What you need to know about the new bankruptcy law

Jet, Sept 12, 2005 by Margena A. Christian

If you're considering bankruptcy, now might be the time because the new bankruptcy law is about to come down hard.

People who are in over their head with debt and seeking to get a fresh start are going to find it more difficult to lay their financial burden down under the new law.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 will take effect Oct. 17, though a few changes took effect immediately after the legislation was signed by President Bush April 20, 2005.

It represents the biggest change to bankruptcy law since 1978, and the new consumer bankruptcy provisions in the Act came as a response to several factors.

A major one was the increase in bankruptcy filings. Over the past decade, that number doubled to more than 1.6 million cases filed in fiscal year 2004.

JET reached out to noted bankruptcy specialist Michael H. Reed, partner in the law firm of Pepper Hamilton LLP in Philadelphia, to take a closer look at what you need to know about the new bankruptcy law.

New Test Determines Whether You Can Qualify For Chapter 7

Reed says that of primary importance is the fact the new amendments to the bankruptcy law create a new requirement called a "means test."

"Under the new amendments, the bankruptcy trustee, or any creditor, can move to dismiss a Chapter 7 filing if the debtor's income is greater than the state median income," he explains.

Should this be the case, the new law may require a person to file a Chapter 13 plan and pay off his debts instead of filing for Chapter 7 relief. Essentially, those deemed able to pay will be required to file under Chapter 13.

Chapter 7 of the bankruptcy code wipes out all unsecured debt. Unsecured debt is debt that is not collateralized by property and commonly includes credit cards, medical bills, personal loans and consumer debt.

Chapter 13 bankruptcy requires debtors to establish a three-to-five year repayment plan and bases payments on one's income and expenses.

Tougher Requirements For Repaying Debt Under Chapter 13

"Not only do the amendments make it harder to use Chapter 7," says Reed, "They have also tightened up significantly the requirements for satisfying Chapter 13."

He adds, "They must pay unsecured claims in full with interest or if they don't pay unsecured claims in full with interest, all the debtors' 'disposable' income must be contributed to the plan for the minimum term of the plan, which is typically five years."

Mandatory Credit Counseling

Reed says that before a person files for bankruptcy, under the new law, a condition of eligibility to go into bankruptcy is undergoing mandatory credit counseling. It is also a condition of coming out of bankruptcy successfully.

"Within 180 days prior to filing, a person must receive credit counseling from an approved non-profit budget and credit counseling agency, either on an individual basis or on a group basis," he says. "The agencies must be approved to provide this counseling by the office of the U.S. Trustee, a federal agency."

If you can't afford to pay for counseling, the agencies have to provide it for you anyway, he says.

Proof Of Income And Tax Payments

People who wish to file bankruptcy under Chapter 7 or Chapter 13 must show proof of their income by providing federal tax returns from the last tax year.

"The debtor must provide a copy, when filing, of their latest tax return or a transcript at least seven days before the meeting of creditors that happens in the bankruptcy case," Reed says. "The debtor can also be required to file tax returns, including any returns that were unfiled and due going back four years. Debtors also can be required to file information about their current income on a monthly basis and also projections on the income or expenses that the debtor expects in the future."

Bankruptcy Protections Removed

One of the most powerful aspects of current bankruptcy law is called the "automatic stay." This term refers to rules that stop almost all collection actions and lawsuits against someone who files for bankruptcy. However, under the new law, some of those protections will be eliminated.

Filing for bankruptcy will no longer delay or stop evictions; actions to withhold, suspend or restrict a driver's license; actions to withhold, suspend or restrict a professional or occupational license; lawsuits to establish paternity, child custody, or child support; divorce proceedings or lawsuits related to domestic violence.

Reed says limiting the automatic stay was done to "address what was perceived as abusive, serial filings ... There are amendments intended to significantly limit the scope of the automatic stay and those situations perceived to be abusive."

Repayment Of Child Support, Alimony Are Priority

Currently, bankruptcy laws provide a system of re-payment priority for creditors, who are people or companies owed money. The new law will see to it that people who are owed unpaid child support and alimony will take priority over any other creditor.

"Support obligations are given a first priority even ahead of administrative expenses," says Reed. "In addition, the automatic stay does not apply to the payment of domestic support obligations. In essence, support obligations are given a new special priority."