Bankruptcy Laws in New Jersey

Bankruptcy cases are a federal issue – handled by the courts of the good ole U.S. of A, not the local state courts. So why, oh why, are things so different for bankruptcies filed here in New Jersey than those filed just over the Hudson River? How is it different?

Imagine this: if you file bankruptcy in Manhattan, you’ll be able to exempt almost $180,000 in equity from your home in a bankruptcy filing – that means you keep that much home value. Double that if you’re married. But, if you’ve moved out to the suburbs in New Jersey (or anywhere from the shore up to the majestic ski slopes of Vernon), there is no exemption under state law, so you’ll be stuck protecting only about $25,000 under the federal exemption rules. 

Confusing? Yes. Unfair? Yes. To understand why, let’s take a step back and learn first about how New Jersey rules work alongside federal bankruptcy law to determine both whether you are eligible to file a Chapter 7 bankruptcy and how much of your property you’ll be able to keep.

Most Bankruptcy Rules Are Set by Federal Law Except for Eligibility and Exemptions

Filings for bankruptcy are made in federal court. The majority of bankruptcy laws and procedures are governed by federal law and do not vary across state lines; a bankruptcy in Kansas is fairly similar to a bankruptcy in Jersey, for example. We’ve discussed typical types of bankruptcy filings and procedures, which are the same across the nation, throughout our FAQs. However, there are a few exceptions to these nationwide rules that applies to people in the Garden State, primarily around the amount of property that is exempt from being sold to pay off debts and the amount of income you can make before you become ineligible to file.

The New Jersey Means Test

When consumers think about bankruptcy, they are really envisioning a Chapter 7 filing – the most common type of bankruptcy that eliminates most (if not all) of your debt after the sale of your excess assets. To file for Chapter 7 bankruptcy, however, you must first pass either part of a two-part means test.

The first component of the means test is based on household income: if your household income is below the median household income for New Jersey, you are eligible to petition for bankruptcy. As of May 2022, the figure was $75,321 for a single filer and a greater amount for families.

The second component of the means test is a review of your last six months of income to determine your monthly disposable income. After paying for essential living expenses such as rent and food, disposable income is the amount of money left over. If your disposable income was $0 or near to zero, you are likely eligible for Chapter 7 bankruptcy under this second test. Before you invest time and money in filing, you should consult with an attorney to ensure that you are eligible.

New Jersey Bankruptcy Property Exemptions

Chapter 7 bankruptcy does not require you to sell everything you own, though it may seem like it after reading New Jersey’s rules. Some of your property is exempt from sale for a good reason: the courts and those who design the laws recognize that it is difficult to begin a new financial life without the essentials that allow you to work and care for your family. Federal law specifies one set of exemptions (a list of your property that cannot be sold to pay your debts), but New Jersey has its own set.

In general, you may choose the exemptions that best suit your circumstances, however, you should consult an attorney before completing your decision. Keep in mind that New Jersey’s exemptions are surprisingly meager compared to the federal list and neighboring states, so unless you are one of the groups that state lawmakers seem to have carved out special rules to protect, most people will want to look hard at the federal exemptions rather than local ones.

Wildcard Exemption

Let’s start with New Jersey’s most flexible exemption: the wildcard. It’s worth $1,000 in value towards anything: your car, your house, etc. Of course, these days, $1,000 barely buys a few nights in a hotel or a monthly PATH pass, but still, the $1,000 exemption is yours.

Homestead Exemption

Most states will allow you to keep your home, up to a certain amount of equity. New Jersey has no such rule – your home is not explicitly protected under state law (though, of course, there is that tiny wildcard exemption). Under federal law, the homestead exemption is $27,900 (twice that for married couples). 

Automobile Exemption

You can’t get to work without a vehicle, right? Umm, that’s unfortunate for Jersey filers, because there is no automobile exemption. Fortunately, there is a federal exemption for up to $4,000 in equity: if you have a car that is worth that much or less (after subtracting what you owe on the car), you can exempt it from liquidation and keep it as part of your bankruptcy filing. Keep in mind that if you owe on the car, and you decide to keep it, you will have to continue making payments on it and you will still owe on the vehicle after filing bankruptcy.

Clothing, Household Goods, Personal Property, and Animals Exemptions

Okay, this is where the New Jersey rules get weird. (And cue the jokes about guidos and guidettes getting fresh for a night out after heading to the bankruptcy court.) New Jersey has no limit on how much of your clothing you can exempt in your filing: if your closet is all designer threads and gold-plated stilettos, double-check with your lawyer, but you may be able to keep it all. You’ll have no house, no car, but all the clothes. Go figure, Jersey. On the other hand, you furniture and other household goods are limited to $1,000 in value. And animals, chattel, personal goods, and stock in a corporation (all combined) are exempt up to $1,000.

Compare that with the federal rule: The federal rule lumps pretty much all of those together into a single category, limits it to $700 per item, and caps the whole category at $14,875. It’s certainly simpler, but you may have to give up your Gucci.

Wages, Cash, and Pensions

New Jersey rules mean you’ll have to forfeit your house, and your car, but what about cash? Well, you are allowed to keep up to 90% of the income you were paid in the 60 days before filing – if you earn up to $7,500 annually. Any more than that and the exemption shrinks.

If you’re feeling discouraged by the local rules, there is one place where they shine: protecting certain interest groups’ retirement and benefit plans. Not only are public welfare plans (such as unemployment, disability, and social security) exempt, but there is a long list of state and government workers’ pensions that are protected as well: teachers, police, firefighters, prison workers, civil defense, city, county, and other public employees, and even alcohol beverage control officers are all protected by state law from having their retirement touched in a bankruptcy filing.

Federal rules, conversely, don’t get so specific with New Jersey state and local employee plans: pension plans, 401k plans, 403b plans, some IRA plans, and some profit-sharing plans are likely exempt.

As always, since retirement plans may vary greatly depending on the employer, and your ongoing income is vital to your financial recovery post-filing, discuss your pension or retirement accounts with a bankruptcy attorney before filing and assuming one or the other set of exemptions will protect it.

Exemptions are Complex: Get Professional Help

Obviously, we kept coming back to the federal rules throughout this article for a reason: most people are more generous. However, depending on your income source, New Jersey’s rules may protect your retirement income better. This is where expert advice from a bankruptcy attorney can really pay off — your attorney can help you maximize the amount of exempt property and set you up for a strong financial future after filing. For expert advice, schedule a consultation with one of our network attorneys.