The new Bankruptcy act of 2005 has made life tough for the debtor.
In April 2005, President Bush signed the Bankruptcy law of 1978. The aim was to streamline Bankruptcy procedures and not let it become an escape route for undeserving individuals.
Prior to this amendment a debtor filing for a Chapter 7 Bankruptcy protection could have their financial slate wiped clean. They could then start life afresh. Most people filed for bankruptcy under Chapter 7.
The new law makes life for debtors much harder. The new law requires debtors seeking bankruptcy protection to file under Chapter 13. This chapter requires them to pay back part of their debts, in case they have an income higher than the median income for their state. For this a means test to determine how much those consumers are able to pay is the cardinal principle.
The act specifies that a Chapter 13 bankruptcy can be availed by those borrowers whose regular income is less than $307,675 in unsecured debts (such as credit cards) and less than $922,975 in secured debts (such as mortgages and car loans). In case an action is envisaged under chapter 13 jointly then the limits are not doubled but they are applied to the total amount owed by the debtors
Jeffrey Wong, a bankruptcy attorney with Greene & Markley, P.C., in Portland, Ore., says that under the old law, more than 90% of people filing for bankruptcy were able to get all of their debts discharged with no installment payments. The new law however will force them to file under chapter 13. Filing under chapter 13 will require them to make some payments in a structured manner. Thus one of the aims of the new Chapter 7 is to see that the creditors get their money back in case the debtor has the means to pay back. The means test thus assumes great importance.
Chapter 13 is very stringent compared to Chapter 7 and makes bankruptcy proceedings much harder. Earlier in a Chapter 7 bankruptcy, your assets (minus those exempted by your state) are liquidated and given to creditors. Your remaining debts if any were cancelled and your debt obligation reduced to zero. Therefore the credit card companies and other creditors sometimes would get no money back.
Many changes have been incorporated in the new Chapter 13 of the Act. This includes a repayment plan up to five years and a debtor counseling session for at least 90 minutes, in the judicial district where he resides. This session is mandatory and must be held at least six months prior to applying for bankruptcy.
Another significant change is that earlier the judge could decide whether you qualified under chapter 7 bankruptcy. It is not so now.
The new law enunciates a two-part means test of your annual income. Firstly certain expenses (rent, food, etc.) will qualify for exemption to determine whether you can afford to pay 25 percent of your "no priority unsecured debt" such as your credit card bills.
Secondly what you earn will be compared to your state's average income. These figures are given by the IRS. These two important points can thwart your attempt to file under chapter 7.
If your income is above your state's median level then you will not be allowed to file for Bankruptcy under Chapter 7. In addition in case the court concludes that you can afford to pay 25 percent of your unsecured debt, the court will require you to file Chapter 13. The idea is to stop abuse of the system. Under the new law, the court will apply living standards as specified by the IRS to determine what is reasonable to pay for rent, food and other expenses. These figures will inform the court as to how much is available to pay the debts. In case you wish to contest the IRS regulation, then a judicial hearing is required and that will involve more expense for the debtor.
Under the old law, the amount of your home equity that was protected from creditors was determined by the state where you filed. In Florida, for instance, your home would have been entirely exempt, even if you bought it soon before filing. The new law, however, is more stringent and filers may only exempt up to $125,000, regardless of a state's exemption allowance.
An individual filing for bankruptcy has to do it by filling forms 22A and 22C. These forms are available on the Adminstrative office of the US courts website. Form 22A id primarily for Chapter & bankruptcy and will require all data to be completed for the 'means test'. He will have to give to the court Monthly income and expenditure with all calculation. Form 22C is for a Chapter 13 Bankruptcy filing.
The original source for the median family income is the Census bureau and for the local andNational standards it is the IRS. In case there is a difference in between the two then you must inform at email@example.com.
Under the new law a person failing the means test may still be alowed to file for Bankruptcy under chapter7 if he can show that he has some special circumstances which could include loss of pay, pay cuts and medical illness. But the discretion is with the judge.
Under the new law, if information about a client's case is found to be inaccurate, the bankruptcy attorney can be fined. This has a deterrent effect as attorneys will to do their home work better so as to verify the correctness of documents.
It generally takes 3-4 months before the Bankruptcy Judge signs the discharge order. But the important point is that the means test has now become paramount in a bankruptcy proceeding.