Consumer Bankruptcy:


Whether you are considering filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy, you are going to want to understand the new bankruptcy law of 2005. Because of a consistent upturn in the number of bankruptcies, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was passed by Congress and signed into law in April. Most of its effects took place by October of that year. It is a significant reform to our nation’s bankruptcy laws.
Changes in the law have a clear impact upon those who are considering filing for bankruptcy. Some of the major changes include:
-Mandatory Credit Counseling- Applicants are not required to enter a government approved program to receive credit counseling. More information about this can be found on the Department of Justice’s website, here.
-Stricter Requirements for Chapter 7- There is a “means test” now, that applicants for Chapter 7 must take, which determines if they are eligible to file for it. If your income is greater than the median income for your state, and you are able to pay at least $100 per month toward eliminating your debt, then you cannot file for Chapter 7 and must file under Chapter 13. The way they determine if you can afford to pay the $100 per month is based upon a formula that takes into account your monthly income, expenses, as well as the total amount that you owe. More information concerning this can also be found on the website for the Department of Justice, here.
-Required Tax Returns and Proof of Income- The new law requires that those wishing to file under either Chapter 7 or Chapter 13 must provide proof of their income in the form of federal tax returns from the prior year. Unpaid taxes from the previous year will stop the bankruptcy proceedings; they will only continue once the taxes are paid.
-Increased and Stricter Chapter 13 Usage- Due to the stricter requirements for Chapter 7, more people have to file for Chapter 13. The two types of bankruptcy differ considerably, but the most significant difference is that under Chapter 13, instead of all debts being discharged, the debtor must enter into a five-year repayment plan, paying a specific amount to the creditors, based upon a formula that takes both expenses and income into account. However, the new law also makes it so those filing for Chapter 13 may need to considerably reduce their expenses. Filers with incomes greater than the median in their state, when determining what income they have that is deemed “disposable,” may no longer calculate based upon actual expenses, but rather on expense amounts that are “allowed” by the IRS. Furthermore, allowed amounts of expenses are deducted from the filer’s average income in the six months preceding the bankruptcy filing, and not from his or her actual income.
-Decrease in “Automatic Stay” Protection- In the past, those who filed for bankruptcy were immediately given the right to certain legal protections, from creditors and other, and including most debt collection agencies and lawsuits; these are what is referred to as the “automatic stay” effect of filing for bankruptcy. This is because the debtor is protected; the impending legal actions against him or her by creditors are stopped (“stayed”). The new bankruptcy of law of 2005 brought some of these protections to an end. Former “automatic stays” and temporary stays that no longer are in force include but are not limited to those concerning eviction actions, the suspension of driver’s licenses, legal actions for child support, and/or divorce actions.
-Preference for Alimony and Unpaid Child Support- Bankruptcy laws establish a hierarchical system for determining the order in which creditors are repaid. That is, those who are owed money are ranked to determine who receives the money they are owed first, second, and so on. The new bankruptcy law changes the old law and gives the first priority for repayment to those who are owed money for unpaid alimony and child support. Other creditors can be paid only after these family member of the debtor have been paid. 
-Compulsory Courses in Debt Management- The courts now require, because of the new bankruptcy law, that those filing for bankruptcy enroll in and take courses in financial management from a government approved program. The first of these mandatory credit counseling courses is to show you if filing for bankruptcy is absolutely necessary. You do not need to follow any plans that they provide, but the court must be made aware of any debt management plans that they suggest. You must also take courses at the end of the bankruptcy the bankruptcy hearings and once again provide proof to the court before all of your debts are discharged. More information on this, along with a list of approved programs, can be found on the Department of Justice’s website, here.
-Additional Area Affected by the Change- Other factors which have changed and may be detrimental to the filer include the way in which property is valued (the cost for replacement, not the value at auction) and the period of time living in a new state for its exception laws to be applicable in the bankruptcy filing. A skilled and experienced bankruptcy attorney can help you understand the implications of these and other changes due to the new bankruptcy law.
It is also of note that the new bankruptcy laws that were passed in 2005 may result in greater attorney’s fees, as the laws are new and more complicated than their predecessors, and not only require a significantly greater time commitment on the part of the attorney, as well as more extensive knowledge, but also impose additional requirements, such as requiring attorneys to verify all information provided by the debtor. The increased difficulty in these cases make it essential that the lawyer you hire be well versed in these new bankruptcy laws.