Before Congress overhauled the bankruptcy laws in 2005, most individual filers had the freedom to choose which type of bankruptcy they think would be best for them. Today, the new bankruptcy law has essentially taken away that choice. Here are the important changes that now dictate how the new bankruptcy law works.
Filing for Chapter 7 is now restricted
Most people chose Chapter 7 bankruptcy (liquidation) over Chapter 13 bankruptcy (repayment) before the advent of the 2005 bankruptcy law. Chapter 7, after all, is known as a “fresh start,” with your assets liquidated and distributed to creditors, and many of your debts wiped out. The new rules, however, have made qualifying for Chapter 7 bankruptcy harder.
To find out if you are qualified to file for Chapter 7, you must first calculate if your current monthly income is lower or equal to your state’s median income for a household of the same size. If it is, then you can file for Chapter 7. If your monthly income is higher than the state median, you can still qualify for that fresh start if you pass a so-called “means test.”
The Means Test
The means test was designed to prevent filers with higher incomes from filing for Chapter 7 bankruptcy. To pass this test and qualify for Chapter 7, you must show that you don’t have enough disposable income to service a Chapter 13 payment plan. You can figure out your disposable income by subtracting actual and standardized expenses from your current monthly income. You will be qualified to file for Chapter 7 if the difference is lower than a certain amount.
Passing the means test, however, doesn’t automatically mean you can go to court straight away and file for bankruptcy.
Credit and money management counseling requirements
Even when it’s already apparent that you’re not capable of embarking on a repayment plan, you will still have to undergo credit counseling before you can actually file your bankruptcy papers. Then again, you won’t have to agree with any repayment plan proposed by the United States Trustee’s office-approved agency that conducted your counseling. You just have to complete the counseling and present the certificate, along with any repayment plan that the agency may come up with, to the court. Only then can you file for bankruptcy.
Money management counseling comes when your bankruptcy case is at an end. You need to complete this requirement before you can get a bankruptcy discharge.
Hiring a bankruptcy lawyer may be tougher and costlier
Unlike corporations and partnerships, individuals filing for bankruptcy are not required to have a lawyer. However, with all the legalities involved in bankruptcy filings, it would be better if you have an attorney representing you in bankruptcy court. Under the new law, however, finding a good bankruptcy lawyer has become somewhat harder than finding a good criminal defense lawyer.
The 2005 bankruptcy law has added several requirements on lawyers that have forced many of them to either raise their fees when representing bankruptcy filers or pull out of the field altogether. One such requirement is that lawyers have to personally guarantee that all of the information provided by their clients is accurate. With this requirement, lawyers will have to spend more time and effort ensuring the accuracy of their clients’ information, which, in turn, would mean they would also have to raise their fees.
These are just some of the important changes to the bankruptcy law that impact filers. If you’re planning to file for bankruptcy and you want to know more, see an experienced attorney.