| Update on Status of "Bankruptcy Abuse Prevention Act" STATUS- Congress passed modifications to the Bankruptcy Code which went into effect on OCTOBER 17, 2005 , for cases filed before that date, the old law applied. CHANGES IN CONSUMER BANKRUPTCY MYTHS OF EFFECT OF CHANGES DISPROVED While much has been made in the press as to how the changes would make filing Chapter 7 Bankruptcy difficult, in actual experience after more than two years under the new law, for 95% of potential consumer Debtors, there is no real change in the Debtor's ability to file. Instead the greatest change is to make the filing more expensive and more time consuming. It has also made it almost impossible for the average Debtor to file without the help of an experienced Bankruptcy attorney The biggest change is that people who file bankruptcy are subject to a means test. Anyone making over a certain amount of income is forced to file under Chapter 13 rather than under Chapter 7 bankruptcy. This means that they have to pay off some or all of their debt -- they are not able to wipe the slate clean. Each state will have different limits. However, the average cutoff point for a family of four is about 52,000. In other words, if this family files for bankruptcy, it has to do so under Chapter 13 and pay off all or some of the debt. For a one-income family, the limit is about 32,000. If the Debtors with this income want to file they have to pass a means test. It is a complicated and detailed test to calculate a debtor's income, and determines whether the debtor qualifies for Chapter 7 or Chapter 13 bankruptcy. In calculating the debtor's income, living expenses are deducted as permitted under Internal Revenue Service standards when determining the taxpayers ability to repay a tax debt. It also permits deductions for expenses "to protect the family from domestic violence," actual expenses for the care of elderly or ill non-dependent family members, private school tuition up $1,500 a year, and some other expenses. One other important change involves car loans. There is a provision that changes how you pay off your car loan if you file for bankruptcy. Under the old law, those filing for bankruptcy who still have a car loan must only pay the blue book value of the car in Chapter 13. For instance, if you still owe 14,000 on your loan but your blue book value is only 8,000, you only paid 8,000. The big automobile makers lobbied to change that. Under the new law, if the vehicle was purchased within the last three years, the Debtor has to pay the contract amount in order to keep the vehicle. There are a multitude of additional changes too numerous to list. They include provisions that require Debtors get credit counseling before filing Chapter 7, and financial planning counseling after filing. It requires greatly expanded disclosure when filing the petition. It also has a provision that makes an attorney for the Debtor virtually the guarantor that the Debtor has accurately filled out the schedules; until the courts interpret this provision, few lawyers are going to be willing to risk representing a Debtor as no one can ever be totally sure the client is being truthful. There are also changes in the Chapter 11 procedures, particularly for small businesses. More details on those provisions are listed below. CHANGES FOR BUSINESS DEBTORS The legislation has several changes affecting business bankruptcy filings that will make it more difficult for financially troubled businesses to remain open while restructuring their debts and businesses, particularily small businesses with less than $2 million in debt. The new procedures will likely lead to earlier closures of businesses, especially smaller ones, and thus result in creditors receiving less than if the reorganizations proceed. There is a less flexible terms for reorganization. Debtors in small cases, for the most part, will be required to file a Plan within 300 days of the filing of the petition
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Is This a Good Reform? |
