in order to  repay the money that you owe creditors, thus wiping your debts clean and giving you the ability to start over financially. The bankruptcy system wants to get you out from under the burden of your debts so that you can continue to be a productive member of society. Thus, there are numerous assets that are protected from bankruptcy liquidation, and these assets allow you to keep living, working, and providing for your family.

Exempt vs Nonexempt Assets

Property that is exempt is property you will be able to keep. Your bankruptcy trustee won’t be able to liquidate items like: your home, vehicle, household furnishings (up to a certain monetary value), the value of life insurance policies, annuities, and retirement accounts.¹ Exemptions do vary by state and federal law, so verify your exemptions with your bankruptcy attorney.

Nonexempt assets are things that are not considered necessary to meet your basic living and working needs. Some examples of items that are usually considered nonexempt in bankruptcy include: expensive collectibles, additional vehicles, musical instruments (unless you are a professional musician), heirlooms, stock & bonds, and vacation homes.

You may be really attached to a nonexempt item, or perhaps you recognize its high monetary value. You might start thinking about ways to be able to ‘beat the system’ so that in the end, you’ll still have that coin collection. Maybe you could just “give” it to your brother for the duration of the bankruptcy, and then he’ll give it back to you after the smoke clears. No one would ever know, right?

During your bankruptcy proceedings, you’ll be asked if you recently transferred, gifted, or sold any property. Lying to the Bankruptcy Court is a very risky endeavor. Once you’ve been assigned a trustee, s/he will comb through all of your assets and actions over the past several years. Anything that seems even slightly suspicious will warrant further investigation. Your trustee has the right to question anyone to whom you may have sold, gifted, or transferred nonexempt property.

Let’s say your mom lent you $10,000 five years ago to help out with a down-payment on your home – with the condition that you would repay her as soon as possible. Nine months ago, when your aunt passed away, you received an inheritance check, and were finally able to pay back your mom, just like you promised.

Neither transferring nonexempt property (like the coin collection) in order to hide it from creditors, nor paying “insiders” before other creditors is permitted under bankruptcy law. Both are considered fraudulent actions. Your trustee has a “look back” period of one full year for transactions that may have occurred between you and family members or friends (“insiders”). [11 U.S.C. § 101(31)]. Any payments to insiders that took place in the year prior to filing your bankruptcy complaint are considered preference payments. These types of payments are prohibited, and will most likely be reversed so that all of your creditors get equal parts of your assets.

If you are considering filing for bankruptcy and have made a payment to someone who is considered an insider under bankruptcy law, be sure to disclose this to your bankruptcy attorney. He may recommend waiting to file until the payment you made no longer falls within the “look back” time frame. He will also advise you against hiding assets from your creditors. Since bankruptcy law is complex and varies on a case by case basis, it’s best to contact a certified New Jersey bankruptcy lawyer as soon as possible.

 

¹nolo.com

 Image credit: Daniel O’Neil