Chapter 7 bankruptcy
may be harder to file under the new law.
The latest changes
to bankruptcy law may be making it harder for some
people to file bankruptcy. And a few filers with
higher incomes are no longer allowed to use Chapter
7 bankruptcy, but will instead have to repay at least
some of their debt under Chapter 13. All debtors
now have to get credit counseling before they can
file a bankruptcy case -- and additional counseling
on budgeting and debt management before their debts
can be wiped out. And, because the law imposes new
requirements on lawyers, it is sometimes tougher
to find an attorney to represent you in a bankruptcy
case.
Here are some of the
most important changes.
Restricted Eligibility for Chapter 7 Bankruptcy
Under the old rules,
most filers could choose the type of bankruptcy that
seemed best for them -- and most chose Chapter 7
bankruptcy (liquidation) over Chapter 13 bankruptcy
(repayment). The new law prohibits some filers with
higher incomes from using Chapter 7 bankruptcy.
How High is Your Income?
Under the new rules,
the first step in figuring out whether you can file
for Chapter 7 bankruptcy is to measure your "current monthly income" against the median income for a household of your size in your state. If your
income is less than or equal to the median, you can
file for Chapter 7 bankruptcy. If it is more than
the median, however, you must pass "the means test" -- another requirement of the new law -- in order to file for Chapter 7.
The Means Test
The purpose of the
means test is to figure out whether you have enough
disposable income, after subtracting certain allowed
expenses and required debt payments, to make payments
on a Chapter 13 plan. To find out whether you pass
the means test, you subtract certain allowed expenses
and debt payments from your current monthly income.
If the income that's left over after these calculations
is below a certain amount, you can file for Chapter
7.
If you're looking
for an easy way to determine your eligibility under
the means test, use our online means test calculator,
created by the author of Nolo's book How to File
for Chapter 7 Bankruptcy, Albin Renauer, J.D. Once
you enter your zip code, the calculator uses the
applicable income and expense standards for your
state, county, and region to determine your eligibility.
Counseling Requirements
Before you can file
for bankruptcy under either Chapter 7 or Chapter
13, you must complete credit counseling with an agency
approved by the United States Trustee's office. (To
find an approved agency in your area, go to the Trustee's
website, www.usdoj.gov/ust, and click "Credit Counseling and Debtor Education".) The purpose of this counseling is to give you an idea of whether you really
need to file for bankruptcy or whether an informal
repayment plan would get you back on your economic
feet.
Counseling is required
even if it's obvious that a repayment plan isn't
feasible or you are facing debts that you find unfair
and don't want to pay. You are required only to participate,
not to go along with any repayment plan the agency
proposes. However, if the agency does come up with
a repayment plan, you will have to submit it to the
court, along with a certificate showing that you
completed the counseling, before you can file for
bankruptcy.
Toward the end of
your bankruptcy case, you'll have to attend another
counseling session, this time to learn personal financial
management. Only after you submit proof to the court
that you fulfilled this requirement can you get a
bankruptcy discharge wiping out your debts. (The
website above also lists approved debt counselors.)
Lawyers May Be Harder to Find -- and More Expensive
As you can see, the
new law adds some complicated requirements to the
field of bankruptcy. This makes it more expensive
-- and time-consuming -- for lawyers to represent
clients in bankruptcy cases, which means attorney
fees have gone up.
The new law also imposes
some additional requirements on lawyers, chief among
them that the lawyer must personally vouch for the
accuracy of all of the information their clients
provide them. This means attorneys have to spend
more time on bankruptcy cases, and charge their clients
accordingly. This combination of new requirements
have driven some bankruptcy lawyers out of the field
altogether.
Some Chapter 13 Filers Will Have to Live on Less
Under the old rules,
people who filed under Chapter 13 had to devote all
of their disposable income -- what they had left
after paying their actual living expenses -- to their
repayment plan. The new law added a wrinkle to this
equation: Although Chapter 13 filers still have to
hand over all of their disposable income, they have
to calculate their disposable income using allowed
expense amounts dictated by the IRS -- not their
actual expenses -- if their income is higher than
the median in their state. And these allowed expense
amounts must be subtracted not from the filer's actual
earnings each month, but from the filer's average
income during the six months before filing.
Other Changes
There are other changes
that can affect bankruptcy filers negatively, including
how property is valued (at replacement cost instead
of auction value) -- this means more debtors are
at risk of having their property taken and sold by
the trustee -- and how long a filer must live in
a state to use that state's exemption laws (this
can make a big difference in the amount of property
a bankruptcy filer gets to hold on to). These changes
and others are explained in The New Bankruptcy: Will
It Work for You?, by Attorney Stephen Elias (Nolo).
Also, you might find author Stephen Elias's podcast helpful: What
Are the Rules Under the New Bankruptcy Law?
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