NEWS    RECALLS    COMPLAINT FORM    SCAM ALERTS   RESOURCES  
Small Claims Guide   Class Actions   Lemon Laws   FAQ   Newsletters  
Share


Complain about a product or service

Automotive    Education    Employment    Electronics    Family    Finance    Health    Homeowners    Insurance    Pets    Shopping    Travel     Print This     Email This    



NEWS   Latest |  Archives |  Auto |  Cells, etc. |  Computers |  Financial |  Health |  Homeowners |  Parents |  Privacy |  Scams |  Seniors |  Travel

New Bankruptcy Law Tightens Rules, Adds Paperwork

It's Now Much Tougher to Get a Fresh Start





By Joan E. Lisante
ConsumerAffairs.com

October 14, 2005
If you're a consumer in financial trouble, your theme song might be "I Got Plenty of Nothin'" from Gershwin's Porgy & Bess. But if you think you've got plenty of nothing now, the new "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" could shrink even that.


Consumer Bankruptcy Filings At Highest Level In Nearly Four Years
Bankruptcy "Reform" Fails to Deliver
Bankruptcy Filings Top 100,000 in October
Personal Bankruptcies On the Rise
New Bankruptcy Law Hurts Consumers and Lenders, Report Finds
Obama Calls for Bankruptcy Law Reform
Bankruptcy Recovery Time Longer than Many Expect
Bankruptcy Rates Rise Among Older Americans
Consumer Bankruptcies Up 47% from Last Year
Bankruptcy Filings Soared in February
Senate To Debate Bankruptcy Law Changes
Dodd Announces Bankruptcy Reform Legislation
Bankruptcy's Early Warning Signs
Credit Counseling Not Helpful in Bankruptcy Cases, Study Finds
New Bankruptcy Law, One Year Later
Bankruptcy Filings Set Record in 2005
Consumer Borrowing Plunges In October
Lawsuit Challenges New Bankruptcy Law
New Bankruptcy Law Tightens Rules, Adds Paperwork
Bankruptcy Filings Surge Ahead Of New Law
IRS Plans to Yank Tax-Exempt Status of 20 Credit Counselors
Credit Cards Ensnare, Victimize Working Families, Report Finds
Congress May Modify Bankruptcy "Reform" that Penalizes Katrina Victims
---
Related Stories

Red & Blue United
A Test of Means or A Mean Test?
Cui Bono? (Who Profits?)
Long View, Long Road
"Laws Can Be Written Again"
What You Can Do
Senate Passes MBNA's Bankruptcy Bill
Congress Ready to Tighten Bankruptcy Law
Medical Bills Leading Cause of Bankruptcy, Harvard Study Finds

Effective October 17th, the Act is a coup for banks, credit card issuers and stores -- otherwise known as "unsecured" creditors (those owed money that isn't backed by an asset, such as a car or home.) It overhauls laws last modified in 1978, tightening requirements for filers and for bankruptcy lawyers who handle their cases.

A major goal: to shift filers from Chapter 7 ("straight") bankruptcy, in which consumer debt is typically liquidated, to Chapter 13 ("reorganization") bankruptcy, which requires that you repay secured and much unsecured debt within five years. No "clean start" in this case.

Here are some of the major changes under the new law:

The "Means Test" This is a new wrinkle that challenges the assumption that a debtor is filing in good faith. Now the burden is on you to show that your use of bankruptcy relief isn't "abusive." The means test calculates your monthly income minus certain allowable expenses. Each state uses its "median income" as a guide. If the balance left is more than about $100 a month, the filing is considered abusive, unless you can show "special circumstances." If you flunk the "means test," it's Chapter 13 for you.

Stringent expense allowances Guidelines for allowable expenses are set by the IRS and are stingy. For example, the food allowance is around $200 per month and housing allowance about $800. Too bad if your actual costs are much higher.

Residency requirements There are both federal and state bankruptcy laws and some state laws are more favorable than others. For example, both Florida and Texas have generous "homestead allowances," which permit debtors to shield assets under the umbrella of homeownership. But the new law aims to discourage "shopping around" for the best deal, so you can't file in a more favorable state unless you've lived there for at least two years.

Mandatory credit counseling You must take an approved credit counseling course within 180 days (six months) of filing a petition. This isn't free -- average cost is estimated at $75.00.

More paperwork In the new "get tough" environment, consumers will have to provide a lot more documentation to show that bankruptcy is warranted. The American Bankruptcy Institute lists some of the proof debtors must provide: a list of secured and unsecured creditors; documentation of credit counseling; monthly income and expenses; assets and liabilities; most recent tax return and any earlier returns that were not filed; pay stubs and photo ID.

Heftier legal fees The burden on bankruptcy lawyers is at least doubled under the new statute. Besides merely gathering the facts from a client, an attorney must now "certify" that a client's numbers are accurate. If they aren't, both lawyer and client could face sanctions. So, in effect, your lawyer must do more fact-checking and investigation to assure that both your information and his/her own certification are above-board. This takes time, which translates into money. Many lawyers are getting out of bankruptcy practice, not wanting to put their careers on the line for filing cases that don't pay very well anyway.

Filing fee changes Charges vary from state to state, but in general, you'll pay more for filing under Chapter 7 and slightly less under Chapter 13.

Valuation increases The law provides that "collateral," which includes your furniture, clothes, autos and electronics, be assessed at a higher value than under the previous law. The new benchmark: replacement value. Chances are, by the time you add up the total value of your possessions using this formula, it will be pretty high.

You'll wait longer to file again If your situation requires another bankruptcy filing, you'll wait longer to do so. The new law provides that, under Chapter 7, eight years must elapse before you can re-file. If you go for Chapter 13 after a Chapter 7, you must wait four years. Going from one Chapter 13 to another, two years must elapse.

No loading up on last minute luxuries The new law requires that any luxury items purchased within 60 days of filing for bankruptcy be repaid in full. Likewise for cash advances and services worth more than $500.

Beware those student loans Under the old law, you couldn't get rid of student loans backed by the government or a non-profit. This protection has been extended to private lenders as well.

Scant Comfort

Despite all this bad news, there are a few pluses. Your house, retirement plans and college savings are exempt, and you can continue to fund the last two (a laughable notion for someone filing in the first place.)

If an unsecured creditor (say, MasterCard) refuses to accept your repayment offer, the court can reduce your principal debt by up to 20%. This is to encourage creditors to cooperate with credit counseling agencies, which often mediate settlements between debtor and creditor.

For those owed child support, this obligation jumps ahead of any other unsecured claim except administrative or legal fees. Also, there are special provisions for a few groups: military personnel on active duty, low-income veterans and people with severe medical disabilities.

So if you're hoping to change your theme song to "For the Love of Money," take note of these changes and get expert advice before you discover that financial "freedom" costs more than you bargained for.

For more information:

American Bankruptcy Institute

U.S. Department of Justice Trustee Program

www.BankruptcyAction.com, which provides comprehensive information on the new Act as well as a state-by-state list of bankruptcy attorneys.

---

Joan E. Lisante is an attorney in Fairfax County, Va.



Report Your Experience
If you've had a bad experience -- or a good one -- with a consumer product or service, we'd like to hear about it. All complaints are reviewed by class action attorneys and are considered for publication on our site. Knowledge is power! Help spread the word. File your consumer report now.

Share

Follow us on Twitter.

FREE CONSUMER NEWSLETTERS

The Daily Consumer
Afternoons M-F

Sign up now!


Consumer News & Alerts
Every Sunday

Sign up now!





CONSUMER NEWS

SAFETY RECALLS

Back to the top |

Advertisement


Custom Search
AUTOMOTIVE
• Dealers
• Manufacturers
• Service
• Extended Warranties
• Lemon Laws
• Recalls
• Tires
• Transporters

FAMILY
• Aging
• Children, Parenting
• Recalls
• Dating
• Education
• Entertainment
• Pets
• Weddings
FINANCE
• Annuities
• Banks
• Credit Cards
• Debt Collection
• Debt Counseling
• Insurance
• Investing
• Loans
• Mortgages
• Payday Loans
• Student Loans
• Tax Prep

HEALTH
• Doctors
• Drugs, Pharmacies
• Health Clubs
• Hearing Care
• Hospitals
• Nursing Homes
• Nutrition, Diets
• Vision Care
• Weight Loss
HOUSE & HOME
• Appliances
• Cookware
• Furniture
• Home Improvements
• Lawn & Garden
• Movers
• Pools & Spas
• Realtors, Rental Agents
• Recalls
• Utilities

ELECTRONICS
• Cable TV/DBS
• Cameras
• Cell Phones
• Computers
• Home Electronics
• Internet Access
• Local Phone Service
• Long Distance
• VoIP
SHOPPING
• In-Home
• Online
• Retail Stores
• Sporting Goods
• Supermarkets
• Telemarketers

TRAVEL
• Airlines
• Bus Lines
• Car Rental
• Cruises
• Hotels
• Travel Agents
• Trains

RESOURCES
• Class Actions
• Complaint Form
• Small Claims Guide
• Lemon Laws
CONSUMER NEWS
• Latest News
• Automotive
• Telecom
• Financial
• Health
• Homeowners
• Scams
• Seniors
• Travel
• More ...

RECALLS
• Automotive
• Children's Products
• Drugs
• Food
• Household Products
• Sporting Goods

ABOUT US
• FAQ
• Privacy Policy
• Advertise With Us
• Newsroom
• Syndication
• Terms of Use

Terms of Use Your use of this site constitutes acceptance of the Terms of Use

Advertisements on this site are placed and controlled by outside advertising networks. ConsumerAffairs.com does not evaluate or endorse the products and services advertised. See the FAQ for more information.

Company Response Welcome If complaints about your company appear on our site, we welcome your response. Please see the Response Form for more information.

For more information, see the FAQ and privacy policy. The information on this Web site is general in nature and is not intended as a substitute for competent legal advice.  ConsumerAffairs.com Inc. makes no representation as to the accuracy of the information herein provided and assumes no liability for any damages or loss arising from the use thereof. 

Copyright © 2003-2009 ConsumerAffairs.com Inc.  All Rights Reserved.    The contents of this site may not be republished, reprinted, rewritten or recirculated without written permission.