The Bankruptcy Abuse Prevention and Consumer Protection Act significantly changes how, and under what conditions, individuals can file for bankruptcy.
The most significant changes to bankruptcy law apply to Chapter 7 bankruptcy because under Chapter 7 debtors are able to discharge, or not have to repay, almost all their current debt. Following are some of the most significant changes that the law creates for both Chapter 7 and Chapter 13 bankruptcy:
Individuals will have to undergo a means test to qualify for Chapter 7 bankruptcy. The "means test" is the way the IRS will determine who will be able to file for Chapter 7 bankruptcy, and who cannot. The test will require your income and expenses to be examined in detail to see how they compare to an IRS-determined standard for your area. If you earn less than the median income for a family of your size in your state, you will be exempt from the means test and can automatically file for Chapter 7 bankruptcy. But, looking back over the past six months from the time you file, if your income is greater than the median income and you can pay at least $6,000 over five years or $100 a month toward your debt, you cannot file for Chapter 7. You will be required to file for Chapter 13 bankruptcy instead, which will require you to repay at least a portion of your debts over three to five years. Extenuating circumstances will not be taken into consideration in doing the six-month “look-back,” so if you suffered a medical hardship or sudden job loss, those circumstances will not be considered any differently than if you chose to run up your credit cards with trips to the shopping mall.
If, because of the means test, you are required to file under Chapter 13, then your monthly expenses will be compared to the IRS National and Local Standard Expense guidelines. The new law places strict limits on the amount that you can claim as living expenses. The court may order you to eliminate or greatly reduce spending on luxury items (like expensive cars, SUV’s, jewelry, etc.), extracurricular events for children (sports, etc.), vacations, etc.
The new law provides for certain additional, allowed expenses, including up to $1,500 per year per child, to send a dependent under age 18 to a private or public elementary or secondary school. Additionally, charitable contributions up to a total of 15 percent of gross income can be made to qualified religious or charitable entities or organizations. Actual expenses that are deemed “reasonable and necessary” for the care and support of an elderly, chronically ill, or disabled family member are also allowed.
Part of the new means test requires that you disclose, or file if you haven’t filed, your most tax return, to verify your actual earned income.
Under Chapter 7 bankruptcy you will be able to wipe out all your unsecured debt, such as your credit card debt and personal loans, but will still owe all your secured debt, including your mortgage.
If you are filing for Chapter 13 bankruptcy you will have to pay the full loan amount owed on your car loan regardless of the condition of the car. Previously you only had to pay what your car was worth (“blue book” or fair market value).
Bankruptcy attorneys will likely charge more to help you file because they must now certify your financial statements to the court and will be held financially responsible if the statements are false.
When applying for either Chapter 7 or Chapter 13 bankruptcy you must receive counseling and a budget analysis, at your own expense, by an approved nonprofit budget and credit counseling agency. Click here for background on nonprofit credit counseling agencies – what they offer and how to work with them.
The filing fee has increased from $155 to $200 for Chapter 7, but decreased from $155 to $150 for Chapter 13. (Note: This is just the fee to file for bankruptcy – it is not the fee that attorneys will charge for legal work done on your behalf.)
Contributions made to a 529 college savings plan more than two years prior to filing for either Chapter 7 or Chapter 13 bankruptcy will be off-limits to creditors. A $5,000 limit applies to contributions made more than one year but less than two years prior to filing for bankruptcy.
The law curbs use of the homestead exemption. Currently bankruptcy filers in the five states that allow the homestead exemption – Texas, Florida, South Dakota, Iowa and Kansas – can shield an unlimited amount of home equity from creditors. With the new legislation, there is a so-called “Enron clause” that now caps the homestead exemption at $125,000 for persons with debts related to a violation of securities laws in the past 10 years or convicted felons. The agreement also creates a 40-month residency requirement to qualify for the unlimited exemption, to prevent debtors from relocating to one of the states where the exemption exists.
Under the new law, if you have filed for Chapter 7 bankruptcy you may not file for Chapter 13 within four years of the Chapter 7 being discharged. Current law allows debtors to file a Chapter 13 bankruptcy immediately following a Chapter 7 bankruptcy in order to pay remaining outstanding debts.
Currently if you are filing for bankruptcy – either under Chapter 7 or Chapter 13 – you receive immediate protection from creditors through the “automatic stay” function. The new law makes the automatic stay subjective to a judge’s decision, creating less certainty about what protections debtors will receive from outstanding creditors.
The new law makes it easier for ex-spouses to enforce that their former spouse who is filing for either Chapter 7 or Chapter 13 bankruptcy makes, and keeps current, on child support and alimony payments.
Under Chapter 7 bankruptcy, there will no longer be an automatic stay for evictions, meaning that if a landlord has already begun eviction proceedings, the renter must either move out or pay the entire rent owed within 30 days.
If you are contemplating filing for bankruptcy, it is a very good idea to consult an experienced bankruptcy attorney and consider working with a nonprofit credit counseling agency that belongs to the National Foundation of Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA). Click here to learn more about credit and bankruptcy issues and how to think about and make decisions related to difficult financial situations.