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Understanding the
New Bankruptcy Laws
Bankruptcy is a federal court process that
helps individuals and businesses repay their debts under the
protection of the bankruptcy court or wipe their debts out
altogether. The Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005 made major changes to bankruptcy law, making it
more difficult for some people to erase debts by filing for
bankruptcy. These changes were prompted by years of complaints
by banks and other financial institutions who believed that
the bankruptcy laws had been abused by many consumers.
There are two basic types of bankruptcies that
apply to most individuals: reorganization (Chapter 13) or
liquidation (Chapter 7).
Chapter 13
In a reorganization bankruptcy, you are required
to file a repayment proposal with the bankruptcy court. Some
debts must be repaid in full, some are repaid as a percentage
of the original debt, and others aren't repaid at all. In
general, Chapter 13 requires you to pay back your secured
debt and as much of your unsecured debt as possible. Payment
plans usually cover a five year period. During the repayment
period, the court will place restrictions on how you can spend
money. In many cases, a set amount will be garnished from
your wages and a trustee of the court will make the payments
to your creditors.
Chapter 7
In a liquidation bankruptcy, you must turn
their personal property (with a few exceptions) over to the
court, which sells it and uses the proceeds to pay all your
debts or a portion of your debts. Chapter 7 has generally
been the most common form of bankruptcy filing for those people
who have no assets to lose and therefore are seeking a "fresh
start." However, recent changes in bankruptcy law have
made this type of filing much more difficult.
What type of Bankruptcy would you qualify
for?
If you're considering filing for bankruptcy,
it may be harder to erase your debts than you think. Under
the old bankruptcy law almost anyone could file Chapter 7
bankruptcy. The new bankruptcy law includes a formula test,
called the means test, to determine who may (and who may not)
be eligible to file Chapter 7 bankruptcy. Those who do not
pass the means test are then required to file Chapter 13 bankruptcy.
The Means Test
In order to file under Chapter 7 Bankruptcy,
your income must be below the median income for same sized
families in your state or you'll be required to go through
a bankruptcy means test. Your income is determined by calculating
your average income from the past six months. For families
with a recent loss of income due to job loss or declining
wages, this average may not reflect their actual current income.
Even if you pass the first part of the means test and you
have an income lower than your state's median, there is an
additional test for your expenses which places severe restrictions
on your spending. If the court believes that you have $100
or more per month in disposable income that you could apply
towards your debt repayment after allowances for child support,
food, housing, and other related expenses, you'll be pushed
into a repayment plan under Chapter 13.
Other Key Changes
Residency requirements
Bankruptcy laws exist at both the state and
federal level. Some states' laws are more favorable than others.
New residency requirements are designed to prevent debtors
from moving to a state with more favorable laws and immediately
filing bankruptcy. In general if you have lived in a new state
that has more favorable bankruptcy laws for less than two
years, you cannot use the more favorable provisions.
Mandatory Credit Counseling
The new bankruptcy law requires that anyone
who files bankruptcy must received credit counseling and financial
education by government-approved programs as a condition for
filing bankruptcy and discharging debts. (See What is Credit
Counseling? for more information about their programs) No
one can file bankruptcy unless they complete an accredited
credit counseling program within 180 days of their bankruptcy
filings.
Increased Paperwork and Higher Legal Costs
New requirements under the bankruptcy laws
put a heavier burden on you to document income, expenses as
well as other various forms and filings. Those wishing to
file for bankruptcy must provide:
- A list of all creditors secured and unsecured.
- Schedules of assets and liabilities.
- Schedules of income and expenses.
- Certificate of credit counseling.
- Evidence of payment from employers, including pay stubs
of the past 60 days.
- Statement of monthly net income.
- Tax returns for the most-recent tax year.
- Tax returns for several years prior to the filing, if
those returns hadn't previously been filed with the IRS.
- Photo identification.
If these documents aren't provided to the bankruptcy
court within 45 days of the initial filing, the court will
automatically dismiss the case. Extensions beyond 45 days
are up to the court. Legal costs under these new requirements
are estimated to much higher than what layers charged under
the old law. There is much more work required or lawyers.
Bankruptcy attorneys are also required to certify their clients'
claims for their assets, liabilities, income and expenses,
and could face court sanctions if they are not.
Filing for bankruptcy has serious consequences and should
not be entered into lightly. Having your debts erased doesn't
miraculously solve your long-term financial problems. Filing
for Bankruptcy, regardless of whether you file Chapter 7 or
Chapter 13 may have long lasting negative effects on your
credit history for up to 10 years. The negative marks of bankruptcy
on your credit may make it difficult to apply for future credit,
secure jobs that require a positive credit profile, rent an
apartment, purchase a vehicle, etc.
Contact
New Horizon Consumer Services
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