Officiallythick

What The New Bankruptcy Laws Mean To Filers

Posted on 15 Jan 2011 by admin | Filled under: bankruptcy

There are many reasons why even a responsible manager of money could face bankruptcy, never mind the financial crisis of the present time. This process can be a daunting challenge for anyone, including the most secure of us, but having fore knowledge of what the steps in the bankruptcy process ahead are should alleviate at least some of the uncertainty. Here we will share a few words of wisdom on the topic so that you may face your bankruptcy prepared.

The New Bankruptcy Law

Effective October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act enacted sweeping changes to the US bankruptcy code. One of the major goals of the new law was to prevent fraud (as indicated by the first three words of the law's name), while another was to reduce the number of bankruptcy filings clogging up the system. In the very words of one of the bill's sponsors in Congress, BAPCPA was meant to make it "more difficult for people to file for bankruptcy." In particular, it has become much harder to file for Chapter 7 (or liquidation) bankruptcy.

Income limitations for Chapter 7 Bankruptcy

Prior to the new law taking effect, filers could file for whichever type of bankruptcy suited them best, most choosing chapter 7 bankruptcy. Now you can still do this -- so long as your average monthly income falls below the median value for a household of your size in your state. Those whose monthly income falls above the median must pass the Bankruptcy Means Test in order to file for chapter 7, else they must file under chapter 13. However, since most filers' income falls below the median, the typical bankruptcy filer won't be barred from choosing to file under chapter 7.

Close Scrutiny of Filings

Although only about one in ten filers has been shown to engage in fraud, the new law cracks down on this minority of would-be fraudsters. The new law requires filers to submit their income tax returns (and provide the same to any creditor upon request); though errors in a filer's paperwork were always subject to criminal prosecution, the office of the Attorney General audits cases for fraud much more frequently pursuant to the new law.

"Disposable Income" has been Redefined for Chapter 13 Filers

Today, as before, those who filed for chapter 13 bankruptcy are required to devote the entirety of their disposable income to their debt repayment plan. However, while chapter 13 filers previously were able to list their actual expenses in the calculation of their disposable income (so long as said expenses were "reasonably necessary"), chapter 13 filers under the new law must use expenses listed by the Internal Revenue Service. Since these "official" living expenses are often less than actual costs, you are left with more to pay into your bankruptcy plan and less to live on. Moreover, since your average income over the previous six months prior to filing is used to calculate your disposable income, your actual income used to pay these expenses may be less than that assumed by your plan.

Property Values have Changed

While under the now-defunct laws replaced by BAPCPA, you were able to value your property at the prices you could expect to get for it at auction or "fire sale," you are now required to value your property at its retail cost from a vendor, accounting for the age and condition of the items. It happens that the old laws typically assumed much of a filers property to have little value, so that this property often fell within exemption categories, but the often higher replacement costs of the new law price your possessions beyond the limits of exemption clauses. Therefore, you are more likely to lose property you would previously have been able to keep under the new laws.

Tougher Residency Requirements

As before, the exemption laws of your current state of residence are used to determine what property you could keep, but the new law requires a longer period of two years of residency. If you moved to another state of residence less than two years ago, you now must use your previous state's exemption laws. Additionally, the homestead exemptions used to determine how much of your home equity you can keep is now determined by the the exemption laws of the state in which your home is located so long as you have lived in that state for 40 months -- a vast increase over the previous residency requirements of just three months.

Additional Challenges

In addition to imposing new challenges upon filers, the new law imposes tougher laws on the bankruptcy lawyers who handle the cases. Most importantly, the bankruptcy lawyer is now required to personally vouch for the accuracy of the information provided to them by their clients. This has led many attorneys to leave the field of bankruptcy law and migrate to other areas of law, and driven up the prices charged by those that remain. An additional requirement mandated of filers is that they undergo credit counseling prior to filing for either chapter 7 or chapter 13 bankruptcy, which you must pay for yourself on a sliding scale, and complete another course on personal financial management before your case can be settled.