The Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005
Recently signed into law, the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005, also known as the Bankruptcy Reform Act,
significantly changes the existing Bankruptcy Code that has been nearly
unaltered for the past 27 years.
Supporters of the new law say that it will now be much
more difficult for individuals to -file for Chapter 7 bankruptcy, which allows
the discharge of all non-secured debt. Instead, many will be required to file
for Chapter 13 bankruptcy, which requires a court-ordered debt repayment
schedule over a three to five year period.
Some of the major changes with the new law:
Qualification for Chapter 7 – Under the new law,
individuals must undergo a ‘means test’ to determine if they are eligible for
Chapter 7 bankruptcy. The test involves a thorough examination of your income
and expenses, based on your family size living in your state, to see if you
are capable of repaying some or all of your debts. If you earn below the
median income you will be allowed to proceed with Chapter 7 filing. However,
if it is determined that you earn more than the median income you may be
required to file for Chapter13.
Under a Chapter 7 filing, you will be allowed to wipe out
all unsecured debt, including personal loans and credit cards, but will still
be required to pay all secured debt, such as home or automotive.
Also, even under Chapter 13 filing, you will be required
to pay back automobile loans in full, instead of the current blue book value
as you were previously allowed to.
Mandatory Credit Counseling – Individuals who wish
to file bankruptcy must submit themselves to Credit Counseling and a Budget
Analysis within 180 days of the petitioning file date and undergo a financial
management education course at their own expense before they can obtain a
bankruptcy discharge.
Limited Homestead Exemptions – States that
previously allowed homes to be sheltered from bankruptcy (Florida, Iowa,
Kansas, South Dakota, and Texas), regardless of value, will now have limits of
up to $125,000 if the individual petitioning for bankruptcy has owned the home
for less than three years and four months (40 months) prior to the filing.
Automatic Stay – Previously, individuals filing
for bankruptcy gained immediate court protection from creditors through the ‘Automatic Stay’ function. With the new law, the Automatic Stay is now
subject to court approval.
Creditor Notification – Petitioners are now
required to notify their creditors of the bankruptcy filing. Creditors who do
not receive notice of the bankruptcy filing are not subject to penalties of
the automatic stay.
Domestic Support Obligations given priority –
Child Support and Alimony are now given first priority claim category of
non-dischargeable debts, making it easier for ex-spouses to enforce current
payments. Domestic Support Obligations are also not subject to the Automatic
Stay.
Non-dischargeable debts expanded –
Non-dischargeable debts have now been expanded to include State and Local
taxes. Previously, only Federal taxes were non-dischargeable.
Non-dischargeable limits expanded –
Non-dischargeable limits were expanded to include luxury goods and services,
made within 90 days of filing and in excess of $500, and cash advances within
70 days of filing and in excess of $750 are now presumed non-dischargeable.
This prevents debtors from running up excess debt immediately prior to a
bankruptcy. Prior to the reformation, the limits were $1150 within 60 days.
Lender Disclosure – Lenders are now required to
disclose, in full, all information regarding introductory interest rates,
minimum payment percentages or fixed amounts, late payment penalties and
deadlines, and tax consequences of certain home equity loans.
Credit Counseling,
Debt Consolidation, &
Debt
Settlement—We’ve also written articles about these alternative forms of debt
repayment. You may want to look into each of these to see which one is right for
you and your current situation.
