2005 Bankruptcy Reform Act

Bankruptcy Reform Act
Major Consumers Changes

The new bankruptcy laws will become effective October 17, 2005, marking drastic changes from the current laws and making it more difficult for consumers to obtain a fresh start.

GENERAL ADVICE – If you are in financial trouble, OR you believe that you may be in financial trouble in the future, you should consider your options NOW. DO NOT wait until October, if nothing else the COST of filing bankruptcy is likely to DOUBLE after October. Download our book “In Debt” and read it carefully.

1. Credit Counseling –

NOW: Under the current law you do not have to contact a credit counselor before you file bankruptcy.

OCTOBER: Under the Bankruptcy Reform Act, BEFORE you can file you MUST receive an individual or group “briefing” (in person, by telephone, or on the internet) from a credit counseling agency APPROVED by the Bankruptcy Court. Exceptions are made for an emergency filing when a briefing is not available within 5 days. The briefing outlines the opportunities for credit counseling AND assists you in performing a budget analysis.
Credit Counseling Agencies can solve financial problems and help individuals avoid bankruptcy. However in a great number of situations they do not offer enough help. In general, Credit Counseling Agencies that belong to the NFCC are both ethical and dedicated, that fact does not alleviate the financial pressures they work under. NFCC members receive about 70% of their funding from Creditor fair share contributions, essentially a 7% to 15% commission on the payments made through voluntary repayment plans. You need to consider that the close ties to the creditors who fund NFCC create a subtle incentive to keep clients from filing bankruptcy, even when it is in your best interest to get a “fresh start”.
After you file you MUST complete a Financial Management Course intended to help Debtors identify and correct the financial mistakes that led to bankruptcy.

2. Help Filing –

NOW: You may file a bankruptcy yourself, have a petition preparer do it, or hire an attorney. If you file your own 1040EZ tax return, you may be able to do your own petition. However, since you pay an attorney a one time fee of $500 - $1500 to get rid of thousands, or even tens of thousands, of dollars in debt – we strongly recommend you spend the money, and hire an experienced, QUALIFIED, bankruptcy attorney - to make sure everything is done right! We think it is better to hire an attorney than to save money using a bankruptcy preparer – who may know just enough about bankruptcy to get you in trouble.

OCTOBER - Bankruptcy Petition Preparers (non-attorneys) and Debt Relief Agencies (attorneys) will be closely regulated and must give you a detailed contract stating what they will do and how much they will charge. The new laws will be so complex (especially the Means Test) that you should hire an experienced, QUALIFIED, bankruptcy attorney. Regrettably, the work involved is going to double, so attorney fees will almost certainly double in October.

3. Prohibited Advice –

OCTOBER - The Act prohibits an attorney from advising you to incur more debt in contemplation of filing bankruptcy. This means that after October your attorney cannot, for example, tell you to sell a high mileage gas guzzling SUV, pay off the loan, and use the proceeds for a down payment on a reasonable family car which you could continue to pay for after filing bankruptcy. You will have to read books on bankruptcy to get that important advice.

4. Multiple Filings –

NOW – If you file a Chapter 7 case you must wait 6 years before you can file another Chapter 7 case. Subject to a requirement of “good faith”, you may file any number of Chapter 13 cases, as soon as one day after completing a Chapter 7 or Chapter 13 case.

OCTOBER - The length of time after a Ch 7 case that you must wait before filing another Ch 7 case has been increased to 8 years.
You may not receive a discharge in a Ch 13 case for 4 years if you received a discharge in a case filed under chapters 7, 11, or 12 during the past 4-years, or for 2 years if you received a discharge in a case filed under chapter 13 during the past 2-years. This does not mean that you cannot file a Chapter 13 case, but it does affect what you can accomplish in a second case.

5. Domicile & Homestead -

NOW & OCTOBER – Starting NOW you are limited in the assets you can protect from creditors by -investing them in a house within about 3 years of filing ($125,000); by spending non-exempt assets on improvements to your residence within 10 years of filing with the intent to keep creditors from taking them; or, starting in OCTOBER, by moving to a state with better exemptions within 730 days of filing. With one exception, there is an absolute cap of $125,000 on the homestead exemption for bankruptcy abuse and certain criminal acts, intentional torts, and willful or reckless misconduct.

6. Notice to Creditors –

NOW – Reasonable Written or Verbal notice of a bankruptcy case is sufficient notice to stop a creditor from trying to collect from you.

OCTOBER – You must keep the bills you receive from creditors and collection agencies because notice may not be effective (the debt may not be covered by the bankruptcy) if you do not use the address and account number provided by the creditor on the latest bills.

7. Automatic Stay

NOW – The Automatic Stay goes into effect when you file a bankruptcy petition and prevents a creditor from repossessing your car, evicting you from an apartment, selling your house at auction, and continuing to try to collect from you – until the creditor asks the Court to lift the Stay and you have an opportunity to say why it should remain in effect.

OCTOBER – If you file a second or third case within 1 to 2 years after a prior case was dismissed – the stay may AUTOMATICALLY END or MAY NOT go into effect at all. If you have filed a previous case within 2 years it is possible that the current case will NOT STOP a foreclosure or other collection activity.
Even if you have not filed before, if a landlord obtains an eviction order that allows them to take possession of your apartment, filing a bankruptcy petition MAY NOT STOP the landlord from having you evicted you IMMEDIATELY.
Filing bankruptcy DOES NOT STOP, or even slow down, any collection activity regarding child support or alimony; dissolution of a marriage (except the property settlement part); domestic violence proceeding; suspension of license; jail term for contempt; etc.

8. Means Testing in Ch 7 Cases –

NOW – There are NO income or expense tests that determine if you will be allowed to file a Chapter 7 bankruptcy.

OCTOBER – A “means test” will determine if you can file a Chapter 7 case. If you have more income than the test allows, or if the Court finds that you are abusing the system based on the totality of the circumstances of your financial situation or because you filed a petition in “bad faith”, then your case will be DISMISSED, unless you agree to pay back a portion of your debts under a Chapter 13 reorganization plan.
There are two objective tests applied to income and expense to determine if your case will be dismissed or converted based on a presumption of abuse.
Median Income Test - The First test is to see if your Current Monthly Income is MORE than the State Median Income. “Median” income means that there are an equal number of people in your state with incomes that are higher and an equal number that are lower than the median income. Basically this test looks to see if your family is better off than half of all the other families around you (keep in mind your case may be ordered to be dismissed or converted even if your income is LESS than the state median income and there is NO presumption of abuse).
Means Test – The Second test checks to see if your Current Monthly Income reduced by allowed expenses exceeds an amount allowed for a family of the same size. The Means Test is essentially an excess income test that determines if what is left over out of your monthly income after deducting reasonable expenses leaves enough money to be able to give a meaningful dividend to your unsecured creditors.
If your Current Monthly Income is LESS than the State Median Income, NO dismissal can be filed based on a presumption of abuse.
If your Current Monthly Income is MORE than the State Median Income, but your excess income is LESS than the amount allowed under the Means Test, there is NO presumption of abuse.
If your Current Monthly Income is MORE than the State Median Income, AND your excess income is MORE than the amount allowed under the Means Test, A PRESUMPTION OF ABUSE EXISTS.
The actual test is so complex that we strongly suggest that if your family income is more than the Median Income for your state, you go to a bankruptcy attorney to find out if you can or cannot file a Chapter 7 case. (The State Median Income figures for a family of 4 are available now 4 person, the U.S.Trustee will have the other State Median Income figures by October)

9. Household Goods –

OCTOBER – Liens on household goods securing loans that were NOT used to purchase the items CAN be avoided (you can keep the household goods without paying the creditor the value of each item) on clothing; furniture; appliances; 1 radio; 1 television; 1 VCR; linens; china; crockery; kitchenware; educational materials and equipment for minor dependents; medical equipment and supplies; furniture for children and elderly or disabled dependents; personal effects (including toys and hobby equipment of dependent children and wedding rings) of the debtor and the dependents of the debtor; and 1 personal computer and related equipment, AND CANNOT be avoided on most works of art; most electronic entertainment equipment; antiques with aggregate fair market value of more than $500; jewelry with an aggregate fair market value of more than $500 (except wedding rings); and a computer, motor vehicle, boat, or a motorized recreational device, conveyance, vehicle, watercraft, or aircraft.'

10. Reaffirm, Redeem, or Ride-Through –

NOW - In a Chapter 7 case you may redeem an item that is security for a debt by paying the value to the creditor, or with the creditors consent, you may reaffirm a debt and continue making payments. If you reaffirm a debt you may NOT stop making payments until the debt is paid in full. So if you reaffirm a debt on a car, and the engine blows up the next day, you still have to pay for the car. You may also, so long as a creditor does not object, do nothing and just keep making payments. By not redeeming or reaffirming you can stop making payments at any time, for example, if the car motor blows up, and NOT owe any more on the loan.

OCTOBER – You MUST reaffirm or redeem a loan that is secured by property within 45 days of the meeting of creditors, or the creditor may repossess the property under state law (it is still possible that they won’t bother to repossess low value items). You must also work out an agreement to assume a lease within 30 days.

11. Disposable Income in Ch 13

NOW – When you propose to repay your creditors in a Chapter 13 case you determine your disposable income by deducting expenses like cable tv, cell phones, etc., from your monthly income. What is left is what you must pay into the plan.

OCTOBER – The disposable income that you must pay into the plan is determined using the same complex formula used in the Means Test. Some people will come out better, some will come out worse. Expenses like cable tv and cell phones will be very limited. In general, if you have income at or above the Median State Income for your size family, you will probably pay more to the Chapter 13 Trustee after October than you would have paid under the old law. If your income meets or exceeds the mean’s test, then any Chapter 13 Plan must be for 5 years, instead of 3 years, unless the plan pays all claims in full over a shorter term.

12. Adequate Protection –

OCTOBER – While it is difficult to predict, it would seem that if your Creditors actively seek “adequate protection”, you will be required to make higher payments to the Chapter 13 Trustee to keep the balance owed to each creditor less than the depreciating value of any security. While this may have been a general requirement in the past, under the Act it is given new emphasis that the Court and Trustees will need to address.


13. Lien Retention and Effect of Conversion –

NOW – When you file a Chapter 13 plan you propose to pay the actual value of secured property – for example: If you owe $10,000 on a car that has a current NADA value of $5,000, you are required to pay $5,000 to the creditor – NOT $10,000. The $5,000 that remains is paid along with other unsecured claims. This has been considered to be fair because if the creditor repossessed the car and sold it they would get $5,000, the same amount that they are entitled to receive from the Trustee. When you have paid the entire $5,000 plus interest to the Trustee and they have paid it to the creditor, you can convert the Chapter 13 case to a Chapter 7 case and keep the car.

OCTOBER – You can still propose to pay the creditor the value of the property securing a loan, and NOT the balance due on the loan (there is a new exception we will discuss below). The problem is that, for example, if you pay the entire $5,000 secured portion of the claim, AND then convert from Ch 13 to Ch 7, you DO NOT GET TO KEEP THE CAR UNLESS YOU PAY WHAT YOU WOULD HAVE PAID IF YOU HAD NOT FILED. The amount owed on the secured claim jumps up to what it would have been UNDER NONBANKRUPTCY LAW and the car continues to be security for the debt! So you would have to pay another $5,000 plus interest to keep the car, or surrender it to the creditor (which most people will do).
This penalty applies only when a case is converted to Ch 7, IF YOU COMPLETE THE CH 13 CASE you get to keep the car without paying for it twice. Nonetheless, not being able to convert to Chapter 7 will create a hardship on people with chronic illnesses who need to convert to discharge medical bills incurred during the 5 years a Chapter 13 plan is in effect.
There is a new provision – You MUST pay the secured and unsecured portions of a claim IN FULL if you purchase or lease a car for personal use within the 910-days before filing, OR buy anything on credit within 1 year of filing. This provision could have a major effect on Chapter 13 cases filed by low to middle income families.

14. Luxury Goods & Cash Advances -

NOW – Consumer debts incurred within 60 days before filing, totaling more than $1000, and owed to a single creditor for “luxury goods or services” [not including goods or services reasonably necessary for the support or maintenance of a debtor or dependent], along with cash advances from a single creditor totaling more than $1000 obtained within 60 days, are presumed [rebutable] to be nondischargeable.

OCTOBER - Consumer debts incurred within 90 days before filing, totaling more than $500, and owed to a single creditor for “luxury goods or services”, along with cash advances from a single creditor totaling more than $750 obtained within 70 days, are presumed [rebutable] to be nondischargeable.

15. No More Ch 13 “Superdischarge” –

NOW - A Chapter 13 discharge covers many debts that are not dischargeable in a Chapter 7 case.

OCTOBER - A Chapter 13 discharge DOES NOT discharge claims resulting from:
1. unfilled, late-filed within two years of the petition date, and fraudulent tax returns (willful tax evasion);
2. liability for “trust fund” taxes, income taxes for 3 pre-petition tax years; and certain other taxes and duties.
3. credit extended under false pretenses or representations or actual fraud other than a financial statement;
4. credit extended under a written financial statement that the Debtor made with intent to deceive that was materially false and reasonably relied on by the creditor;
5. debts that were neither properly listed nor scheduled in the petition to permit timely filing of a proof of claim (and in the case of claims regarding luxury goods, fraud by a fiduciary, and willful injury, sufficient time to challenge dischargeability), unless the creditor had notice or actual knowledge of the case so as to permit a timely filed proof of claim;
6. fraud by a fiduciary, embezzlement, or larceny;
7. a domestic support obligation;
8. educational loans (as expanded by the Act - absent undue hardship);
9. death or personal injury caused by unlawfully operating a motor vehicle, vessel, or aircraft under the influence of intoxicants;
10. criminal restitution or a fine included in a sentence on the debtor's conviction of a crime; and
11. civil restitution or damages as a result of willful or [Ch 7 “and”] malicious acts resulting in personal injury or death of an individual;
Under the Act a Ch 13 Plan DOES discharge three types of debt that cannot be discharged in a Ch 7 case, claims resulting from:
1. property settlements [not support obligations];
2. willful and malicious injury to property; and
3. debts incurred to pay non-dischargeable tax obligations.

16. Tax Returns -

NOW – The Trustee reviews your income tax returns for the current year, and perhaps the last year, but does not file them with the Court.

OCTOBER – You must file all returns with taxing authorities that you have not filed in the last 3 to 4 years, and file copies with the Court shortly after filing your case, so that your creditors may review and copy them. If you do not file tax returns that are due, and file all tax returns that come due while your case is pending, with the tax authorities, AND file copies with the Bankruptcy Court, your case will be DISMISSED.

17. Student Loans –

OCTOBER - Unless you prove that repayment of a student loan would create an undue hardship on you and your dependents, which is very difficult to prove absent a severe disability, all student loans are now non-dischargeable, even where the lender is a non-governmental, commercial, entity.

18. Priority for Support Payments –

OCTOBER - Claims for domestic support obligations are granted a First Priority under the Reform Act – to be paid after secured debts but before taxes or any other consumer debts.

19. Pension and Profit Sharing Plans - 401K Loans –

OCTOBER - Deductions for retirement, pension, and profit sharing plans, and for repayment of amounts borrowed from those plans, receive special, favorable, treatment under the Act.

GENERAL ADVICE – If you are in financial trouble, OR you believe that you may be in financial trouble in the future, you should consider your options NOW, DO NOT wait until October. Download our book “In Debt” and read it carefully.

Provided courtesy of www.njlawconnect.com/newjerseybankruptcy.htm