Major Bankruptcy Code amendments
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has made dramatic changes to the bankruptcy system. The changes were passed by Congress and signed into law by President Bush this past April, and became effective October 17, 2005.
Opponents of the changes argue that they will make it extremely difficult to get a fresh start, while their proponents counter that they more evenly balance the interests of creditors and debtors. Regardless of your perspective, the effects will be felt by all. The following is a discussion of the key changes resulting from the new bankruptcy law.
Mandatory credit counseling
Most applicants for bankruptcy must now undergo credit counseling in a government-approved program at least six months prior to filing. The information and procedures for pre-filing credit counseling (together with a list of approved credit counseling agencies) can be found at the U.S. Trustee Program's website ( http://www.usdoj.gov/ust/). The U.S. Trustee Program is a unit of the Department of Justice responsible for overseeing the administration of bankruptcy cases.
Stricter eligibility for Chapter 7 filing
Bankruptcy applicants who wish to file subject to Chapter 7 (liquidation) must now meet strict eligibility requirements under a "means test." This requirement is perhaps the centerpiece of the new act.
Under the "means test" a debtor can file for liquidation only if his current monthly income is less than the median income in the state of residence. The Bankruptcy Court must first determine whether, after the deduction of certain essential living expenses from his income, the debtor can afford to pay 25% of his non-priority unsecured debt-such as credit cards (take note of the fact that the average American has approximately 11 credit cards). Next, his income will be compared to the state's median income.
In short, a debtor won't be allowed to file under Chapter 7 if:
his income is above his state's median income and
he can afford to pay 25% of his unsecured debt.
If a debtor doesn't meet both requirements-say that while his median income is below the state's median, the bankruptcy judge determines that he can pay 25% of his unsecured debt-the judge can require the debtor to file under Chapter 13 instead. Filing under Chapter 13 will require the debtor to enter into a repayment program with his creditors, over a five-year period, based on a strict expenses-to-income formula.
The "means test" is even tougher than it first appears because, in determining a debtor's income and what he can afford to pay, the court does not look at his actual expenses, but instead will determine expenses based on living standards established by the Internal Revenue Service. In many cases, the expenses that the court will apply to a case may be much lower than the debtor's actual expenses, making him appear to be able to afford a Chapter 13 repayment plan, when in fact he cannot.
If the court determines that a debtor's income is sufficient to pay off his debts, then the court will presume that the Chapter 7 filing was abusive, and, instead of converting it to Chapter 13, the judge will have the option of dismissing it outright, which will leave the debtor completely without protection from the Bankruptcy Code.
The bottom line result is that the amendments impose a standard of living baseline on those individuals or families who seek relief under its provisions.
Tax returns and proof of income
Individuals wishing to file bankruptcy under Chapter 7 or Chapter 13 must now present proof of their income by providing federal tax returns from the last tax year. If they have not paid taxes for the previous tax year, then they must do so before the bankruptcy can proceed.
Fewer automatic stay protections
People who file for bankruptcy have generally been entitled to immediate protection from creditors and others-including most debt collection and lawsuit actions-in the form of an automatic stay of all collection proceedings. Some of these protections have been eliminated under the new provisions. For example, filing for bankruptcy no longer delays or stops:
driver's license suspensions,
legal actions for child support, or
Child support and alimony
The Bankruptcy Code provides a system of repayment priority for creditors. Among the changes in creditor priority under the new amendments is that people who are owed unpaid child support and alimony (i.e. the bankruptcy debtor's family members) take priority over any other creditor.
Financial management education
Somewhat similar in concept to mandatory credit counseling prior to filing is the requirement that the debtor also receive mandatory financial management education by participating in a government-approved financial management education program. This is to take place after the conclusion of bankruptcy proceedings, but before any debt can actually be discharged, The debtor is obliged to pay for these services. As with mandatory credit counseling, a debtor can get information, such as approved providers of financial management education, from the U.S. Trustee Program's website.
Sanctions for improper filings
A debtor an his lawyer better have all facts straight, and the debtor better be a viable candidate (meeting all of the new provisions) before filing, as there is now a penalty provision that falls squarely on debtors and on those advising individuals considering filing for bankruptcy as well. It permits the judge to impose sanctions on both the debtors and the attorneys for filing a Chapter 7 case that is dismissed or converted to Chapter 13. The judge may order both to pay sanctions to the bankruptcy trustee to reimburse him for all reasonable costs, including attorneys' fees, incurred in connection with the motion to convert or dismiss a Chapter 7 case, if the judge grants the motion.
Much easier to convert or dismiss
The amendments make it much easier to dismiss a bankruptcy case, or to convert a Chapter 7 case to Chapter 13.
Before the amendments, a judge could not convert a Chapter 7 case to Chapter 13 unless the debtor himself requested the conversion. That is no longer the case. Any party in interest (in other words, one of the creditors) can now move to dismiss the case.
As stated, the amendments went into effect on October 17, 2005, and as a result millions of consumers who would otherwise be eligible for a clean slate under Chapter 7 may be forced to live with the provisions of Chapter 13, and face a five-year payback plan. Not surprisingly, in the weeks prior to the effective date bankruptcy applications rose by 50% in the United States.
The new provisions are expected to slow down the bankruptcy process, increase the cost of bankruptcy and put many consumers in the hands of the so-called non-profit debt counseling industry. On the positive side, they should begin to push Americans to manage better their finances and reduce their appetite for credit debt.
© 2005 Goldman Antonetti