What are the new bankruptcy laws?
Although small changes are made to bankruptcy law periodically, most recently the bankruptcy laws were overhauled in 2005 by Congress. The goal of the new 2005 bankruptcy law was to make it more difficult for debtors with higher incomes to discharge their unsecured debts by filing Chapter 7 bankruptcy. Discussed below are the main updates to the bankruptcy law.
New Means Testing for Chapter 7 Bankruptcy
Prior to 2005, debtors had the flexibility to choose whether they wanted to file Chapter 7 bankruptcy or Chapter 13 bankruptcy. Chapter 7 bankruptcy allowed for a liquidation of unprotected assets and an immediate discharge of debts. Chapter 13 bankruptcy allowed for debtors to create a 3 or 5 year bankruptcy repayment plan to repay a portion of their debts.
Under the new 2005 bankruptcy laws debtors now must have limited income and pass a means test to file Chapter 7 bankruptcy. To determine if you can file bankruptcy under the new law you must first compare your current monthly income against the median income for a household of your size in your state. If your income is equal or below the state’s median income you can file Chapter 7 bankruptcy. If not, you must pass an additional means test.
The means test is used to determine if you will have enough disposable income to make payments on a Chapter 13 plan. The calculation can be complicated, but basically you subtract debts and allowable expenses from your current monthly income. If you have sufficient income after this calculation, you must file Chapter 13. If you have insufficient income, as determined by the law, you can file Chapter 7 bankruptcy.
Counseling Requirements under 2005 law
Under the new bankruptcy 2005 laws debtors will also have to complete a credit counseling course prior to filing for bankruptcy. Debtors will also have to complete a financial planning course prior to completing the bankruptcy. The goal of the credit counseling course is to provide additional information about the alternatives to filing bankruptcy.
Certificates for each class are given at the completion of the course and must be submitted to the bankruptcy court. Additionally, you must take courses which are approved by the court.
Hiring a lawyer is more expensive
Under the new bankruptcy laws hiring a bankruptcy lawyer is also more expensive. Not only is filing bankruptcy more time-consuming for lawyers, the lawyer must now personally vouch for the accuracy of all of the information their clients provide to them.
There are also several other minor changes to bankruptcy laws which should be discussed with a bankruptcy lawyer. As mentioned above, the main change is that debtors who might have filed Chapter 7 bankruptcy prior to 2005 now will find their income is too high and they will be required to file Chapter 13 bankruptcy, create a 3 or 5 year debt repayment plan, and will not have their qualifying unsecured debts discharged immediately. Instead, debts will be discharged after the plan is completed.
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