Events and relationships of these sorts influence the
selection of a chapter and the timing of a bankruptcy filing.
Gather up the details so a lawyer can assess your options
The Congress has passed sweeping changes to the Bankruptcy
Code, designed to restrict the availability of a discharge
in Chapter 7 bankruptcy and substantially reduce the relief
available in Chapter 13 bankruptcy. The bill is effective
October 17th, 2005.
It's impossible to predict with certainty how the changes
reviewed below will be implemented and interpreted by bankruptcy
trustees and judges. What is clear is that under the new
law there will be far more hoops for the debtor to jump
through to get a fresh start. The process will be more expensive
for the debtor and the court system, and there will be an
extended period of uncertainty as the players work their
way through the changes.
Eligibility for Bankruptcy
The debtor can elect to file either
a Chapter 7 or Chapter 13 bankruptcy. Debtors whose debts
are primarily consumer debts are subject to scrutiny by the
trustee or the judge as to whether they have enough disposable
income that permitting them to file Chapter 7 would be a “substantial
abuse”. If so, the case can be dismissed or the debtor
can convert to a Chapter 13 which repays debts, usually only
in part. There are caps on the amount of secured and unsecured
debt a debtor may have and file Chapter 13.
Passed: A "means test"
would determine whether a debtor could file Chapter 7 bankruptcy.
Anyone with an income below the median income for families
of the debtor’s size in their state would be exempt
from the means test. For those debtors above the median
income, a presumption of abuse on the part of the debtor,
which the debtor has the burden of disproving.
In applying the means test, the average income over the
past 6 months is used, regardless of present actual income.
Mortgage and car payments, and the amount necessary to pay
back taxes and past due support, are subtracted. Private
and public school expenses for children are limited to $1500
per child per year. If, after deducting those amounts and
the living expenses provided in the IRS’s national
collection standards, the debtor could pay at least $6000
to unsecured creditors over 5 years, the debtor’s
only option would be Chapter 13 bankruptcy.
Barriers to Filing
Any individual who is willing to
submit to the jurisdiction of the bankruptcy court can file
a bankruptcy case. Legal counsel is widely available and subject
to fierce price competition.
Passed: Debtors must obtain approved
credit counseling before they can file bankruptcy. Unfiled
tax returns must be filed within weeks of the commencement
of the case. Lawyers for debtors, but not lawyers for creditors,
face personal liability for monetary sanctions if their
client is not eligible for Chapter 7 bankruptcy or the facts
in the petition are later disproved. The filing fees for
bankruptcy cases would increased. Legal fees charged by
attorneys who remain in the field are expected to increase
Debtors elect Chapter 13 bankruptcy
to cure mortgage arrearages, catch up on back taxes, discharge
debts not dischargeable in Chapter 7 bankruptcy, and keep
nonexempt assets. Secured debts such as car loans can be reduced
to the present value of the collateral. The debtor’s
disposable income for determining how much of the pre-filing
debt must be repaid is determined by the judge’s assessment
of what living expenses are necessary and reasonable for this
debtor and his family. Plans run three years unless the debtor
proposes a longer plan, which cannot exceed 5 years.
Passed: Disposable income will be calculated
using the IRS collection standards, rather than allowing
the judge flexibility. Strip down of liens on cars will
be limited to vehicles purchased more than 2 ½ years
before the bankruptcy. Debtors whose gross income exceeds
the state median will be required to remain in Chapter 13
for five years. It is unclear how the means test guaranteeing
a certain level of repayment to unsecured creditors will
intersect with the debtor’s efforts to cure mortgage
arrears and prevent foreclosure on his or her home.
Debtors can file a Chapter 13 bankruptcy
immediately following a chapter 7 bankruptcy to pay debts
that survived a Chapter 7 bankruptcy discharge. A Chapter
7 discharge is available in the seventh year following a previous
discharge. Debtors whose Chapter 13 cases are dismissed short
of discharge can refile a bankrutpcy case, so long as the
new case is filed in good faith.
Passed: The interval between Chapter
7 discharges is increased by two years. A Chapter 13 may
not be filed within 4 years of a Chapter 7 discharge. No
change is made on the debt caps for eligibility for Chapter
13, creating a class of debtors with larger debt totals,
for whom only the more expensive and complex Chapter 11
bankruptcy is available.
The "automatic stay"
uniformly stops collection actions against the debtor or his
property, and requires the creditor who wants to continue
enforcing state law rights to get permission from the bankruptcy
Passed: The automatic stay is hedged
or conditioned in many circumstances, creating less certainty
about immediate protection of the debtor. Filing bankruptcy
will not stay acts to collect back support, including revocation
of driver’s licenses or professional licenses. Creditors
omitted from the official list of creditors are free to
continue collection action even if they have actual notice
of the bankruptcy. If a prior case is dismissed, the duration
or even the existence of a stay is limited in subsequent
cases. Landlords are freed to complete evictions, even when
the tenant-debtors are paying rent.
Discharge of Debts
Present: Debts not dischargeable in Chapter
7 bankruptcy include recent taxes, family support and student
loans, plus a group of debts that may be nondischargeable
if the creditor proves in bankruptcy court that the debt
was incurred by various kinds of dishonesty or that the
debt was created in a divorce proceeding. Chapter 13 provided
for a broader, “ super discharge”, allowing
discharge of more kinds of debts in exchange for undertaking
a repayment plan.
Passed: More debts become nondischargeable
in Chapter 7 bankruptcy, including privately funded student
loans, all debts arising from divorce and debts incurred
to pay nondischargeable debts such as taxes or support.
Presumptions of fraud are broadened to include purchases
of “luxury goods” of $500 within 90 days of
filing or cash advances of $750 or more within 70 days of
filing. The Chapter 13 discharge won’t cover taxes
for which the taxing authority didn’t file a timely
claim, unfiled tax years or debts tinged with dishonesty.
The proposed law imposes new duties on debtors and their
attorneys, and failure to timely perform those duties will
result in dismissal of the case or lifting of the automatic
stay. Coupled with the new limitations on a second filing,
the consequences of mistakes, inattention, or misfortune
become far more serious, as the court and the trustee have
less discretion to deal with human frailty and intervening
circumstances. The presumption that the debtor is entitled
to relief from his debts is effectively replaced by presumptions
that the debtor’s filing is abusive until the debtor
This overview looks at those aspects of the bill that
impact the average debtor. Exactly how it actually will
work, or not work, will only become known as debtors, lawyers,
trustees, and judges try to apply it to the real world of
consumers and their debts.