Changes Caused by Bankruptcy Reform

The Major Changes of the Bankruptcy Reform Act and How They Affect Filers

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 went into effect in October of that year. As its name clearly implies, it was designed to make bankruptcy less attractive to filers and curb perceived abuses of the bankruptcy system.

The fight about this law was waged by financial institutions on the one hand and consumer rights advocates on the other. Lenders felt that the bankruptcy courts were being abused and that borrowers who had the means to repay were allowed to walk away from their obligations.

This, in turn, raised the cost of credit for the rest of us, since the losses were spread among those still solvent.

Consumer advocates argued that the majority of filers were in that position because of unexpected bills – generally due to medical conditions – and that it would be a hardship to deprive consumers of their “fresh start” in order to fatten the profits of the lenders.

On the middle ground where those that felt the changes to the bankruptcy law would make little difference, since most filers fell under the median income of their home state and were so hopelessly in debt that they could never repay their bills.

The lenders won and the law, which is considered the most far reaching reform of the bankruptcy laws in 20 years, passed.

Here are highlights of the major changes likely to affect individual filers:

1. Credit counseling is required and must take place within 6 months before filing. The counselor is supposed to determine if the debtor can file for Chapter 7 & or Chapter 13. He is also supposed to set up the Chapter Thirteen repayment plan, if applicable.

So far only local Consumer Credit Counseling Services set up by the National Foundation for Credit Counseling have been approved to perform this counseling.

The sessions last 90 minutes and cost $50. The reports are that they do little good for either the debtor or creditors.

2. Since the main thrust of the act was to make it more difficult for high wage earners to get a Chapter Seven bankruptcy discharge, if their income exceeds their state’s median income, they are forced into a Chapter Thirteen repayment plan.

Once in this plan they are placed on a strict – some say draconian - budget determined by IRS regulations. They are told how much of their money is to go to debt repayment and how much they can spend on things like food and housing.

The debtor must file a new statement of income and expenses each year the plan is in effect.

3. If the debtor ran up bills of $500 or more for “luxury goods” from a single source within 90 days of filing or borrowed $750 or more within 70 days of filing, these debts will be considered non-dischargeable. If he bought a car within 2 and a half years of filing, the lien holder will keep his lien until the entire debt is repaid.

4. Debtors used to shield assets by buying homes in states with big or even unlimited “homestead” exemptions. They would, in effect prevent creditors from being able to collect on their debts, by tying all their money up in a home in one of these states. Now the debtor has to acquire the house about 3 and a quarter years before filing a bankruptcy petition. Otherwise his exemption is limited to $125,000.

Residency will be determined by where the debtor spent the majority of his time within the 6 months before filling.

5. The debtor must “reaffirm” his secured debt or reveal what his intentions are regarding that debt within 45 days after the first creditors meeting. If he fails, the automatic stay is lifted and the creditor can foreclose, repossess or start a suit to collect his money. A debtor can no longer just pay the debt without reaffirming it.

6. Automatic stays will not be granted if it can be shown that the debtor has had a habit of abusing the bankruptcy system. Many used to file bankruptcy petitions merely to hold off their creditors or to buy themselves time, having no intention of following through on the bankruptcy.

7. A Chapter 13 discharge will not be granted if the debtor obtained a Chapter 7, 11 or 12 discharge in within the 4 years prior to the date of filing or if a Chapter 13 case was filed within 2 years of the pending case.

8. More documentation must now be provided by the debtor. In addition to the list of creditors, schedules of assets and liabilities, income and expenses, debtors must also file:

• A certificate of credit counseling
• Evidence of payment from employers received 60 days before filing
• A statement of monthly net income and any anticipated increase in income or expenses after filing
• Tax returns for the most recent tax year
• Tax returns filed during the case including tax returns for prior years that had not been filed when the cases began
• A photo ID.

Failure to provide the documents within 45 days after the petition has been filed will result in automatic dismissal of the case. However the debtor can apply for a 45 day extension.

9. The court will give support obligations first priority over everything but the administrative costs of a trustee.

The automatic stay does not apply to the payment of domestic support or to the enforcement of a wage garnishment. This includes obligations incurred either before or after the bankruptcy filing.

Failure to remain current on support claims is grounds for conversion of a Chapter 7 to a Chapter 13 case or complete dismissal of the petition. The debtor must be current on all his obligations in order to confirm a repayment plan and the plan must provide for priority payment of support.

9. The new law curbs the ability of the court to grant discharge of certain debts at the completion of the 5 year plan. Unpaid trust fund taxes, taxes for which returns were never filed or filed late within two years of the petition, taxes for which the debtor filed a false return in order to evade taxes, debts from fraudulent activities, debts unlisted in the petition, theft by a fiduciary, domestic support payments, student loans, damages awarded for injuries due to drunk driving, criminal restitution, fines, civil restitution or damages awarded for willful or malicious personal actions resulting in personal injury or death are now excepted from Chapter 13 discharge.

10. The automatic stay will not prevent eviction if the debtor fails to pay his rent after the petition is filed.

11. Attorney’s can’t represent themselves as “Debt Relief Agencies”. They cannot advise the debtor to incur more debt before filing and among other things they must enter into a written contract specifying all costs and informing the debtor that a lawyer is not necessary to file bankruptcy.

In spite of this, I think lawyers are more necessary than ever when filing bankruptcy. Find a local bankruptcy attorney to represent you at these hearings.

12. The trustee can void all transfers made to self directed trusts within 10 years of the filing, if he can show that the transfer was made to harm or defraud a creditor.

13. Federally guaranteed student loans were never dischargeable. Now student loans owed to for-profit and nongovernmental entities are also not dischargeable.

14. A Chapter 13 discharge will not be granted until the debtor takes a course in financial management as determined by the trustee.

15. The time between Chapter 7 discharges has been extended to 8 years to discourage “serial” filers.

Before the law took effect, there was a rash of filings, which was expected.

But since then, after taking a brief dip, the number of bankruptcy filings is starting to climb again, which seems to indicate that maybe all has not gone as planned – which is, of course, nothing new where the government is concerned.

This article does not purport to offer legal advice, nor is it a complete summary of all changes made to the bankruptcy laws.

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