The New Bankruptcy
It is no secret that many people have contemplated bankruptcy due to the financial strain they are facing. A large percentage of people make financial New Year’s resolutions and bankruptcy is an option that they have pondered. Consumers assume bankruptcy is their way out of the financial crisis in their household. This may have been the answer prior to 2005; however bankruptcy changed drastically on October 17, 2005. The government lobbied unsuccessfully for 8 years and 3 failed attempts to pass a bankruptcy reform. They succeeded on April 20, 2005 when President Bush signed The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 into law. The law went into effect on October 17, 2005. The reform was the biggest change to bankruptcy in decades. There are many significant changes listed below that anyone contemplating bankruptcy should be aware of.
Key Changes to Bankruptcy
- A financial means test that will be administered to individuals who wish to file Chapter 7. It will make it more difficult for debtors with above their median state income to file a liquidation bankruptcy under Chapter 7.
- A requirement that all debtors must receive a briefing from an approved credit counseling agency at least six months before they can file.
- A provision making it easier for a court to dismiss a bankruptcy case completely or to convert a Chapter 7 case to a Chapter 13 case.
- Tax returns from the last tax year are required. If the filer didn’t pay taxes they are ineligible to file.
- Prior to any debt debts being discharged the debtor must participate in a government-approved financial management program.
- Some of the “automatic stay” protections have been eliminated. Consult with an attorney for more detailed information.
- If you purchased your vehicle less than two and half years ago you will be responsible to pay the full amount of the lien off in Chapter 13. On the other hand, if you bought your car more than two and half years off you are only responsible to pay the fair market value of the vehicle.
- Any past due obligation payment (child support, alimony, etc.) are first priority and the filer must remain up to date on those payments.
This reform was finally put into effect for a couple different reasons. Mainly, over the years there had been an increased amount of bankruptcy filings, which in turn cost consumers and creditors a lot of money. For example in 2004, 1.1 million people filed for Chapter 7 which is also referred to as liquidation. The process of Chapter 7 is that all non-exempt items are liquidated and paid to the creditors. Any remaining debts are cancelled leaving the individual the opportunity to start over in the financial world.
However, since the majority of people who file for Chapter 7 don’t have that many assets several creditors or debtors take a loss on the remaining balance. Creditors can’t afford to take a loss on millions of dollars per year, therefore they tax or increase prices on customers who are meeting their financial obligations. In 2003 the Nilson Report stated that issuers of proprietary and credit cards “lost 18.9 billion in 2002 from consumer bankruptcy filings.” It is estimated that a large portion of that loss was made up by taxing consumers.
The bankruptcy law also took into consideration how many loopholes were in the current system. People and attorneys were abusing this. There were countless cases where people filed, yet had the ability to pay back part or all of their debts. Many of these filers should not have qualified for Chapter 7, yet they did. Chapter 13 would have been the better alternative; however since there was no law stopping them attorneys allowed them to avoid paying back the debts by filing Chapter 7. Chapter 13 is the route to take when someone is financially able to afford some or all of their debts. In Chapter 13 bankruptcy the filing party is put on a repayment plan that is up to 5 years. Most fees and interest payments will be reduced or eliminated through this bankruptcy.
In addition to the reform making it harder to qualify, it also made it very costly. It is estimated that filers can expect to pay over 50% more since the reform was passed. Since most people filing for bankruptcy don’t have liquid cash that proves to be a dilemma considering most, if not all, fees are due upfront. On average a Chapter 7 Bankruptcy will cost a little under $2,000, and a Chapter 13 Bankruptcy will average $3,000.
With the new reform in place bankruptcy is proving to be a vital lifeline only to those who need it. Bankruptcy should always be a last resort. If you or a loved one is considering your options please contact an attorney before making any decisions.
