Magazine article Partners in Community and Economic Development

Bankruptcy Reform Legislation: Designed to Curb Abuses of the Current U.S. Bankruptcy Code, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the Act) Establishes a Needs-Based System of Qualifying for Protection under the Law

Magazine article Partners in Community and Economic Development

Bankruptcy Reform Legislation: Designed to Curb Abuses of the Current U.S. Bankruptcy Code, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the Act) Establishes a Needs-Based System of Qualifying for Protection under the Law

Article excerpt

The Act was signed by President Bush in April 2005, and most of its provisions become effective in October of this year.

Currently individuals file for either Chapter 7 liquidation or Chapter 13 reorganization bankruptcy relief. Chapter 7, the most common bankruptcy filing, allows debtors a fresh start by requiring them to relinquish all of their nonexempt assets, which are liquidated to pay creditors. Any debt in excess of the amount collected from asset liquidation is then forgiven. Chapter 13 filings allow debtors to repay specified debts over a three-year period, and forgive any debts not included in the repayment plan.

Under current standards most individuals opt to file under Chapter 7. According to U.S. Bankruptcy Statistics 1.1 million filed for Chapter 7 relief in 2004, while nearly 450,000 filed for relief under Chapter 13.

Qualifying for bankruptcy protection

The new guidelines include a "means test" to determine if debtors with annual income above the state median income level qualify for protection under Chapter 7. Debtors who can pay unsecured creditors, such as credit card companies, at least $6,000 ($100 per month) over a five-year period, provided that amount is sufficient to pay 25 percent of the outstanding debt, will be redirected to a Chapter 13 repayment plan.

Debtors capable of paying creditors more than $10,000 ($166.66 per month) over a five-year period are assumed to be abusing the system and will automatically be denied Chapter 7 relief.

Debtors whose income is below the state median income level are exempt from the "means test" and will automatically qualify for Chapter 7 protection. These debtors, however; can still be redirected to a Chapter 13 repayment plan if they are able to pay a minimum of 25 percent of their outstanding unsecured debt over a three-year period, as opposed to the five-year period specified for other fliers.

The Act continues to provide protection for individuals who face extenuating circumstances such as a serious medical condition or other hardships. These cases, however, must be supported by documentation detailing expenses or deductions from income.

Income and expense calculation

The new law includes an interesting twist: calculations of income, expenses, and disposable income used to determine a debtor's ability to repay and the rate of repayment for bankruptcy filings will no longer be based on actual income and expenses, but rather on specified calculations and Internal Revenue Service (IRS) guidelines for reasonable living expenses. When calculating a debtor's income to determine his or her ability to repay, the court will use the average income for the six months preceding the filing of the case instead of following the former guidelines, which were based on current monthly income. The new method of calculation could pose problems for recently unemployed debtors or those whose expenses are higher than the IRS norm.

Dischargeable debts

The Act will significantly reduce the dollar amount of pre-filing accumulated "goods or services not reasonably necessary for the support or maintenance of the debtor or the debtor's dependents" that can be discharged. In addition it will increase the time period over which these luxury debts can be accummulated, thus allowing creditors to recover larger amounts of outstanding debt.

Credit card debt in excess of $500 accumulated within 90 days of filing will not be discharged. Currently the law states that amounts in excess of $1,225 accumulated 60 days prior to the filing cannot be discharged. The dischargeable limit for cash advances accumulated within 70 days (currently 60 days) of filing will be reduced from $1,225 to $750. Furthermore the cash advance limitations apply to any items purchased, not just luxury goods.

Counseling

The new law requires that debtors receive credit counseling prior to filing for bankruptcy, and it mandates financial management training prior to discharges for bankruptcy. …

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