The US bankruptcy law was amended by a comprehensive new law that made some fundamental changes. The "New" law became fully effective on October 17, 2005. Under the new law there is an income test. A debtor with income above the amount specified in the law must be reviewed under a "Means Test". The Means Test may prevent the Debtor from using Chapter 7 liquidation (discussed below) but will be required to use Chapter 13 and make a plan to pay off certain debts.
A provision of the new law concerns the exemption for a home which in some states (Florida, as example) under the old law was unlimited will be capped at $125,000 if the property was acquired within 3.3 years before filing the bankruptcy petition.
Another change is that the filing of a new Chapter 7 case is prohibited if the debtor has filed a Chapter 7 case within the previous 8 years. (Under the old law, a new filing was allowed after 6 years.)
The new law requires random audits of at least one case in every 250 cases filed.
The new law requires that a copy of the Debtor's previous year's income tax return be provided and copies of current tax returns upon request.
A Debtor must have a Credit Briefing by phone or on-line from a non-profit credit counseling agency before filing a bankruptcy petition and must complete a personal financial management instruction course before the debts can be discharged.
The new law gives greater protection to specified retirement and education accounts.
Bankruptcy attorneys will have to verify the Debtor's information and confirm that after inquiry, the attorney has no knowledge that any of the information in the petition is incorrect.
Here is some detail about the "Means Test" for Chapter 7 Debtors under the "New" law.
The Debtor's average monthly income over the previous 6 months will be compared to the Median income in the Debtor's state considering household size (family and others living together.) If the Debtor's income is at or below the Median, the Debtor can file a Chapter 7 case.
If the Debtor's income is above the Median, a "Means Test" is used to determine if the Debtor has enough income to repay some of the unsecured debts. If so, the Debtor files a Chapter 13 case (with a repayment plan) not a Chapter 7 case.
The Means Test starts with the monthly income; subtractions are made for food, clothing, utilies, car, and housing expenses; also subtracted is Secured debt that will be due in five years; and Priority debts; also some charitable contributions can be subtracted as well as the cost of caring for an ill or elderly family member.
The amount left after these deductions is "Disposable Income". If the Debtor has less than $100 monthly excess income, the Debtor can file under Chapter 7. According to various formulas specified in the law, some higher disposable income Debtors will file under Chapter 13 not Chapter 7.
There are many other details in the New law that are not discussed here.
Some studies show that about 85% of bankruptcy filers have incomes below their state's median income and will still be able to file under Chapter 7 under the New law.
Everyone can get a free copy of their credit report at least once a year.
There has been some suggestion that bankruptcy attorney fees will increase because of the incresed demands of the New law. Time will tell if this is true.
US bankruptcy law can be a confusing mix of laws, rules, and interpretations. Here are some basics relating to US bankruptcy law. We'll mention the different chapters, voluntary and involuntary bankruptcy, debtor, creditor, types of debts. We hope to answer some of your questions about the bankruptcy laws.
The US Bankruptcy law (sometimes called the Bankruptcy Code) is divided into chapters and sub-chapters. The various types of bankruptcy procedures are usually referred to by the number of the chapter in which they appear in the Code.
Types of Bankruptcies
Chapter 7: Liquidation Chapter 7 of Title 11 concerns bankruptcies where the debtor's property (except exempt property) is turned over to the trustee to pay off the debts. As a simple example, if Mr. Smith owes $25,000 to his creditors and files for bankruptcy under Chapter 7, Smith gives his property (money, car, stamp collection, etc.) to the court appointed trustee who will use the assets to pay Smith's creditors. If there is not enough to pay all the debts, the trustee gives each debtor a part of the assets. The remaining debts are discharged or wiped out and Smith can start over with a clean slate.
Some of Smith's property may be exempt and does not have to be given to the trustee. The exemptions may be those listed in the US bankruptcy law or they may be those listed under state law. Each state decides which exemptions a bankrupt debtor can use. New York, as an example, allows only the exemptions included in the New York state law to be used.
Some examples of exempt property might be a certain amount of cash, a car up to a certain value, some professional books, tools, and equipment; some alimony and support payments, a bible, some clothes, part or all of a home. These vary from state to state. In some states a fairly valuable home can be kept by the debtor while in another state only a very modest home is safe from creditors. You will want to find out about the exemptions that apply to you.
In some Chapter 7 liquidation cases, there are either no assets or very few assets available to pay the creditors. The creditors just write off the debt. If a creditor believes a fraud has occurred when the credit was applied for (perhaps a false credit application), or that the debtor is hiding assets or transferred assets to hide them from the creditors, or at the time the debtor used a credit card (as an example), there was a plan or intent not to pay the money back, then the creditor can ask that the debt not be discharged. If the creditor objects to the discharge, a mini-court case (adversarial proceeding) may be started to have the court decide if the debt should be discharged.
Business Chapter 7 The same rules apply to a business that is a Chapter 7 debtor. If the business is a corporation, the corporation is the debtor and files the petition not the shareholders (unless they also choose to file.) A careful examination will be made of the business books and records to make sure the business was not improperly drained of assets before filing.
Chapter 11: Reorganization Chapter 11 filers are mostly businesses but an individual can also use Chapter 11. This Chapter allows the debtor the business to continue to operate while it gets time to pay its creditors. The bankruptcy court appoints someone to watch the business operation. The business management must make reports to the court as to how things are going. If the business cannot make it, the case can be converted to a Chapter 7 liquidation case and the business is closed down. If it is successful, the business can emerge from Chapter 11 and resume normal operations. Chapter 11 cases are usually quite complicated and a bankruptcy attorney is almost always used.
Chapter 13: Wage Earner Protection This chapter is officially called " Adjustment of Debts of an Individual with Regular Income." The title explains who can use this Chapter. It is to allow an individual who has consumer (household) debts to make a plan to pay creditors. There are limits to the amount of debt and other rules about who can file a Chapter 13 case. The plan usually gives the debtor more time (up to 5 years) to pay creditors. The plan may provide that the creditors must wait longer for their money and that they will not get all the money paid back. The kinds of debts that can be discharged in a Chapter 7 case are somewhat different from those dischargeable in a Chapter 13 case.
The advantage of Chapter 13 when compared to Chapter 7 Liquidation, is that Chapter 13 allows the debtor to keep his/her property. The debtor pays from wages or other regular income and can keep property such as a house, boat, car or other things. Property related to a secured claim may have to be given up to a secured creditor. If the wage earner/debtor fails to make payments according to the plan and does not change the plan, the case can be converted to a Chapter 7 liquidation case.
Involuntary Bankruptcy The Bankruptcy Code permits creditors to file a bankruptcy petition and force a debtor to answer in the Bankruptcy court. There are rules as to the number of creditors and the amount of debt required to begin an involuntary case. This procedure allows creditors to force a debtor into court who has assets but who refuses pay the creditors. An involuntary case can be brought against an individual or a business.
Other Chapters The Bankruptcy law has other chapters relating to railroads and stockbrokers. These are complicated and are not discussed here.
General Comments The laws are quite detailed. The above is a very short summary of some of the content of a few of the chapters. There are many other matters not mentioned such as that a co-debtor may still be liable for a debt even after the debt is discharged in a bankruptcy. Also, some debts are not dischargeable such as some taxes, spouse and child support payments, criminal fines, some school loans, and others.
We suggest seeking advice from an experienced bankruptcy attorney in your area.
Can we help you? This office advises and files bankruptcies only in certain locations in the State of New York. If an individual resides in, or a business has its principal office or major assets in, one of the following places in New York, we can be consulted and we can accept a case. The places are: all of New York City including New York (Manhattan) , Bronx, Kings (Brooklyn), Queens, and Richmond (Staten Island). Also, Nassau and Suffolk counties on Long Island, and Rockland and Westchester Counties.
An experienced attorney is probably the best guide through the bankruptcy maze. The possibility for problems to arise is great and the price paid for mistakes may be very high.
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© Richard Madison 2005
Law Office of Richard Madison
Last edit 17 Oct 2005