As of Oct. 17, 2005, The Bankruptcy Abuse Prevention & Consumer Protection Act of 2005 became law and the bankruptcy laws are no longer written in your favor. In fact, filing for bankruptcy protection has become more complicated than it ever was before.
The now complex process of filing for bankruptcy is consumer unfriendly but quite rewarding to the credit card industry that lobbied hard for this “bankruptcy reform” bill. Despite enjoying windfall profits to the tune of some $30 billion in 2003, the credit card industry has convinced lawmakers that debtors regularly abuse the bankruptcy system. According to the credit card industry’s well-paid lobbyists, the bankruptcy laws needed a major overhaul.
A major overhaul of the bankruptcy laws is exactly what we got. As it stands, there will be little, if any, abuse of the current bankruptcy laws as currently written. Filing for bankruptcy is now much more difficult and potentially more costly than ever before.
There are now additional hoops you have to jump through before you even file for bankruptcy. Under the new laws, you have to meet with a credit counselor approved by the United States Trustee Program no more than six months before filing. The program is a division of the Department of Justice that oversees the administration of all bankruptcy cases in the U.S. To find the credit counseling agencies in your home state go to the U.S. Trustee Program Web site at http://www.usdoj.gov/ust and click on the link titled “Credit Counseling and Debtor Education.”
When you consult with a credit counseling agency, a credit counselor will go over your finances with you and may suggest a repayment plan. You have the right to refuse to go along with any plan suggested to you, but will have to submit the counselor’s formal recommendations when you file for bankruptcy. You will also have to file a certificate that proves you have completed mandatory counseling sessions.
Throughout the process of filing for bankruptcy it may be a good idea to have a lawyer represent you through all formal bankruptcy proceedings. Thanks to the new bankruptcy laws, lawyers will have to spend more time on your case and will likely charge you more money for their extra time. Lawyers now have to personally verify all financial and creditor information you provide them, which can be a very time consuming endeavor.
In addition to the increased hassle for lawyers, judges in bankruptcy courts now have less authority to be lenient with debtors. Traditionally, a judge in bankruptcy court would determine if you could file under Chapter 7 (asset liquidation) bankruptcy. The judge would require you to file under Chapter 13 (payment reorganization) bankruptcy if it was determined by the court that you could pay off your debts within three to five years.
The determination of whether you can qualify for Chapter 7 bankruptcy is now taken out of the courts’ hands and determined by a complex “means test.” Prior to taking the means test, the size of your family and your income is compared to the median income of other families of the same size in your home state. To see the median income of families in each state, go to the U.S. Trustee Program Web site at http://www.usdoj.gov/ust and click on the link titled “Means Testing Information.”
If your income falls below the median you won’t have to take the means test and may qualify for Chapter 7 bankruptcy. If your income is above the median income for a family of your size there will now be a presumption that your debt is caused by abuse. Under the means test you’ll be essentially “guilty until proven innocent;” an unprecedented legal philosophy that sets a potentially dangerous standard for other laws in the United States.
With the means test, your income and a number of expenses are used to determine whether you have abused your credit and are disqualified from filing for Chapter 7 bankruptcy. The means test is also used to determine if you can make a payment of at least $6,000 to your creditors over the course of five years under a Chapter 13 bankruptcy repayment plan.
When you undergo the means test, your average income over the past six months is computed and all of your major debts (mortgage, cars, credit cards, etc.) are subtracted. Any other secured debts or debts from judgments against you may also be deducted. If you’ve recently lost your job or had your income reduced, this will not be factored into your average six-month income, leaving you less likely to be able to make repayment if you only qualify for Chapter 13 bankruptcy.
After your debts are deducted from your average six-month income, an arbitrary IRS national collection standard will be used to determine how much of your living expenses will be deducted. Your actual living expenses may be higher than what the IRS allows to be deducted.
After the math is complete, if your total disposable income for a month is less than $100 you will be allowed to file for Chapter 7 bankruptcy. If your total disposable income for a month falls between $100 and $166.66, you will fail the means test if it is determined that you can afford to pay more than 25 percent of your unsecured debts. If your total disposable income for a month is more than $166.66 you automatically fail the means test and will only qualify for Chapter 13 bankruptcy.
All of your disposable income factored by the IRS will be expected to go toward paying off your debt under Chapter 13. If you have less money in actual disposable income available you won’t be able to pay all your bills and your bankruptcy plan will be doomed to failure.
In addition to being more likely to fail, bankruptcy plans under the new laws don’t have many of the protections consumers used to take for granted. Under the old laws a majority of your personal property was considered exempt from seizure and assumed to be worth very little. Not so under the new laws.
You are now required to price all of your personal property according to what it would cost to replace at retail along with the age and condition of each item. Any of your valuable property once considered exempt could now be in danger of being seized to pay off your debts. Personal heirlooms such as a large coin collection, jewelry, sports memorabilia or other collectibles could now be at risk of being seized under bankruptcy proceedings.
In addition to more of your belongings being at risk under the new bankruptcy laws, you may not be able to get certain creditors off your back now. Under the old laws, you could get a stay on any collection actions filed by creditors against you, preventing them from contacting you and trying to collect on your debt.
Under the new laws a stay from collection actions is now conditional but what a stay is conditional upon remains a mystery. Worse, nobody seems to know what protections are set in place for debtors at this time. If you’ve had any prior bankruptcy filings dismissed, you may not even qualify for a stay on any debt if you successfully file for bankruptcy in the future.
If a creditor has been notified of your bankruptcy and is not on an official list of creditors they may continue to attempt to collect what you owe them under the new laws, regardless of any stay you may have already had established. Under these new laws, landlords will now be allowed to evict you if you owe back rent, even if you are currently paying rent. File for bankruptcy and you could lose an apartment or other living spaces you are renting.
In addition to filing for bankruptcy being a more risky proposition, you may not be able to get as many debts discharged as with prior bankruptcy laws. Traditionally, Chapter 7 bankruptcies would not allow the discharge of debts from taxes, child support, alimony payments, student loans or debts entered into through divorce or fraud. Under the new laws even more debts are nondischargeable.
If you’ve purchased anything considered a luxury (above $500) within 90 days of filing or taken out a cash advance of $750 or more 70 days prior to filing, your application for bankruptcy protection will be considered fraudulent and your case will likely be dismissed.
Dismissal will also occur if you don’t provide the required credit counseling certificate, proof of any payments received from employers 60 days prior to filing, monthly net income statements along with anticipated increases in income and expenses after filing, tax returns or transcripts from the last tax year, photo ID or anything else that may be required within 45 days. Fail to turn in any one of these required items by the due date and your bankruptcy case will be dismissed automatically.
If you successfully file for Chapter 7 bankruptcy you will no longer be able to immediately file for Chapter 13 bankruptcy to pay off any remaining debts. You’ll have to wait four years to file a Chapter 13 after successfully filing a Chapter 7 and will have to wait nine years if you need to file another Chapter 7 bankruptcy.
From start to finish, the process of filing for bankruptcy is much different than it has been in decades past. As judges and lawyers come to terms with the new bankruptcy laws the full impact of these laws has yet to be determined. At the very least, bankruptcy is no longer the “quick fix” solution many debtors once relied on to help them eliminate their debts.
You will now have much more to consider in making the decision if filing for bankruptcy protection is the right thing to do. Making the wrong decision today will cost you far more time and money than it ever has before.
John Campbell is the writer and editor of CashBuzz, A financial portal for the rest of us. Check out cashbuzz.com for the latest articles on money management and tips and tricks that can help improve your finances. This article may be reprinted on your Web site if the copyright, author information and active link are included.