Recent Changes in Bankruptcy Law
On October 17, 2005, filing for bankruptcy got significantly more complicated and stressful for individuals looking for debt relief. That was the date that the Bankruptcy Abuse Prevention and Consumer Protection Act went into effect and required significantly tougher reporting and qualification requirements than mentioned in the definitions of the various bankruptcy filings above.
Why did the law change? Because major lenders started wondering if bankruptcy was becoming too much of a “quick fix” for irresponsible borrowers trying to get out of debt. Whether that's truly the case is a matter for public opinion. Many people in trouble still see bankruptcy as a last resort, not merely an easy way to escape their responsibilities.
Chapter 7 bankruptcy came under specific attack in the law, since as indicated it was the most common form of individual filing and thought of as a “fresh start” for most people facing debt trouble. Today, many people are seeing the possibility of a fresh start turn into a regimented repayment schedule of current debts because many former Chapter 7 candidates are finding they qualify only for Chapter 13 bankruptcy.
Just because someone you find on the Internet says he specializes in consumer counseling doesn't mean he's legitimate. If you file for Chapter 7 bankruptcy and need to fulfill the credit-counseling requirement, your trustee may recommend a particular resource to do that. But it also makes sense to check any recommendations against listed agencies at the Web site for the National Foundation for Credit Counseling (
As indicated above, you need to check with a bankruptcy attorney to see if state law has affected the overall provisions created by the federal law.
According to the new federal law, Chapter 7 filers now have to face an income test (also known as a “means test”) that states the following: If the debtor's average monthly net income for sixty months is greater than $10,000, he or she won't be able to file under Chapter 7.
If the debtor's average monthly net income for sixty months is less than $6,000, then filing will likely be permitted; between $6,000 and $10,000, the debtor can file under Chapter 7 only if net monthly income is less than 25 percent of all nonpriority unsecured debts.
With regard to college savings, as long as the funds have been held for more than two years in a Coverdell or 529 college savings plan and the beneficiary is a child, stepchild, or grandchild, funds should be safe from liquidation.
The new law contains a particularly controversial challenge for potential Chapter 7 filers. Again, unless state laws override, bankruptcy petitioners under Chapter 7 have to supply proof that they've completed six months of consumer credit counseling, preferably with a payment plan. The point? So bankruptcy trustees have an indication on paper of whether the filer had extenuating circumstances in their filing (such as medical debt or divorce) rather than an inability to control their spending.
Keep in mind that people who get involved in credit counseling services, particularly debt repayment programs, are statistically more likely to file bankruptcy later on. It's wise to keep control of your debt payment issues while you're solving them. Get some advice from a qualified financial planner or bankruptcy attorney before you hand off responsibility for your debt problems to someone else.
Paperwork and asset exposure has gotten heavier, too. Before the 2005 legislation was passed, filers needed to present a basic net worth statement and an overall statement of their financial affairs. Under the new Chapter 7 requirements, courts now want to see several years of tax returns and detailed earnings projections, and they'll even ask for assets in retirement accounts and 529 college savings plans. This doesn't necessarily mean you'll need to liquidate them, but courts do want to know what you have.
It's actually rare that people lose their home as a result of bankruptcy — foreclosure, that's another story. However, the 2005 federal bankruptcy law states that an applicant must live in a home for forty months to receive the state's homestead exemption, or asset protection, and the exemption will be capped at $125,000. Again, make sure your attorney knows current state law in this regard. Also, the law makes specific provisions to prevent filers from transferring money or equity into a homestead with the intent of defrauding a creditor.
Generally, most retirement funds are safe in bankruptcy, but Roth IRA assets are exempt up to only $1 million. Checking state law is essential here, and it helps to get assistance from a financial planner as well.
