New Bankruptcy Law Simplified

Now that the new Bankruptcy Abuse Prevention Act is in affect, we thought that a simple clarification was in order.

Approaching the October 17 deadline, thousands of people flocked in droves to their local courthouse with bankruptcy papers clutched in their hands fearing that their income level would make it impossible to file for Chapter 7 liquidation under the new bankruptcy law. The first week of October showed over 100,000 filings, up from approximately 68,000 the week prior. This was the fourth straight record week when more than 3 times the normal number of bankruptcies were filed.

Bankruptcy attorneys have been working their fingers to the bone processing some 20,000 bankruptcy applications per week while their technical personnel work feverishly to upgrade their software to reflect the recent bankruptcy changes. The 25 changes to the bankruptcy law will initially complicate the process until the attorneys become familiar with all of its new intricacies. One thing you can absolutely depend upon is that the process has become more expensive.

Bankruptcy Abuse Prevention Act

If you are faced with filing for bankruptcy, the following clarifications may be helpful:

Credit Counseling

Debtors wishing to file for either Chapter 7 liquidation or Chapter 13 repayment plans must first attend a credit counseling program approved by the U.S Trustees Program. The Credit Counselors Directory can be found here.

Debt Education

Prior to your bankruptcy being discharged, you must attend a debtor education course in which you will learn financial management skills to prevent your relying on bankruptcy protection in the future. The Debtor Education Provider Directory can be found here.

Note:

• There is a temporary waiver of the above 2 requirements in Louisiana and the southern district of Mississippi due to the effects of Katrina.
• The United States Trustees Program is not responsible for overseeing bankruptcy cases filed in Alabama or North Carolina.

Bankruptcy Forms

• You can find the necessary bankruptcy forms here.
• In addition to the above bankruptcy forms you must also provide
  • Credit counseling certificate
  • Pay stubs for the last 60 days (if any)
  • Most recent tax returns
  • Photo ID

The Means Test

This calculation will determine whether you qualify for Chapter 7 liquidation or a Chapter 13 repayment plan. It is based on the median income of the state in which you reside. If your income is less than the state median, you will be allowed to file for Chapter 7 liquidation, if your income is over the state median you may be headed for Chapter 13 repayment plan. Your repayment plan can last for up to 5 years.

You can find the state median incomes here.

Your income is calculated by taking your average income over the previous 6 months and multiplying the average by 12. If your income is over the state median it is not time to panic, not yet that is.

There are certain allowable expenses for housing, utilities, food clothing and other necessities that can be deducted from your income. This is not the actual amount you may spend on sustaining your life but rather the allowable expenses as seen by your friends at the IRS. You can find the IRS allowable expenses here:

• Monthly allowable living expenses.
• Allowable housing and utility expenses for your neighborhood.

In addition to the IRS allowable expenses, you are allowed to deduct the following:

• Some taxes, but not property or sales taxes
• Mandatory payroll deductions, but not 401(k) contributions
• Term life, dental, vision, health and disability insurance premiums, but not auto, liability, homeowners, renters or whole life premiums
• Child care, but not primary or secondary school tuition beyond $125 month per child
• Business expenses
• Charitable contributions

If after all the deductions available are taken into account and the final calculation made, you have less than $100 per month left over, you can file for Chapter 7 liquidation. If your monthly balance is more than $166.66, you’re heading for a Chapter 13 repayment plan.

For those of you that retain between $100.00 and $166.66 per month, another calculation is used to determine whether you have enough to repay at least 25% of your debt. If it is determined that you are able to repay some of your debt, you will be filing under a Chapter 13 repayment plan.

Bankruptcy And Your Car

Under the old bankruptcy law, if you owed more on your vehicle than it was worth, the excess debt was erased by your Chapter 13 filing. If you wished to keep the car you would continue to make payments but based on a reduced amount that reflects the fair market value of the vehicle. This practice was known as ‘loan stripping’. Sadly, this is no longer allowed on vehicles purchased within 910 days (2.5 years) of filing.

Unsecured Debts

Some unsecured debt is not forgiven in a bankruptcy. These include but are not limited to taxes, child support and the like. With the advent of the new bankruptcy law the following debt types have been additionally restricted:

• Student loans. Prior to the new law, student loans couldn't be forgiven if the money was lent by a not-for-profit or a government-sponsored loan program, unless the debtor could show undue hardship. Now, that protection has been expanded to private and for-profit lenders. This hardship provision says if the payment of your student loan causes you to experience continued hardship, the note can be forgiven. The question is what constitutes continued hardship? We’ll investigate this one further as we are aware of many students that graduate with $20 — $50,000 of debt and no job opportunity with the wages necessary to repay the student loan therefore creating hardship. A student or recent graduate’s problem is not finding income for luxury items but for the very necessities of life, food, clothing, housing and medical insurance. In our opinion if any one of these necessities is missing from your life, undue hardship will occur. It would be in the nation’s best interest to create a hospitable environment for those that persevered and received an education. It just makes good economic sense to have educated people working at the task at hand rather than being distracted by the manifestations a life of poverty invites.
• Cash advances. Under the old bankruptcy law, debtors had to pay back credit-card cash advances of more than $1,225 taken out 60 days or less before a filing. The new law reduces the amount to $750 and includes advances made within 70 days of a filing. This law prevents debtors from heeding the advice to ‘max out your credit’ before you file. (A formally allowed and now clear abuse of the bankruptcy system). Now it appears that should you wish to push the envelope and take whatever you can possibly get, (rather than the old school method of maxing out your cash advances 61 days before filing), you now have to max out 71 days in advance. What a difference 10 days makes is up to speculation.
• Fraudulent credit-card use. Much in the same vain as cash advances, if the court determines that you racked up credit-card debt knowing you were going to file for bankruptcy, the amount you owe won't be discharged in Chapter 7 or Chapter 13.
• Drunk driving liabilities. There are some things that make ultimate sense and this is one of them. If you were selfish or arrogant enough to cause damage because of your propensity to drink and drive, you must pay the price.

Refiling Chapter 7

In an effort to prohibit those that view bankruptcy as a business from ‘serial filing’, the new law dictates that a waiting period of 8 years between Chapter 7 filings be in effect.

Exceptions

The credit counseling requirement would be waived if the United States Trustee determined that the credit counseling services for a district were not reasonably able to provide adequate services. This means that if you simply have no credit counseling services in your geographical area, or credit counseling services no longer exist due to natural disasters (hurricanes) you can file for bankruptcy without undergoing credit counseling.

In addition, the Dept. of Justice won’t enforce its required documentation rule for those filers who lost their documents in a natural disaster (hurricane etc.). Although a distinct ‘long shot’, the courts will consider income loss, increased expenses or other anomalies encountered because of ‘special circumstances’ (increased costs arising from a natural disaster) that allow the debtor to file for Chapter 7 liquidation rather than a Chapter 13 repayment plan.

Drop us a line if you require any other point of clarification or have an opinion on the new bankruptcy law.

Relevant Articles:

Filing for Bankruptcy: The ins and outs, the ups and downs.

What you can keep in a bankruptcy: Federal and State Bankruptcy Exemptions