In October 2005, the new bankruptcy laws went into effect. Since that time consumers have found it more difficult to discharge debts under a Chapter 7 Bankruptcy filing.
Consumers with higher incomes are required to file a Chapter 13 bankruptcy which means they will have to repay some of their debt. All consumers are required attend credit counseling and education before even filing bankruptcy.
Types of Bankruptcy Filings for Individuals
1. Chapter 7 Bankruptcy
In a Chapter 7 Bankruptcy the trustee gathers and sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay creditors in accordance with the provisions of the Bankruptcy Code.
Part of the debtor’s property may be subject to liens and mortgages that pledge the property to other creditors. In addition, the Bankruptcy Code will allow the debtor to keep certain “exempt” property; but a trustee will liquidate the debtor’s remaining assets. A Chapter 7 Bankruptcy filing may result in the loss of property.
A Chapter 7 Bankruptcy will not get you out of paying any taxes, fines, student loans, alimony, child support or other court ordered judgments. You remain responsible for those items after the bankruptcy filing is complete.
2. Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years.
If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” (1) If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years.
In no case may a plan provide for payments over a period longer than five years. During this time the law forbids creditors from starting or continuing collection efforts. Once all creditors have accepted your repayment plan, you and the creditors will be legally bound to follow it.
Advantages of Chapter 13
Chapter 13 offers individuals a number of advantages over liquidation under Chapter 7. Individuals have an opportunity to save their homes from foreclosure under Chapter 13. Foreclosure proceedings can be stopped and you will have an opportunity to cure delinquent mortgage payments over time.
Another advantage of Chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the Chapter 13 plan. Doing this may lower the payments.
Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers. Chapter 13 also acts as a consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under Chapter 13 protection.
The Major Changes to Chapter 7 Bankruptcy
Chapter 7 Eligibility
The new Chapter 7 laws will restrict higher income consumers from filing under Chapter 7 which means their debts will not be discharged or liquidated. Now, more consumers are being forced to file Chapter 13 bankruptcy which means debts will have to be repaid.
In order to file a Chapter 7 bankruptcy your current monthly income must be measured against the median income for a similar size household in your State. If your income is determined to be less than or equal to the median, you may for a Chapter 7 bankruptcy. If it is more than the median, you must pass “the means test” for a Chapter 7 bankruptcy.
The Means Test
The means test determines whether a debtor is eligible for Chapter 7 (liquidation) or must file under Chapter 13 (wage-earner repayment plan). Its purpose is to determine if you have enough disposable income is available after subtracting certain allowed expenses and debt payments from your current monthly income. You can file a Chapter 7 only if the income left over is below a certain amount. Under the new laws, eliminating unsecured debt like credit cards is very difficult.
Required Debt Counseling
In accordance with the new bankruptcy laws, all consumers must attend credit counseling 6 months prior to filing bankruptcy. For a list of approved credit counseling agencies by state and judicial district visit: www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm.
This website will give you a list of qualified credit counseling centers. The counseling must come from one of these approved credit counseling centers. Consumers must also complete an additional financial education/certification before having their debts finally discharged.
It has not only become very difficult for the consumer to file bankruptcy but it also difficult to find a bankruptcy attorney. Under the new laws, if information about a client’s case is found to be inaccurate, the bankruptcy attorney may be subject to various fees and fines. The amount of required paperwork and documentation necessary will undoubtedly raise your attorney fees. Attorneys will be charging considerably more to handle the complexities of the new bankruptcy laws.
Stricter Homestead Exemptions
Homestead exemptions allow the debtor to keep some of the equity safe from creditors. The amount varies from state to state but as of April, 2005, the homestead exemption is limited to $125,000 of your state’s homestead exemption if the property was acquired within the previous 1215 day (3.3 years). The cap is not applicable to any interest transferred from a debtor’s previous principal residence (which was acquired prior to the beginning of such 1215-day period).
A consumer must eight years to file another bankruptcy case. This was increased from six years.
How Will Your Credit be Affected
A bankruptcy will remain on your credit history for up to 10 years. During this time you can expect to pay higher interest rates for the next several years after filing. You may also be required to explain the circumstances surrounding your decision to file bankruptcy to potential new creditors.
Filing bankruptcy should be a last resort, well thought out decision. There is life after bankruptcy and in most instances you can begin to rebuild credit several months after a bankruptcy is filed. Read 6 Tips to Rebuild Credit After Bankruptcy.