Bankruptcy Law Overhaul

Article excerpt

HOUSTON _ In its first major overhaul of federal bankruptcy law in 16 years, Congress recently made it tougher to use bankruptcy as a weapon against a former spouse.

Bankruptcy reform also changed who is eligible for various kinds of bankruptcy and also how much property a filer can protect.

Debts incurred in the course of a divorce or separation or in connection with a separation agreement or divorce decree can no longer be wiped out.

These includes debts incurred while married that one party agreed to pay as part of a divorce settlement and any money owed the former spouse in property settlements.

Under the old law, certain kinds of non-child or spousal support obligations _ such as settlements for community property _ incurred in a divorce or separation could be discharged by bankruptcy.

"They (members of Congress) were trying to close loopholes that some people use to try to modify their support obligations," said Mark Taylor, a bankruptcy attorney at the Dallas office of Liddell, Sapp, Zivley, Hill LaBoon.

The new law adds child support and alimony to the list of so-called "priority debts" that must be paid first in bankruptcy.

Under the old law, child support and alimony were treated as general unsecured debt and stood at the end of the payment line with all other unsecured claims, such as credit card debt.

The new law also allows a state court to continue with a lawsuit to establish paternity, establish or modify child support or alimony or collect child support or alimony.

"You cannot avoid these debts by bankruptcy," said Richard Dole, a law professor at the University of Houston. "If these debts are the problem, don't file for bankruptcy.

Under the new law, if you used your credit card to pay income taxes, which otherwise couldn't be dismissed, that debt couldn't be wiped out by filing for bankruptcy.

The bankruptcy reforms also carry changes that will benefit consumers.

For example, Congress made it easier for people to make good on late mortgage payments and save their homes from foreclosure.

"The debtor can pay that past due amount right up to the time of foreclosure," Taylor said. "You could walk up to the foreclosure sale and pay your bill."

Under the old law, that wasn't possible once a court entered a foreclosure judgment, Taylor said.

The new law also will make it easier for some big borrowers to file for protection under Chapter 13 of the U.S. Bankruptcy Code.

Consumers who wanted to file for bankruptcy under Chapter 13 but couldn't because of previous debt ceilings can now enter that door because Congress raised the limits by passing the Bankruptcy Reform Act of 1994. …