In 2005, new bankruptcy laws were introduced as a result of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).
Significant changes have been made to the U.S. Bankruptcy Code, and it is important to understand the implications of these changes and what they mean to you when it comes to your bankruptcy options.
1. Means Test. Under the old law, filers could choose which type of bankruptcy was best for their situation; however, new rules now make it more difficult for a debtor to qualify for a Chapter 7 filing.
The Means Test is perhaps the most significant change to the Code and was introduced as a way of determining eligibility based on an individual’s income. If the test results show that a debtor is able to handle a Chapter 13 repayment plan, Chapter 7 will be denied.
Tax returns and proof of income must be submitted to the court and the Means Test formulas will be applied to see if a debtor’s income is low enough for a Chapter 7 plan. This law was designed to prevent bankruptcy abuse but also makes the filing process much more complex and costly.
2. Mandatory Credit Counseling. Under the new laws, before filing for bankruptcy, debtors are now required to take credit counseling with an agency approved by the United States Trustees Office.
The court must be provided with a certificate of completion showing that the debtor has received this counseling within 180 days prior to filing, or their petition will not be accepted.
Also, toward the end of a bankruptcy case, a filer will be required to attend an additional session which will cover budgeting and money management. Again, discharge will not be granted until the court receives proof that this requirement has been fulfilled.
3. New Requirements For Lawyers. New bankruptcy laws have placed greater responsibility on attorneys for the accuracy of client information that is provided to the courts.
This could make it more difficult for a debtor to find a lawyer and may significantly increase legal fees since lawyers are required to spend more time on each case.
4. Changes to Disposable Income Calculations. Prior to the BAPCPA, Chapter 13 filers were required to put all their disposable income toward debt repayment plans. While this is still the case, disposable income is now calculated based on IRS allowable expense guidelines rather than a filer’s actual cost of living expenses.
These allowable expenses are subtracted from a debtor’s average income for the 6 months prior to filing to determine “disposable income.” This new calculation could mean that people filing for bankruptcy may be required to live on less than previously allotted under the old laws.
5. Changes to Homestead Exception Laws. Previously, the amount of home equity protected from creditors was based on the filer’s state of residence.
However, new laws stipulate that if a debtor has lived in the current state less than 2 years, they may be required to file under their previous state laws, especially if those laws are less favorable.
Also, if a debtor has owned the property for less than 40 months (1215 days) prior to filing, homestead exemptions will be limited to $125,000, regardless of equity value. These new laws were introduced to prevent filers from moving assets to states that may have more beneficial exemption laws.
6. Changes to Waiting Periods Between Filings. The waiting period between Chapter 7 filings has now been changed from 6 years to 8 years. Additionally, a filer must wait a minimum of 4 years between a Chapter 13 and Chapter 7 plan, and 2 years must elapse between Chapter 13 filings.
7. Reduced Automatic Stay Protection. Under the old laws, filers received immediate protection from creditors including any debt collection and lawsuit actions. However, new laws have eliminated some of these protections, including such things as eviction notices and legal action for child support.
You should discuss these new bankruptcy laws with a qualified attorney in your area to see how they directly affect your situation:
Top of New Bankruptcy Laws
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