The 2005 Bankruptcy Reform

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S.256), was signed into law by President Bush on April 20, 2005. While some provisions of the law became effective immediately, all provisions relating to personal bankruptcy became law on October 17, 2005.

Here are the top five changes to bankruptcy legislation introduced by this legislation.

Means test to be eligible to file under Chapter 7

In a move to force more debtors into a Chapter 13 Wage Earner repayment plan, instead of allowing for a straight liquidation bankruptcy under Chapter 7, the trustee or any creditor can bring a motion to dismiss a Chapter 7 application if the debtor’s income is greater than the state median income.

In simple terms: if your income is too high, you will probably be required to file a 5 year repayment plan under Chapter 13.

If a debtor’s current net monthly income (based on the last six month’s average), less one-sixtieth of secured payments and priority debts, less allowed expenses permitted by the IRS and certain other allowed expenses, is greater than $100 per month, the trustee or any creditor can request that you be required to file under Chapter 13.

This is a complicated area of the law, so the advice of a bankruptcy attorney is essential.

Mandatory credit counseling

Within 180 days of filing debtors are required to receive credit counseling from an approved nonprofit budget and credit counseling agency. These counseling agencies in most cases are to be approved by the U.S. Trustee.

In addition, the court may not grant a Chapter 7 or Chapter 13 discharge, unless the debtor has completed an education course in personal financial management as approved by the U.S. Trustee. A debtor will be denied discharge under §727 if the debtor fails to complete the debtor education course.

Car liens not discharged under Chapter 13

If a vehicle was purchased with 910 days of filing (approximately two and a half years), the creditors can retain its lien until the entire debt is paid, not just the secured portion.

In the past, if a creditor had a $10,000 lien on a $6,000 vehicle, it was possible for the debtor to pay the $6,000 fair market vehicle to the creditor and have the lien fully discharged.

Under the new law, if the vehicle was purchased within the past 2.5 years, the secured creditor must be paid in full in a Chapter 13 filing. However, note that the interest rate could be reduced even if the purchase occurred within 910 days of bankruptcy filing.

Scope of discharge

Debts owed to a single creditor totaling more than $500 for luxury goods incurred within 90 days of filing are presumed non-dischargeable. Cash advances of $750 received within 70 days of filing are also presumed to be non-dischargeable.

For example, if you receive a cash advance on your credit card two months before filing for bankruptcy. Note that this requires an affirmative by the creditor to seek a return of these funds. Under many circumstances, the creditor may not wish to challenge the transactions. However, you should seek the advice of competent counsel to evaluate your situation and provide you with an appropriate plan to ensure your are protected.

Duration of Chapter 13 Plans

As noted earlier, if the Chapter 13 debtor’s income is greater than the state median income for the debtor’s respective family size, the plan proposed must be for 5 years.

Your plan may be for three years if your income is less than the state median income for your family size, and you filed Chapter 13, not chapter 7.A debtor may choose to file a chapter 13 instead of a Chapter 7 even when eligible due to a desire to pay back creditors, or a need to pay mortgage arrears or tax arrears.

In summary, whether your plan will be three years or the maximum of five years depends on a number of variables, so it is strongly recommended that you consult an attorney for a complete analysis of your situation.