The New Bankruptcy
Law
The new bankruptcy law may make it harder to file Chapter 7 bankruptcy.
The latest changes
to bankruptcy law may be making it harder for some people to file bankruptcy.
And a few filers with higher incomes are no longer allowed to use Chapter 7
bankruptcy, but will instead have to repay at least some of their debt under
Chapter 13. All debtors now have to get credit counseling before they can file a
bankruptcy case -- and additional counseling on budgeting and debt management
before their debts can be wiped out. And, because the law imposes new
requirements on lawyers, it is sometimes tougher to find an attorney to
represent you in a bankruptcy case.
Here are some of
the most important changes.
Restricted
Eligibility for Chapter 7 Bankruptcy
Under the old rules,
most filers could choose the type of bankruptcy that seemed best for them -- and
most chose Chapter 7 bankruptcy (liquidation) over Chapter 13 bankruptcy
(repayment). The new law prohibits some filers with higher incomes from using
Chapter 7 bankruptcy.
How High is Your
Income?
Under the new rules,
the first step in figuring out whether you can file for Chapter 7 bankruptcy is
to measure your "current monthly income" against the median income for a
household of your size in your state. If your income is less than or equal to
the median, you can file for Chapter 7 bankruptcy. If it is more than the
median, however, you must pass "the means test" -- another requirement of the
new law -- in order to file for Chapter 7.
The Means Test
The purpose of the
means test is to figure out whether you have enough disposable income, after
subtracting certain allowed expenses and required debt payments, to make
payments on a Chapter 13 plan. To find out whether you pass the means test, you
subtract certain allowed expenses and debt payments from your current monthly
income. If the income that's left over after these calculations is below a
certain amount, you can file for Chapter 7. See
Counseling
Requirements
Before you can file
for bankruptcy under either Chapter 7 or Chapter 13, you must complete credit
counseling with an agency approved by the United States Trustee's office. (To
find an approved agency in your area, go to the Trustee's website,
www.usdoj.gov/ust, and click "Credit
Counseling and Debtor Education".) The purpose of this counseling is to give you
an idea of whether you really need to file for bankruptcy or whether an informal
repayment plan would get you back on your economic feet.
Counseling is
required even if it's obvious that a repayment plan isn't feasible or you are
facing debts that you find unfair and don't want to pay. You are required only
to participate, not to go along with any repayment plan the agency proposes.
However, if the agency does come up with a repayment plan, you will have to
submit it to the court, along with a certificate showing that you completed the
counseling, before you can file for bankruptcy.
Toward the end of
your bankruptcy case, you'll have to attend another counseling session, this
time to learn personal financial management. Only after you submit proof to the
court that you fulfilled this requirement can you get a bankruptcy discharge
wiping out your debts.
Lawyers May Be
Harder to Find -- and More Expensive
As you can see, the
new law adds some complicated requirements to the field of bankruptcy. This
makes it more expensive -- and time-consuming -- for lawyers to represent
clients in bankruptcy cases, which means attorney fees have gone up.
The new law also
imposes some additional requirements on lawyers, chief among them that the
lawyer must personally vouch for the accuracy of all of the information their
clients provide them. This means attorneys have to spend more time on bankruptcy
cases, and charge their clients accordingly. This combination of new
requirements have driven some bankruptcy lawyers out of the field altogether.
Some Chapter 13
Filers Will Have to Live on Less
Under the old rules,
people who filed under Chapter 13 had to devote all of their disposable income
-- what they had left after paying their actual living expenses -- to their
repayment plan. The new law added a wrinkle to this equation: Although Chapter
13 filers still have to hand over all of their disposable income, they have to
calculate their disposable income using allowed expense amounts
dictated by the IRS -- not their actual expenses -- if their income is higher
than the median in their state. And these allowed expense amounts must be
subtracted not from the filer's actual earnings each month, but from the filer's
average income during the six months before filing.
Other Changes
There are other
changes that can affect bankruptcy filers negatively, including how property is
valued (at replacement cost instead of auction value) -- this means more debtors
are at risk of having their property taken and sold by the trustee -- and how
long a filer must live in a state to use that state's exemption laws (this can
make a big difference in the amount of property a bankruptcy filer gets to hold
on to).
(see
also:
What Is Bankruptcy?,
What Bankruptcy Can and Cannot Do,
Who Can File for
Chapter 7 Bankruptcy,
What is Chapter 7?,
What is Chapter 13?)