THE NEW BANKRUPTCY LAWS WILL AFFECT YOUR RIGHTS!
On April 20, 2005 President Bush signed into law a new
set of bankruptcy statutes. Some of the provisions took effect
immediately, but most changes will become effective on October 17, 2005.
Under the new bankruptcy law, it may be more difficult
for some people to eliminate their debts through Chapter 7. But,
some people will benefit by waiting to file until the new law goes into
effect.
If you are considering filing bankruptcy prior to
October 17th, be sure that your attorney analyzes your situation under
both the existing law and the new law. You need to know what the effect
will be in your situation in order to make an informed decision.
The analysis of your situation requires a detailed
review of your income and expenses. The brief overview of the new law on
this web site is not a substitute for counsel from an experienced
bankruptcy attorney. We strongly encourage you to get legal advice for
your personal situation.
The following are some of the changes that the new law
will require. These changes affect all cases filed on or after October
17, 2005.
QUALIFICATION FOR CHAPTER 7: MEANS TESTING
Whether you will be allowed to file a Chapter 7
(straight) bankruptcy case depends on your family income, family size,
and family expenses. If your household income is greater than the state
median income for a family of your size then your creditors, the court,
or the bankruptcy trustee may request that the court dismiss your case
due to “abuse," unless you can demonstrate that your monthly expenses
justify filing a Chapter 7 case.
The state median income is determined by the Census
Bureau. The 2004 median incomes will be used for bankruptcy filings
until revisions are released by the Census Bureau in 2006.
Below are the median income numbers for Texas (these
numbers do not apply to you if you reside in a different state).
*For the 5th and each additional family member, add
$6,300 per person to the number shown for the 4-person family.
How do you know if you are below the median
income? In general, you total the gross
income you received (not take home income) for each month for the 6
months preceding the month you filed the bankruptcy. Then, you double
that number to get an annual number. There are several special
adjustments that could apply in certain circumstances, such as if you
are self-employed, were unemployed during that 6-month period, or
received social security or disability income.
Presumably, if your adjusted gross household income is
below the median income, you are eligible for Chapter 7.
Notice that because the gross income number is
calculated based on the six-month period preceding the date of the
bankruptcy filing, the timing of your case can be very important. If you
had unusually high or unusually low income at any time during the
preceding 6 months, it can affect your eligibility for Chapter 7. And,
if you are not eligible for Chapter 7, the amount and timing of your
income during the preceding 6 months can also affect your payment under
a Chapter 13 plan.
If your adjusted gross household income is over the
median household income, you must calculate whether or not you can
"afford" to make a monthly payment under Chapter 13 and whether that
payment will be sufficient to provide a benefit to the creditors.
The new bankruptcy law provides a list of permissible
expenses that you may claim as deductions from your current monthly
income. A detailed review of all of those expense deduction calculations
is not feasible here. In general, though, you may count the full amount
of your house payment (but not necessarily the full amount of your rent
payment if you are renting), the full amount of your car payments (but
not necessarily the full amount of your lease payment if you are
leasing), an allowance for food, utilities, clothes, transportation and
other living expenses, and the normal amounts deducted from your
paycheck for items like taxes and insurance. You do not deduct amounts
you are paying to unsecured credit card debts. The amounts of the
allowances for various items change depending on your income level and
family size. They may also change depending on what county you reside
in.
If you have certain kinds of priority debts, like past
due income taxes or child support, you can deduct those as well.
If you own your home or your car free and clear, you
can nevertheless take a deduction for the allowed ownership cost for the
home or vehicle. If you are receiving child support, repaying a 401(k)
loan or, making contributions to a 401(k), you may also be able to
deduct those amounts. If one of these situations applies, you may well
be a person who would substantially benefit by waiting and filing under
the new law rather than current law.
The court will presume that you are not eligible for
Chapter 7 bankruptcy if your current monthly income should, after
deducting permissible expense amounts, leave you with at least $100 per
month to be repaid to your creditors. In such cases, you will have to
repay at least $6,000 over as long as five years through Chapter 13.
In order to successfully argue against dismissal or
conversion of your case to Chapter 13, you must demonstrate "special
circumstances that justify additional expenses or adjustments of current
monthly income." And even if your income falls below the state median,
the court may still dismiss your case for “abuse”.
NEW CHAPTER 13 PROVISIONS
The new bankruptcy laws provide different treatment
for persons in Chapter 13, depending on whether their gross income is
over or under the state median income.
In general, if your gross income is less than the
state median income, the new provisions in Chapter 13 will not
substantially affect the amount you pay to unsecured creditors in your
case. See the other pages on our web site for a more detailed analysis
of the pre-October 17 Chapter 13 provisions. But, the provisions
discussed below for past due car payments and the discharge provisions
discussed below do apply to you.
If your gross income is over the state median income,
Chapter 13 provides a new method of calculating your payment amount.
Under the new law, the debtor must calculate a monthly disposable income
amount based on the same calculations described above for computing
whether you are eligible for Chapter 7 or not. If you are not eligible
for Chapter 7, you multiply the monthly disposable income by 60 to
produce the total amount that must be paid to unsecured creditors under
Chapter 13. For example, if your monthly disposable income is $200, you
must pay $12,000 to unsecured creditors in your Chapter 13 plan. The law
seems to indicate that the $12,000 total in this example would include
attorneys' fees and other administrative costs. You may pay that amount
in monthly installments over as short a period as you like or you may
pay it for a period not to exceed 60 months. If you also need to include
payments on secured debt (such as past due car or house payments), those
amounts will increase your monthly payment to the Trustee.
Whether you are over or under the median income, you
will still be able to include past due amounts on house or car payments
in your Chapter 13 plan in order to save your house or car. But, if you
bought your car within the 30 months preceding the filing date, you may
have to continue making all payments due on the car as specified in your
contract. The same rule may apply to other property purchased on a
secured credit account (like a furniture loan) within the 12 months
preceding the filing date. But, this new provision in the bankruptcy
code is very confusingly written; it may mean exactly the opposite of
what car lenders think it means and it may permit debtors to
dramatically affect these loans. Unfortunately, we will not know exactly
how to interpret this provision until a court has decided what it means
or Congress amends the law.
Certain debts that are dischargeable under current
Chapter 13 laws will not be dischargeable under the new law. For
example, income taxes for periods more than 3 years old but for which no
return has been filed, debts arising by fraud or damage to another
person's property, debts owed to a single creditor totaling more than
$500 for luxury goods incurred within 90 days of filing, and cash
advances of $750 within 70 days all are non-dischargeable in Chapter 13.
MANDATORY CREDIT COUNSELING AND EDUCATION
Prior to filing bankruptcy:
Every individual who files for bankruptcy must, within the 6 months
prior to filing, receive mandatory credit counseling from an "approved
nonprofit budget and credit counseling agency." The credit counseling
agency must provide proof that you have received the mandatory
counseling.
After filing bankruptcy:
You will not be permitted to discharge your debts under Chapter 7 or
Chapter 13 unless you complete a mandatory debtor education course in
personal financial management as approved by the U.S. Trustee. You must
choose your counseling provider from a list provided by the court or the
US Trustee. In Dallas, Plano and Ft. Worth, the Chapter 13 Trustees
provide a debtors' education course that may fulfill the requirements.
Other providers will probably charge a fee for these services.
USING BANKRUPTCY TO STOP CREDITORS
The new law may limit your ability to stop creditors
through the use of the “automatic stay.” If you have filed for
bankruptcy within the past year and need to re-file because the previous
case was dismissed, your creditors may be able to collect again from you
30 days after the new case is filed. The automatic stay may be continued
after the 30-day period for good cause.
If two or more bankruptcy cases were dismissed during
the prior year, the automatic stay does not go into effect at all unless
the court orders it after a hearing and a demonstration that the filing
was made in good faith. There is an assumption that you have filed your
bankruptcy case in bad faith unless you can prove otherwise.
If you file for bankruptcy in order to stop an
eviction proceeding, the landlord will be able to continue with the
eviction if for any reason you fall behind on your new rental payments
after the case is filed.
DOCUMENTS TO BE PROVIDED FOR YOUR BANKRUPTCY CASE
In addition to the list of creditors, schedules of
assets, liabilities, income and expenses, debtors must provide:
This provision will require that debtors file all or
most delinquent tax returns -- in most cases before the Section 341
Meeting of Creditors. Failure to provide the documents within 45 days
after the petition has been filed results in automatic dismissal of the
case.
TIME BETWEEN FILING CASES
These provisions apply to cases filed both before and
after October 17, 2005.
You will not be eligible to receive a discharge of
your debts in Chapter 7 if you received a prior discharge within 8 years
of the new filing. You will not be eligible to receive a discharge in
Chapter 13 if you have filed a Chapter 7, 11 or 12 bankruptcy case
within the 4 years prior to the date of filing of the pending case, or
if you have filed a Chapter 13 case within 2 years of the pending case.
OTHER MISCELLANEOUS CHANGES
If you have moved from a different state within the
past two years, you may be subject to the laws of your former state of
residence in connection with what property you are allowed to keep in
Chapter 7.
The amount of equity in your home that you’re allowed
to keep is limited to $125,000, if you have owned your home for fewer
than 3 years and 4 months (unless you moved from another home in Texas
into your current home).
Debts owed to a single creditor totaling more than
$500 for luxury goods incurred within 90 days of filing are presumed to
be non-dischargeable; cash advances of $750 within 70 days are similarly
treated.
The cost of filing a bankruptcy case will increase.
