The
American Bankruptcy Institute states that between 30,000
and 210,000 people will be affected by legislation passed
by Congress on April 14, 2005. The legislation creates
the biggest overhaul of our Bankruptcy Code since 1978.
President Bush signed the bill within a matter of days
(on April 20), and the changes to the bankruptcy laws
will take effect 180 days after April 20, 2005.
Credit
card companies and the retail and auto financing industries
have been pushing bankruptcy reform for the past ten
years, and now they have it. In the eyes of these industries,
the changes are necessary to “weed out abusers
of the system who use Chapter 7 bankruptcy protection
to shirk debt they can afford to pay.” washingtonpost.com,
April 15, 2005. The premise of the changes to the Bankruptcy
Code is to make it more difficult to file for Chapter
7 bankruptcy (a proceeding in which a debtor’s
assets are liquidated and given to creditors, with many
of the debtor’s remaining debts being canceled–thereby
giving the debtor a “fresh start”). Thus,
more people will be forced to file for Chapter 13 bankruptcy
protection. (This is known as reorganization. It is a
debt repayment plan that can be spaced out for up to
five years.)
It
is expected that the people who will be hardest hit by
the bankruptcy changes are low-income working people,
single mothers, minorities, and the elderly. The changes
will also “remove a safety net for those who have
lost their jobs or face crushing medical bills.” CBSNEWS.com,
April 14, 2005.
Undoubtedly,
the changes will cause a dramatic rise in bankruptcy
filings over the next six months or so. Here’s
how bankruptcy filings will be affected:
Before
a person could file bankruptcy, the potential debtor
would need to meet with a credit counselor during the
six-month period prior to applying for bankruptcy. It
will be the potential debtor’s responsibility to
pay for the counseling. In addition, before any debts
are discharged in bankruptcy, the debtor will be required
to attend money management classes.
Currently,
judges have a great deal of latitude in determining if
a debtor may file for bankruptcy. The debtor’s
personal circumstances are currently taken into consideration.
With the new bill, there will be a “qualifying
test,” and few if any exceptions will be able to
be made. Under the new bill, a person’s income
will be subject to a two-part “means” test.
The test includes a formula that will exempt certain
expenses such as rent, food, etc., in order to determine
whether a person can afford to pay 25 percent of his
or her nonpriority unsecured debts (e.g., credit card
debts). The person’s income is then compared to
his or her state’s median income. A person will
be unable to file for Chapter 7 if his or her income
is above the state’s median, but the person can
pay 25 percent of his or her unsecured debt. However,
if income is below the state’s median and the person
can pay 25 percent of unsecured debts, the court can
require a person to file for Chapter 13, rather than
Chapter 7, if it believes the debtor is trying to abuse
the system by filing for Chapter 7. http://money.cnn.com/2005/04/13/pf/bankruptcy_bill/indedx.htm?cnn=yes.
A
potential debtor’s homestead exemption is also
affected by the new bill. Currently, the state where
a debtor files may allow the debtor to protect some or
all of his or her home equity from debtors. In some states,
a home may be entirely exempt even if it was purchased
shortly before filing for bankruptcy. Other states set
a limit on the amount of the exemption. Now, however,
if a debtor has not lived in a state for at least two
years before filing for bankruptcy, he or she may only
take the state exemption of the state where he or she
lived for the majority of the time for the 180 days before
the two-year period. Also, if the debtor’s home
was acquired less than 40 months prior to filing or the
debtor has violated security laws or been found guilty
of certain criminal conduct, the maximum exemption would
be $125,000.
The
new bill gives an additional benefit to creditors. At
present, if a creditor won’t receive money owed
in a bankruptcy proceeding, it can contest the ruling
if it’s a Chapter 7 proceeding, but not if the
debtor filed under Chapter 13. The new bill provides
a creditor the right to contest in a Chapter 13 filing.
Not
leaving anyone out of the changes, the new bill also
has a tremendous effect on attorneys. As reported in
the March 14, 2005, edition of The National Law Journal,
the bill would impose “new requirements and new
liability on debtor’s attorneys, many of whom will
decide that handling consumer bankruptcies is no longer
worth the risk.” Why: The new bill states that
if information about a debtor’s filing is determined
to be inaccurate, the attorney may be subject to fees
and fines. Attorneys also feel, according to The National
Law Journal article, that the new laws “would interfere
with the attorney-client relationship, will increase
malpractice premiums and overhead costs, and ultimately
will leave many low-income clients without bankruptcy
representation.”
As
an aside to the bankruptcy law changes, it was also reported
the weekend of April 16, 2005, that credit card companies
will now be increasing their required minimum payments.
Currently, most companies require a minimum monthly payment
of 2 percent of a person’s credit card balance.
On a $10,000 debt, that’s $200. However, with this
change, it will now be 4 percent for a minimum payment,
thereby doubling the minimum payment to $400 a month.
Since most people have five to ten credit cards, this
doubling of monthly payments may well force some people
into some form of bankruptcy—a bankruptcy that
will need to pass the new, stringent ways-and-means test.
