2005 Bankruptcy Reform - What’s New?

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.

While it is too early to know for sure, it is assumed that this change will increase the number of Chapter 13 plans filed, and therefore increase the amount of money distributed to creditors during bankruptcy proceedings.

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

Mandatory Credit Counseling

Withing 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 13 discharge unless the debtor has completed an education course in personal financial management as approved by the U.S. Trustee. A debtor can be denied discharge under §727 if the debtor fails to complete the 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.

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, in most cases you would be required to repay that cash advance.

Duration of Chapter 13 Plans

As noted earlier, if the Chapter 13 debtor's income is greater than the state median income, the plan proposed must be for 5 years. Prior to these amendments, a shorter period of payments was possible. In addition, on the anniversary date of a confirmed plan, a debtor must file a new statement of income and expenses.

In summary, the new legislation may require a debtor to make payments for a longer period of time, so it is strongly recommended that you consult an attorney for a complete analysis of your situation.