Here's what you need to know about the Bankruptcy Abuse and Consumer Protection Act passed in 2005:
You must undergo credit counseling
Before being allowed to file either Chapter 7 liquidation or a Chapter 13 repayment plan, debtors must prove they've attended, within the six months before filing, a credit-counseling program approved by the Department of Justice.
Before your bankruptcy case is closed, you'll have to go through another round of education -- this time intended to teach you financial-management skills. You'll find the DOJ-approved list of debtor-education providers here. Failing to complete this education will result in your case being dismissed.
You need these documents -- or else
Failing to provide certain documents within 45 days of your filing (with a possible 45-day extension) will cause your case to be dismissed automatically. In addition to the paperwork that used to be required -- lists of creditors, assets, liabilities, income and expenses -- you must also provide:
- Your credit-counseling certificate (see above)
- Your pay stubs for the previous 6 months (if any)
- Your most-recent tax return, plus any return filed while your case is pending and any returns filed for prior years that hadn't been filed when your case began
- A photo ID and Social Security Card
Exception: The DOJ said it won't enforce this rule against filers who can't produce the documents because of natural disaster.
You can't make too much money
The means test was ostensibly designed to prevent people who could afford to pay some of their debts from erasing them in a Chapter 7 liquidation filing. Instead, these folks would be shunted into a Chapter 13 repayment plan.
But only the filers who make more than the median income for their state (you can find the figures on the Department of Justice website) will be subjected to the means test. Your income is determined by taking your average monthly take for the previous six months, then multiplying that figure by 12.
Most filers, bankruptcy experts agree, make less than the medians, which range from the mid $40 thousands for a family of four in New Mexico to about $90,000 for the same size family in New Jersey. If you make less, you won't face the means test and will be allowed to continue with your Chapter 7 filing.
If your income is above the median, more number crunching is in store. Certain "allowed expenses" for housing, utilities, food, clothing and other items are deducted from your income. What you actually spend on most of these items is irrelevant; what matters is what the IRS has set as a standard for these items. You can find more details here.
You're also allowed to deduct a variety of other "necessary expenses," including:
- Taxes, but not property or sales taxes
- Mandatory payroll deductions, but not 401(k) contributions
- Term life, dental, vision, health and disability insurance premiums, but not auto, liability, homeowners, renters or whole life premiums
- Child care, but not primary or secondary school tuition beyond $125 month per child
- Business expenses
- Charitable contributions
If you have less than $100 a month left over after all the allowed deductions, you're allowed to continue with your Chapter 7 filing. If you have more than $166.66, Chapter 13 is a given.
If the amount falls between $100 and $166.66, yet another calculation is made. Is this leftover income enough to repay at least 25% of the debt you would otherwise erase? If so, you're generally shunted into a repayment plan. If not, you can continue with your Chapter 7.
Exception: Debtors can avoid Chapter 13 by arguing they have "special circumstances." While attorneys don't expect many to be successful, the DOJ has said that the courts can consider income loss, increased expenses or other difficulties arising from natural disasters as special circumstances that warrant allowing debtors to remain in Chapter 7.
Repayment lasts longer
If you do wind up in a Chapter 13 repayment plan, you'll have to stay in it longer to get relief.
Under the old law, a debtor who hewed to a Chapter 13 repayment plan for three years could have his or her remaining debt erased. Under the new law, repayment plans must last for five years if the borrower's income is over the state's median. Also, the borrower must file new statements of income and expenses each year.
No relief for an upside-down car loan
Under previous bankruptcy law, people who owed more on their cars than the vehicles were worth could get the excess debt erased in Chapter 13. They could keep the cars if they could continue making the payments, and the total amount they owed was reduced to the fair market value of the car.
This "cram down" or "lien stripping" will no longer be allowed if the auto was purchased within 910 days (about 2.5 years) of filing.
More debts are inerasable
Some unsecured debts, like recent taxes and child support, typically couldn't be discharged or erased under previous bankruptcy law. Now more types of loans come under that restriction, including:
- Student loans. Prior to the new law, student loans couldn't be erased if the money was lent by a not-for-profit or in a government-sponsored loan program, unless the debtor could show undue hardship. Now, that protection has been expanded to private and for-profit lenders.
- Cash advances. Under the prior law, debtors had to pay back credit-card cash advances of more than $1,225 taken out 60 days or less before a filing. The new law reduces the amount to $750 and includes advances made within 70 days of a filing.
- Fraudulent credit-card use. If the court decides you racked up credit-card debt knowing you were going to file for bankruptcy, the amount you owe won't be discharged in Chapter 7 or Chapter 13. It used to be that a creditor had to successfully object to the charges to prevent a Chapter 7 discharge, but even then debt could be erased in Chapter 13 if the debtor completed his or her plan.
In addition, the "super discharge" available in Chapter 13 has been reduced. This discharge in the past effectively wiped out most remaining debt after debtors completed their repayment plans. Now more types of debt will survive the Chapter 13, including debts for trust-fund taxes, domestic support payments, student loans, drunken-driving liabilities and some types of court-ordered damages.
You can't refile for 8 years
In the past, a debtor could file another Chapter 7 case six years after receiving a discharge from his or her last Chapter 7 case. The waiting period has been increased to eight years. There are also more restrictions on how often debtors can file Chapter 13 cases, which in the past were often used fraudulently to stop or slow evictions or foreclosures even when the borrower had no intention of following through with the case.
To learn more, visit our Fayette office!
104 East Main Street P.O. Box 40
Fayette, OH 43521