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The "new" bankruptcy law went into effect on October
17, 2005. Despite what you may hear, bankruptcy is definitely not gone, but it has changed. The paperwork is
more cumbersome for most people and there are more requirements to file. It is harder to fill out the paperwork,
and if you don't get it right there are harsher consequences. All kinds of bankruptcy are still available, but there
are new tests to measure which types may be the appropriate type. Special bankruptcy approved credit counseling courses
are now required before your case is filed, but you don't need to take the course before you talk to an attorney.
As an attorney who concentrates on bankruptcy law, I will discuss your options to help you decide if bankruptcy
is right for you and if so, how to proceed.
Putting off speaking to an attorney could hurt you, your family, your health and/or
your sanity. If an attorney can offer a legal solution, coming in earlier usually allows you better options,
and may also allow you to keep your property, pay some or all of your debts (or prevent you from getting even more debt you
can't pay.) Speaking to an attorney doesn't mean you are going to file bankruptcy. It does mean you are going
to learn what legal options that attorney sees in your case, which may include bankruptcy or non-bankruptcy options.
The President signed the the 2005 Bankruptcy Act on April 20th, 2005 and
it went into full effect for cases filed on or after October 17, 2005.
No one knows all the effects that will take place under the new law and like bankruptcy
attorneys across the country, I will be trying to make sense of this legislation in the upcoming months and years.
Please read further on this page for information about this law.
The New Law
The first thing to know is that Bankruptcy is still available to help
protect people in financial need, even though it has gone through a major change.
For eight years, the credit card industry pushed for new bankruptcy laws, and thanks to their
intense lobbying efforts and high political contributions, they succeeded. The changes make it harder
for consumers to file bankruptcy and have eliminated some of the benefits of prior law.
The Bill is called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
... who wouldn't support that? We all want to stop abuse and protect consumers, don't we? So do the Senators
and Representatives who have taken the word of the credit card companies who pushed this law and whose high paid lobbyists
worked so hard to pass it. Just reading the title makes it sound like something we should all
support.
The problem with this new law is that it won't stop fraud and it doesn't
protect consumers. I think it should be called the Bankruptcy Prevention and Fraud on Consumers Bill
because makes it harder for lower and middle class workers who are already being beaten down by high interest rates, high
housing costs, job losses, divorce and/or medical bills. In my opinion, this is a tool of lenders trying
to squeeze more money out of already strapped families and individuals.
The Bankruptcy Reform Act of 2005 include provisions which will make it harder
for most people to file bankruptcy. It involves more paperwork for everyone, and many of the changes just don't make
a lot of sense.
Attorneys are required to provide additional disclosures, including disclosures that must
be given to you at the start of any assistance to you. You may find that attorneys won't talk to you on the phone
anymore, even to answer simple questions because of the required disclosures. You may be asked to come in to receive
those notices before the attorney will answer any of your questions. But a consultation should provide you with
the answers you need about YOUR situation, and to see if bankruptcy will help you, so meeting with an attorney to find out
what your rights are is often a very good idea anyway.
Our Senators and Congressman didn't listen to the people who know the system best - bankruptcy
judges, law professors, and lawyers who represent both sides (debtors and creditors). Many people opposed the new
law as being harsh, unbalanced and overreaching. It will punish the majority of people who are honest
and in financial trouble, for alleged bankruptcy abuse by a small minority.
The law is hard on consumers and provide additional hurdles to jump. Attorneys are learning to apply the law and make sure that clients are getting the best treatment possible under
the new laws.
Even though the law was passed in order to have more people to file Chapter 13 cases to
repay some of their debts, it makes Chapter 13 harder. Provisions in the current Chapter 13 laws have
been changes so it is not as beneficial as before, but there are still many benefits to filing. Chapter 7 is subject
to stricter guidelines and more paperwork, but many people are still eligible for Chapter 7 under the new law.
Most bankruptcy lawyers are honest and care about their clients, and help them file
correct and accurate documents. If documents are filed incorrectly, the new law makes it more difficult to fix problems
due to incorrectly filed or dismissed cases, if you are able to fix them at all. Most attorneys only recommend bankruptcy
if it is a good option, and they work hard to do the job right. This makes the whole system work better as well
as protecting good honest people.
Now, more than ever, you need an experienced attorney to guide you through the bankruptcy
process.
New Burdens
The new law imposes heavy burdens on debtors by requiring documentation which is not
now required, including providing tax return(s) to the Court.
People who make more than their areas median income will have to apply a formula
to see if they can file Chapter 7. People below the median income won't use that formula, but have other requirements
to consider. The old law required people who could afford to make payments to file a Chapter 13.
The new law makes says it makes people who can afford to make payment file Chapter 13, but it makes people
use a government imposed formula to calculate what they make and what they spend, and it may not be realistic. It
imposes an income and expense test (the "Means" test) based upon IRS standards which may not leave families with enough to
realistically live on, and may force people to give up their homes, cars or other all in an effort to pay credit cards
back a few more dollars. Under the old law, the Bankruptcy Court reviewed debtors' real
income and expenses expenses to see if they could afford to pay instead of the means test "formula" income and expenses.
For people whose income exceeds the median income for their living area, the
"means test" will calculate income and expenses, and must be applied before a bankruptcy case is accepted. So if
your income is above the median income in your area, it doesn't mean you can't file bankruptcy but it does mean you have to
take the test. The problem is that the test uses artificial numbers in the calculations, and is complicated to
apply. The test may not reflect reality and may show leftover income where there really is none.
As the Courts interpret these laws, we will find out how this Means Test will affect
people. Passing or failing this test may depend on how well your attorney understands all the factors and nuances involved
with the test.
Credit Counseling Requirement
People will have to complete a Bankruptcy Court Approved
Credit Counseling Course (not just any credit counselor) before being allowed to file (except in very
rare emergency situations). Programs are approved by the local bankruptcy court system. You must go through an approved
program, not just any credit counseling company, before filing your case and within the 180 days prior to
filing. A second course must be completed after filing in order to receive a discharge of debts. Companies are advertising
hoping to pick up some fees from potential bankruptcy debtors.
You do have to complete the course and receive a certificate of completion before you
can file a bankruptcy case, but you do not have to see a credit counselor before you speak to an attorney.
An attorney will discuss whether or not bankruptcy is right for you, or not, and give you information about the required
credit counseling programs. A second financial course is required in order to receive a bankruptcy discharge.
Your attorney will make sure that you complete any required counseling courses through
an approved course provider. You may be able to complete the program from your attorney's office or your home,
over the Internet. The courses are different from what credit counselors traditionally did, because it
is an educational course. Most people contact credit counselors to set up a "debt management program" where the
company takes money from you, and supposedly helps negotiate your debts to lower amounts or interest rates. The bankruptcy
courses are educational programs to advise you about financial issues, budgeting, etc. but you do not have to pay into a debt
management program before filing for bankruptcy. For more information, please see my answers under FAQs.)
For more information go to
(American Bankruptcy Institute).
(National Association of Consumer Bankruptcy Attorneys)
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