Guide To Understanding Bankruptcy
The Bankruptcy Abuse Prevention and Consumer Protection Act made sweeping changes to American bankruptcy laws, affecting both consumer and business bankruptcies. Many of the bill's provisions were explicitly designed to make it more difficult for individuals to file for bankruptcy. Some of the bill's more significant provisions include the following provisions:
Means Test For Chapter 7
The new law makes it considerably more difficult for individuals to file for bankruptcy under Chapter 7, under which most of their debts are forgiven (or discharged), as opposed to Chapter 13, under which no debts are forgiven. Under the old law, filers had a presumption of eligibility to file under Chapter 7, with the final determination made by bankruptcy judges, who evaluated the specific nature of each bankruptcy. In lieu of this judicial discretion, the new law substitutes a means test to determine whether filers have enough income to pay some portion of their debts, and thus file under Chapter 13.
The means test applies to filers whose gross income (based on the six month period prior to filing), is above the median income in their state (ranging from $72,451 in Massachusetts to $42,290 in West Virginia, as of 2005). Individuals whose incomes are below the median automatically qualify for Chapter 7. Filers whose incomes are above the median must then calculate their Disposable Monthly Income (DMI) to determine whether they are able to make payments on their debts sufficient to qualify them for Chapter 13. The DMI is determined by subtracting priority debt payments, secured debt payments, Internal Revenue Service determined expense allowances, taxes and certain other expenses from a filer’s monthly income. If the DMI is less than $100 per month, they are permitted to file under Chapter 7. If the DMI is above $100, they must file under Chapter 13.
This formula effectively rewards filers with assets that are heavily mortgaged and debtors with larger amounts of unsecured debt. Since alimony and child support payments are "priority debts" it also has the effect of making it easier for people who owe back domestic support obligations (such as "deadbeat dads") to file under Chapter 7 than other debtors (but the child support is not dischargeable).
Notice: By calling 1800DEBT.COM (that's 1800-332-8266) you will reach a special debt relief call center that will automatically connect you to a certified debt professional that services your area based on the area code that you are calling from. We highly suggest that you call this toll-free number in conducting your research for debt relief and to determine if filing for bankruptcy is the right decision for your particular situation. If you prefer, click here to make your request online for a free consultation and for other options.
Additional Requirements For Filers
The new law adds a number of new requirements for bankruptcy filers making the filing process more difficult and costly. These additional requirements include:
- Mandatory credit counseling and debtor education. All potential bankruptcy filers must now undergo credit counseling via an “approved nonprofit budget and credit counseling agency” prior to filing for bankruptcy. Chapter 13 filers must also complete a course in “personal financial management” prior to filing for bankruptcy.
- Additional filing requirements and fees. The new law increases the amount of paperwork involved in filing and raises the filing fees. The law also allows filing fees to be waived for debtors earning below 150 percent of the federal poverty level.
- Increased attorney liability and costs. Attorneys representing bankruptcy filers are now required to conduct an investigation of their clients' filings and can be held personally liable for inaccuracies. Most bankruptcy attorneys predicted that this will result in increased attorneys fees and will make attorneys less likely to take on some cases. In addition, bankruptcy filings are now subject to audit in a manner similar to tax returns.
- Fewer automatic protections for filers. The new law eliminates some of the protections bankruptcy filers previously enjoyed, such as stopping or delaying evictions, avoiding driver's license suspensions, and delaying child support proceedings.
- Increased compliance requirements for small businesses. The new law increases the bureaucratic compliance obligations and shortens the deadline for Chapter 11 reorganizations involving small businesses, a series of new requirements not applicable to larger businesses.
- Increased amount of debt repayment under Chapter 13. The new law made several changes that effectively increased the amount of debt that Chapter 13 filers will have to repay. Most prominently, Chapter 13 payment plans are now five years long, as opposed to three years under previous law. In addition, the "super discharge" provision, which allows filers to discharge many of their debts under Chapter 13 in return for agreeing to a payment plan, is significantly curtailed under the new law.
- Increased length of time between discharges. The new law increases the length of time from six to eight years between which a filer can receive a Chapter 7 discharge.
Limits To The Homestead Exemption
Under the new law, the homestead exemption, which allows bankruptcy filers in some states to exempt the value of their homes from creditors, is limited in various ways. If a filer acquired their home less than 1,215 days (40 months) prior to filing, or if they have been convicted of security law violations or been found guilty of certain crimes, they may only exempt up to $125,000, regardless of a state's exemption allowance. Filers must also wait two years before using their state’s exemptions.
These provisions were largely intended to prevent filers from forum shopping, i.e. moving assets and domiciles to a state with more favorable exemptions and filing. It was alleged that O.J. Simpson did this when he moved to Florida, which has an unlimited homestead exemption, and bought a multi-million-dollar residence and then filed for bankruptcy. However, it is not clear if the new law’s 1,215-day restriction would have applied to this example because the wording of the legislation leaves an ambiguity concerning whether it applies to states where federal exemptions are not available (such as Florida and Arizona). Definitions of federal exempt property and the valuation rules for that property are also more precisely defined in a manner favorable to creditors compared to current law.
Other Changes To The Bankruptcy Code
- The new law allows creditors to pursue collection remedies without court permission in various circumstances such as offsetting tax refunds, pursuing tax and domestic relations litigation in all respects except the final turnover of assets from the estate, establishing wage assignments in domestic relations actions, repossessing vehicles and personal property subject to loans or leases 45 days after the first meeting of creditors in cases where no court action has been taken regarding that property, and allowing evictions that completed the court process prior to the filing of the petition or involve endangerment to property or drug use to proceed. The law also makes it easier for creditors who received preferential payments of less than $5,000 from the debtor before bankruptcy to avoid repaying such payments for the benefit of all creditors.
- The law improves the ability of the bankruptcy estate to reclaim assets placed in asset protection trusts within 10 years of filing or paid as employment bonuses to insiders within 2 years prior to filing.
- The law makes Chapter 12 bankruptcy (farm reorganization) permanent while adding family fishermen, overhauls the treatment of complex financial contracts including many derivative contracts used by hedge funds, and overhauls the treatment of ancillary foreign bankruptcy proceedings.
- The law extends protection to non-ERISA pension plans like private sector 403(b)s and some Individual Retirement Account that ERISA plans had enjoyed making these plans more similar to ERISA plans.
Speak To A Certified Debt Professional
We strongly suggest that prior to filing for bankruptcy or engaging the services of any debt relief service that you first speak to several debt professionals. Obviously you can call anyone that you wish and speaking to 3 or more debt professionals may prove very beneficial in finding the right solution. So, by all means, be sure to check out the various resources listed on this page and website. You can locate a bankruptcy attorney licensed in your local area by calling toll-free 877-828-0606.
We highly recommend, however, that in your research you call 1800DEBT.COM for a FREE debt consultation. By calling this number you will not only be able to speak immediately to a "certified" debt specialist, but based on the area code you're calling from, your call will automatically be routed to a debt professional in your local area. Today, each state has their own laws, regulations and licensing requirements, so it's important to speak with someone who is familiar with your particular area. If you are not in a position to speak to a counselor at this moment in time, you may also click here to make your request online for a free consultation and for other options..
In addition, the debt management specialist will be able to assist you in various ways depending on your particular situation. So do yourself and your loved ones a huge favor that could significantly change your lives and call right now and speak to a debt professional. The call is absolutely free, completely confidential and there is no obligation whatsoever. You truly have nothing to lose, except, that is — your debt!
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