The Bankruptcy Law Change
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a major reform of the bankruptcy system, was passed by Congress and signed into law by President George W. Bush in April 2005. Changes instituted by this new law took effect on October 17, 2005. Below are some of the key changes that came about as a result of this new bankruptcy law.
Mandatory Credit Counseling
With an agency approved by U.S. Trustee's office.
- Before You File - to give you idea of whether you really need to file or if an informal repayment plan would get you back on track.
- Once Case is Over - to learn personal financial management.
Stricter Eligibility for Chapter 7 Filing
New law will prohibit some filers with higher incomes from using Chapter 7.
Using "Means Test":
- If your current monthly income is less than the median income in your state, you can file for bankruptcy under Chapter 7.
- If your current monthly income is above the median income in your state, & you can afford to pay $100 per mo. toward paying off your debt, you can't file under Chapter 7 & must proceed under Chapter 13.
- Whether you can afford to pay $100 per mo. ($6,000 over a 5-yr period) is based on a formula that includes your monthly income, expenses, & total amount of your debt.
Property Must Be Valued at Replacement Cost
- You must value your property at what it would cost to replace it from a retail vendor, taking into account property's age & condition, not like under old law which was what it sold for in "fire sale" or auction.
- Requirement sure to jack up value of property, means more debtors stand to have their property taken & sold by the trustee.
Tax Returns & Proof of Income Required
- People wishing to file under Chapter 7 or Chapter 13 must show proof of their income by providing federal tax returns from the last tax year.
- If a bankruptcy filer has not paid taxes for previous tax year, he or she must do so before the bankruptcy can proceed.
More Filings Under Chapter 13
- If bankruptcy applicant is ineligible for filing under Chapter 7 based on "means test" , must file Chapter 13 instead.
- Debtor enters into a three to five-year repayment plan in which he or she must pay a certain amount of money to creditors, based on a strict expenses-to-income formula.
Some Chapter 13 Filers Will Have to Live on Less
- Filers still have to hand over all of their disposable income, but they have to calculate their disposable income using allowed expense amounts dictated by IRS, not their actual expenses, if their income is higher than the median in their state. These expenses are often lower than actual costs.
- Allowed expense amounts must be subtracted from the filer's average income during the six months before filing, not from filer's actual earnings each month. Debtors may be required to pay a much larger amount of "disposable income" into their plan than they actually have to spare every month.
Fewer "Automatic Stay" Protections for Filers
- Some of the previous protections have been eliminated.
- For example, filing for bankruptcy no longer delays or stops eviction actions, driver's license suspensions, legal actions for child support, or divorce proceedings.
New Priority of Unpaid Child Support & Alimony
Among the changes in creditor priority is that people who are owed:
- Unpaid Child Support
- Unpaid Alimony
take priority over any other creditor. (i.e. Bankruptcy Filer's Family Members)
Mandatory Financial Management Education
After the conclusion of bankruptcy proceedings, but before any debt can be discharged, debtors must participate in a government-approved financial management education program.
Tougher on Lawyers
The law imposes new requirements on lawyers - it will be tougher to find an attorney to represent you. This is why it is extremely important your hire a firm, like Phoenix Law, that practices exclusively in the area of foreclosure prevention and bankruptcy.