President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 on April 20, 2005. The law went into effect on October 20, 2005.
The act contained the biggest changes to bankruptcy law in 25 years. The law makes it more difficult for people to have their debts discharged under Chapter 7 bankruptcy, and they will have to pay for pre-bankruptcy credit counseling. All of those people who are barred under the new law from filing Chapter 7 will be forced to file Chapter 13 bankruptcy, which requires a payment plan over a period of years instead of giving a fresh start.
Changes to a Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, the income of the person filing will be subject to a two-part means test. First, your income will be calculated with exemptions such as rent and food to determine whether you can afford to pay 25 percent of your unsecured debt such as your credit card bills. Second, your income will be compared to your state's median (middle) income.
You won't be allowed to file for Chapter 7 if your income is above your state's median income and you can afford to pay 25 percent of your unsecured debt. Even if your income is below the state's median income and you can pay 25 percent of your unsecured debt, the court may still deny your Chapter 7 filing. There will be very few exceptions to this test, no matter how sympathetic your case is.
Changes to a Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy, the court will apply IRS living standards to determine what is reasonable for expenses such as rent and food, and the rate you need to repay your debts. The IRS standards are more strict than the courts have been in the past.
What Does the Part About Credit Counseling Mean?
A person filing for Bankruptcy must meet with a credit counselor in the six months prior to filing for bankruptcy. In addition, if your filing for Chapter 7 bankruptcy is approved, you must complete money management classes before your debts are discharged. Both of these credit counseling requirements are at your expense.
Do I Need a Bankruptcy Lawyer?
Especially since the laws are changing, it is a good idea to consult a bankruptcy lawyer before taking any action. Filing for bankruptcy is a difficult and complicated process, and an experienced bankruptcy attorney can help you avoid many of the pitfalls and traps in the legal system. An experienced bankruptcy attorney may also help you explore repayment options that do not require filing for bankruptcy.
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