Bankruptcy Law

     The federal bankruptcy law changed in 2005, it called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, and it affects almost all filers.  Potential bankruptcy filers are precluded from filing until they receive counseling from a United States Trustee Office approved credit counseling agency.  The potential filer is evaluated to see if he can qualify for a Chapter 7 bankruptcy filing.  The new bankruptcy law imposes an income means test.  A six month average of income is compared to the median income for the area the potential filer lives in.  If his average income is greater than the median income, the potential filer cannot file under Chapter 7 bankruptcy.  If his income is under the median then disposable income is calculated.  This is determined by subtracting expenses, according to IRS standard allowable expenses, from the average income figure.  If disposable income is less than $100, then the potential filer can file under Chapter 7 bankruptcy.  If not, he can file under Chapter 13 bankruptcy.

     The new bankruptcy law also imposes other counseling requirements on the filer, in addition to the pre-filing requirement..  The filer must complete finance and debt management courses before his debts are discharged.  He has to present a certificate to the bankruptcy court stating that he has completed these courses.

Lawyers and the New Bankruptcy Law

     The 2005 law also imposes some new requirements on a bankruptcy lawyer.  Bankruptcy lawyers have to personally vouch for the information presented in bankruptcy cases.  This means they cant just take their clients word for it because they are now personally responsible.  Legal entities will have to spend more time checking out the facts given by their clients, and will charge the clients accordingly.  So the legal cost of a bankruptcy attorney has gone up.

     The method of asset valuation has also changed under the 2005 bankruptcy law.  Asset valuation is now based on replacement retail value.  This change results in a higher value for a lot of personal property that will now be considered non-exempt and subject to liquidation by the trustee.  This means that bankruptcy filers are able to protect fewer assets.

Filing and the New Bankruptcy Law

     The new bankruptcy  law also changed state residency requirements for filing.  Under the old law, a filer had to be a resident for three months in order to use that states asset rules.  The new bankruptcy law changes the residency requirements to three years.  This affects the amount of equity required in a home, cars, etc.  Potentials  bankruptcy filers should check the federal rules for assets if they don't meet the residence requirements.

    Chapter 13 bankruptcy  filings are also affected by the new bankruptcy law.  The new computation of income and expenses leaves the Chapter 13 bankruptcy filer with less income to live on since a larger chunk of it is going to pay his creditors.  In addition, the new bankruptcy  law does not prevent legal action for eviction, child support, divorce or drivers license suspensions.

The new bankruptcy law results in more Chapter 13 bankruptcy filings and higher legal fees for bankruptcy law firms because of the requirements of making them personally vouch for the accuracy of the information provided. You should seek professional advice from someone familiar with the new bankruptcy law.