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Key Changes of the Bankruptcy Law
There are several key changes to the new bankruptcy law, called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The three major changes to the law that will affect the most people are the ticket in, the means test, and the ticket out. There are several other smaller changes that will also be discussed later.
Ticket In
The "ticket in" is simple a credit counseling session that the person wishing to file bankruptcy must attend. You must attend this credit counseling session six months prior to applying for bankruptcy. Also, the credit counseling session must be done by a non-profit agency that has been approved by the United States Trustees office.
Means Test
Right now, the bankruptcy court determines whether or not you can qualify for chapter 7 bankruptcy. Under the new law, your income will be tested by a two-part "means test." The first test is a formula that exempts certain expenses (rent, food, etc.) to determine if you can afford to pay 25 percent of your unsecured debt, such as credit card bills. Next, your income will be compared to your state's average income.
The court will not allow you to file chapter 7 bankruptcy if your income is above average for your state and you are able to pay 25 percent of your unsecured debt. Under the new bankruptcy law, the court may allow you to file under chapter 13, though.
If your income falls below your state's average but you are able to pay 25 percent of your unsecured debt, you may be able to file chapter 7, but the bankruptcy court will still have the authority to require you to file chapter 13 instead if the court believes you would be abusing the system by filing under chapter 7.
The new bill also allows for special accommodations for active-duty military service members, for low-income veterans of the military, and those with serious medical conditions in the consideration of the new means test.
Ticket Out
The "ticket out" for the new bankruptcy law is attending a financial education class from an approved provider before your bankruptcy can be finalized. The United States Trustees Office approves the class providers. This class is commonly called a Debtor Education Class.
Also under the new law, the court will apply living standards derived by the IRS to determine what is reasonable to pay for food, rent, and other expenses to determine how much you have available to pay on your debts.
Other Changes
The new law will place more stringent restrictions on the homestead exemption. One example is that if you have not lived in the state for at least two years, they may only take the state exemption of the state where they lived for the majority of the time for the 180 days before the two-year period.
Also under the new law, if some of the information about a client's case is found to be inaccurate, the bankruptcy attorney may be subject to various fees and fines.
This new bill also gives top priority to a spouse's claim for child support among creditors' claims on the debtor in bankruptcy. Also, the new bill gives Wall Street investment firms the right to work for a company before and after it files for bankruptcy.
What is Bankruptcy?
Bankruptcy is simply a process that was established by a set of federal laws that are designed to give debtor's a "fresh start" by canceling many of their debts through an order of the court.
Bankruptcy will also allow creditors a chance to get their designated shares of any money that the debtor can afford to, or are obligated to, pay back to the creditors.
When an individual files bankruptcy, the creditors must stop any attempts to collect the debts, at least temporarily. There is usually some immediate relief from creditor pressure, and a bankruptcy can stop a pending foreclosure sale of your home, a garnishment of your wages, or a threatened repossession. During a bankruptcy, most creditors cannot call, write, or sue you after you have filed bankruptcy.
What Bankruptcy Doesn't Cover
There are some things that a personal bankruptcy will not cover. A personal bankruptcy usually does not erase child support payments, alimony, fines, taxes, and some student loan obligations you may have.
Also, unless you have an acceptable plan to catch up your debt under a chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or lien on it.
How Chapter 7 works
Chapter 7 is known as straight bankruptcy, or liquidation bankruptcy. This means your assets will be sold, with a few exceptions. Exempt property may include cars, work-related tools and basic household furnishings. Some property may be sold by a court-appointed official-a trustee-or turned over to creditors. You can receive a discharge of your debts under Chapter 7 only once every six years, and it stays on your credit report for 10 years. Bankruptcy, however, is for life. Loan applications and many job applications ask if you have ever filed for bankruptcy. Ever. If you lie to get a loan because your bankruptcy is very old, technically you have committed criminal fraud.
Both Chapter 7 and Chapter 13 bankruptcies may get rid of unsecured debts and stop foreclosures, repossessions, garnishments, utility shut-offs, and debt collection activities. Both types provide exemptions that allow you to keep certain assets, although exemption amounts vary. However, personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. Chapter 7 usually does not allow you to keep your home or property if your creditor has an unpaid mortgage or lien on it.
A Chapter 7 case begins with the debtor filing a petition with the bankruptcy court. The petition should be filed with the bankruptcy court serving the area where the individual lives or where the business debtor has its principal place of business or principal assets. In addition to the petition, the debtor is also required to file with the court several schedules of assets and liabilities, a schedule of current income and expenditures, a statement of financial affairs, and a schedule of executory contracts and unexpired leases. A husband and wife may file a joint petition or individual petitions. (Official bankruptcy forms can be purchased at a legal stationery store. They are not available from the court.)
In order to complete the official bankruptcy forms which make up the petition and schedules, the debtor(s) will need to compile the following information:
(1) A list of all creditors and the amount and nature of their claims
(2) The source, amount and frequency of the debtor's income
(3) A list of all of the debtor's property
(4) A detailed list of the debtor's monthly living expenses (i.e., food, clothing, shelter, utilities, taxes,
transportation, medicine, etc.)
Currently, the courts are required to charge a $155 case-filing fee, a $30 miscellaneous administrative fee, and a $15 trustee surcharge (a total of $200). The fees should be paid to the clerk of the court upon filing or may, with the court's permission, be paid by individual debtors in installments (limit four). The final installment must be paid no later than 120 days after filing the petition.
For cause shown, the court may extend the time of any installment, provided that the last installment is paid no later than 180 days after the filing of the petition. The $30 administrative fee and the $15 trustee surcharge may be paid in installments in the same manner as the filing fee. If a joint petition is filed, only one filing fee, one administrative fee, and one trustee surcharge are charged. Debtors should be aware that failure to pay these fees may result in dismissal of the case.
The filing of a petition under Chapter 7 "automatically stays" most actions against the debtor or the debtor's property. This stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally cannot initiate or continue any lawsuits, wage garnishments, or even make telephone calls demanding payments. Creditors normally receive notice of the filing of the petition from the clerk.
One of the schedules that will be filed by the individual debtor is a schedule of exempt property. Federal bankruptcy law provides that an individual debtor can protect some property from the claims of creditors either because it is exempt under federal bankruptcy law or because it is exempt under the laws of the debtor's home state.
Many states have taken advantage of a provision in the bankruptcy law that permits each state to adopt its own exemption law in place of the federal exemptions. In other jurisdictions, the individual debtor has the option of choosing between the federal or state law packages of exemptions. Thus, whether certain property is exempt and may be kept by the debtor is often a question of state law. Legal counsel should be consulted to determine the law of the state in which the debtor lives.
A meeting of creditors is usually held 20 to 40 days after the petition is filed. If the United States trustee or bankruptcy administrator designates a place for the meeting that is not regularly staffed by the United States trustee or bankruptcy administrator, the meeting may be held no more than 60 days after the order for relief. The debtor must attend this meeting, at which creditors may appear and ask questions regarding the debtor's financial affairs and property.
If a husband and wife have filed a joint petition, they both must attend the creditors' meeting. The trustee also will attend this meeting. It is important for the debtor to cooperate with the trustee and to provide any financial records or documents that the trustee requests. The trustee is required to examine the debtor orally at the meeting of creditors to ensure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy, including the effect on credit history, the ability to file a petition under a different chapter, the effect of receiving a discharge, and the effect of reaffirming a debt.
In some courts, trustees may provide written information on these topics at the meeting or in advance to ensure that the debtor is aware of this information. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors.
In order to grant the debtor complete relief, the Bankruptcy Code allows the debtor to convert a Chapter 7 case to either a Chapter 11 reorganization case or a case under Chapter 13, as long as the debtor meets the eligibility standards under the chapter to which the debtor seeks to convert, and the case has not previously been converted to Chapter 7 from either Chapter 11 or Chapter 13. Thus, the debtor will not be permitted to convert the case repeatedly from one chapter to another.
Chapter 13 Bankruptcy
You may be saying right now that you don't want to file chapter 7, you are planning to file chapter 13. How does the new law affect me? Before, the court would determine what you can afford to pay based on what you and the court deem to be reasonable and necessary expenses.
Now, the court is going to use a set of living standards derived by the IRS that determines what is reasonable to pay for food, rent, and other expenses. This will determine how much of your income you will have to pay on your debts.
Once again, it takes the human reasoning factor out of the bankruptcy equation. If you feel the IRS living standards are unreasonable in your case, you must ask for a hearing from a judge to contest them.
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