|
The filing rate for bankruptcy has more than
doubled during the last decade, and last year
approximately 1.6 million households filed for
bankruptcy. Congress saw the increase as a abuse
by people who would otherwise be able to repay
their debts. The primary supporters behind the
new, recently passed Bankruptcy Reform are your
creditors. They feel they are getting less than
they should when people file for bankruptcy.
Obviously, some consumers do abuse the
bankruptcy system, but the overwhelming majority
of people filing bankruptcy are in financial
distress. Most consumers are filing as a result
of job loss, medical expense, divorce, or a
combination of those causes. The ability to file
for bankruptcy and to receive a fresh start
provides crucial aid to families overwhelmed by
financial problems. This new act will deny many
consumers access to bankruptcy court and the
ability to file Chapter 7. Banks, big business,
lending institutions, and credit card issuers
will benefit greatly from the new laws.
Under the new Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005, you will be
required to receive a certificate of completion
from an approved non-profit credit-counseling
agency within 180 days prior to filing
bankruptcy. The certificate must state that you
have received a briefing on opportunities for
available credit counseling and have been
assisted in performing an individual budget
analysis. People who have even the smallest
ability to pay on some of their debts will be
strongly encouraged to utilize the non-profit
counseling service, even if it means they will
be repaying a higher percentage of debts than
they would with even a Chapter 13 Bankruptcy.
The Bankruptcy Reform Act clearly favors
credit-counseling plans that provide for
repayment of 60% or more of the debts. However,
the debt is to also be repaid over a much
shorter period of time. Remember, a
credit-counseling plan may only be set for 36-60
months , whereas the original credit card could
have been payable over 20 years. What does this
mean? For starters, your monthly payments may go
up significantly. However, this requirement may
not apply if the debtor faces a potential loss
of property before he or she can complete the
good faith attempt to repay the debt balance
owing.
The most controversial provision of the new
Bankruptcy Abuse Act is the enforcement of the
“Means Test”. The “Means-Test” essentially
denies access to Chapter 7 bankruptcy to debtors
deemed “able” to pay their debts. The
“Means-Test” examines three different aspects of
your income and expenses and then determines
your ability to file Chapter 7 Bankruptcy. The
first scenario is, does a family earn above the
average median income for their state? The
numbers that will be used as the median income
for each state can be found here. If the
combined gross income of your family is greater
than the median family income in your state, you
cannot file Chapter 7. Then, your option is to
file a Chapter 13 repayment plan. The Chapter 13
Bankruptcy requires you to repay a percentage of
your debts over a 36-60 month period. At this
point if you answered “no” to the first
question, you would need to answer the following
question. Do you have excess monthly income of
more than $100.00 after you deduct the National
Standards for Allowable Living Expenses based on
your gross monthly income? If the answer is “no”
you still must answer another question. Do you
have excess income to pay 25% of your unsecured
debt over the next 60 months or 5 years? If the
answer is “no” - Congratulations. You are now
eligible for a Chapter 7 Bankruptcy. If the
answer is yes to any of these, then Chapter 7
may not be filed but you could qualify for
Chapter 13. Any time a debtor has $100.00 a
month more income than the IRS National and
Local Standard Expense guidelines will allow,
they must submit themselves to a 60 month
Chapter 13 repayment plan. This kind of plan
will only yield a mere $6,000.00 for creditors
over five years, less costs of
government-sponsored administration.
The “Means-Test” examines your previous six
months income. However, a lot can change during
six months. If you lose your job, see a
reduction in wages, or lose income due to
medical problems, the “Means-Test” could still
force you to pay higher monthly payments in a
Chapter 13 plan than you are able to afford.
This could eventually lead to wages being
garnished, repossession of your cars and
foreclosure actions on your house. The test also
limits private parochial school tuition expenses
to $1,500.00 per year. Based on statistics
provided by the National Center for Educational
Statistics, $1,500.00 would have covered
parochial school in 1993, but it is now barely a
third of what parents are paying. This may force
struggling families to remove their children
from private or parochial school for three to
five years in order to complete their Chapter 13
repayment plan. The law does allow for up to 15%
of your gross annual income to be given to
charities or tithed.
Debtors filing Chapter 7 or Chapter 13
bankruptcy, must provide a copy of their most
recent tax return to the trustee, at least seven
days prior to the 341 meeting. Under existing
law, debtors in Florida, Texas, Kansas, Iowa and
South Dakota can shield an unlimited amount of
home equity from creditors by filing for
bankruptcy protection. Under the new agreement,
an individual must own a residence in the state
for at least 40 months before declaring
bankruptcy to get qualify for that exemption. If
unable to meet the residency requirement, a
debtor would be allowed to take only a $125,000
homestead exemption. This new language applies
only to states whose homestead exemption already
exceeds $125,000. The new Bankruptcy Bill has no
negative impact on situations where a debtor has
lived in their home for 40 months, even if they
recently paid down significant portions of their
mortgage.
Another new addition to Chapter 13 Bankruptcy
Laws affects your ability to keep your car
during a filing. Under the previous Bankruptcy
law, debtors could keep a car without making all
of the payments on the loan. They could pay only
the Blue Book Value and still be able to retain
the vehicle. However the new Bankruptcy law
states that you complete the full term of the
loan at the original amount or allow the car to
be repossessed. This means that people who owe
more than their cars are worth could be
negatively affected. The new Bankruptcy law also
places a cap on the amount of money that can be
protected in an IRA, pension or retirement
savings. Current legislation allows you to
protect all of the money you have in your 401(k)
if you file bankruptcy. In the past, Individual
Retirement Accounts were treated the same way.
This is not true, however, under the bankruptcy
reform. This new bill would allow only the first
$1 million saved in an IRA to be protected from
creditors. Any amount over that is unprotected.
However, if you recently changed jobs and rolled
your 401(k) into an IRA then your creditors will
not have access to those funds. Education IRAs
will also be protected.
In summary, the new Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005
makes it much more difficult to file for
bankruptcy. President Bush signed this bill on
4/20/05 and it goes into effect 180 days after
that date.
If you are struggling with debt and want to
avoid the arduous process of filing bankruptcy,
contact The Debt Reduction Group. We can help
you avoid bankruptcy and can negotiate
settlements on your debts, reducing them by
40-60% on average. Our consultation is
completely free with no risk or obligation. You
can call us toll-free at 888-443-DEBT or fill
out the Free Consultation Form, found here.
|