New Bankruptcy Laws
Congress passed a new set of bankruptcy laws ("bankruptcy abuse prevention and consumer protection act") more commonly referred to as BAPCPA which resulted from many years of intense lobbying by banks, financial institutions and credit card companies. These new laws were passed and signed into law by President Bush effective with cases filed on or after October 17, 2005.
Contrary to popular belief and erroneous news coverage, the new bankruptcy laws did not eliminate bankruptcy or change many of the protections for debtors. With the assistance of an experienced bankruptcy attorney, an individual or corporation can still avail themselves of the same protections as under the old bankruptcy laws. In some cases the new laws are even more advantageous. There are just a few more hoops to jump through and more documentation required.
What were the main changes to the new Bankruptcy laws?
The list below explains the main changes, but does not include all of the changes.
1. Means Test for Chapter 7 Eligibility
If the debtor’s income is greater than the state median income or if the debtor’s current monthly income (determined by an average of the previous six months income) less secured payments, less priority debts, less the allowed expenses permitted by the IRS, less certain other allowed expenses, is greater than $100 per month then there is a presumption of abuse and Chapter 7 is generally not an option. Debtors who exceed these limits would generally be required to file a repayment plan under Chapter 13. In determining whether the median threshold has been reached, the law looks at the number of people in the debtor’s household (which the census bureau defines to be all the people occupying a dwelling unit).
2. Mandatory Credit Counseling
No individual may be a debtor under the Bankruptcy Code unless they have, within 180 days prior to filing, received credit counseling from an “approved nonprofit budget and credit counseling agency,” either in an individual or group briefing. These counseling agencies are to be approved by the U.S. Trustee. (There are exceptions for: emergencies, those times when the person was not able to receive counseling within five days, and for times when the U.S. Trustee has determined that the approved agencies are not adequate to provide the required counseling.).
3. Limit on Auto Lien Stripping in Chapter 13
A Chapter 13 plan must provide that a secured creditor retain its lien until the payment of the entire debt, not just the secured portion, where the creditor holds a security interest in a motor vehicle (car title) purchased within 910 days (2 ½ years) of the filing. The interest rate can still be reduced even if the value can be reduced or crammed down.
4. Mandatory Debtor Education
The court may not grant a discharge unless the debtor has completed an education course in personal financial management as approved by the U.S. Trustee. This course must be completed within 45 days after the first scheduled Section 341 meeting of creditors in a Chapter 7 case and by the time the last plan payment is due in a Chapter 13 case.
5. Scope of Discharge
Debts owed to a single creditor totaling more than $500 for luxury goods incurred within 90 days of filing are presumed non-dischargeable; cash advances of $750 within 70 days are treated the same way. These are increased amounts and longer periods than provided under the prior law but are generally not an issue with most consumer filings.
6. Serial Filings (Chapter 20)
A discharge will not be granted in Chapter 13 if the debtor obtained a discharge in Chapter 7, 11 or 12 within the four years prior to the date of filing the pending case, or in a Chapter 13 case filed within two years of a new case. This provision, though, does not prevent the debtor from filing a Chapter 13 case and receiving the benefits of the bankruptcy, including the stay of legal proceedings, ability to cure arrearages on secured claims over a period of time. There just will not be a discharge at the end of the payments.
7. Time between Discharge
A Chapter 7 Debtor cannot receive a discharge if a prior Chapter 7 discharge was received within eight years (rather than six under the old law) of the new filing. Time between filings to obtain a discharge is: Ch. 13 to Ch. 13 is 2 years, Chapter 7 to Chapter 13 is 4 years, Chapter 13 to Chapter 7 is 6 years and Chapter 7 to Chapter 7 is 8 years.
8. Homestead Exemption
Debtors may elect state exemptions in the state in which they have lived for the 730 days prior to the bankruptcy. If they have moved during that 730 day period, the state exemptions are those for the state in which they lived the majority of the time for the 180 days before the 730 day period. Regardless of the level of state exemptions, the debtor may only exempt up to $125,000 of interest in a homestead that was acquired within the 1,215 day period prior to the filing. However, the calculation of that amount does not include any equity that has been rolled over during that period from one house to another within the same state. For those who have violated securities laws or engaged in certain criminal conduct, the cap is $125,000, notwithstanding a higher state law allowance. This provision does not have much effect in Georgia as the homestead limits are $10,000 for an individual and $20,000 for a joint case. So there was no change.
Reaffirmation agreements now contain extensive disclosures, detailing the rights that the debtor has and specifying the amount of debt reaffirmed, rates of interest, when payments will begin, filing requirements with the court, the right to rescind, and a certification that the agreement does not impose an undue hardship on the debtor. These agreements are presumed to create a hardship if the debtor’s expenses, including the reaffirmed debt, exceed income. If there is such a presumption, the debtor must explain to the court why it can, nevertheless, still afford to satisfy the debt (but no such requirement applies if the reaffirmed debt is owed to a credit union.).
10. Limit on Automatic Stay
The new law limits the application of the automatic stay, or provides that it does not go into effect in certain circumstances, where there are serial filings under circumstances that would indicate bad faith or abusive filings. The stay terminates after 30 days if there is a filing by an individual in Chapter 7, 11 or 13 (but not Chapter 12) within one year after the prior case (under any Chapter) was dismissed. There are certain exceptions to this general rule. A party in interest (including the debtor) may move to extend the stay and show that the filing is in good faith. If two or more cases under any Chapter were dismissed during the prior year, the automatic stay does not go into effect at all until the court so orders, after a hearing and a demonstration that the filing was made in good faith.
11. Notice to Creditors
Notice to be given by a debtor to creditors must be to the address designated by the creditor, either in communications to the debtor or by the creditors preferred address as provided to the court. Such notice to creditors must include account numbers.
12. Duration of Chapter 13 Plans
If the Chapter 13 debtor’s income is greater than the state median income, the plan proposed must be for five years.
13. In addition to the list of creditors, schedules of assets liabilities, income and expenses, debtors must provide to following documents:
a. certificate of credit counseling;
b. evidence of payment from employers, if any, received 60 days before filing;
c. statement of monthly net income and any anticipated increase in income of expenses after filing;
d. tax returns or transcripts for the most recent tax years;
e. tax returns filed during the case including tax returns for prior years that had not been filed when the case began; and
f. a photo ID, among other items.
14. Debtor’s Statement of Intent
A debtor must provide a section 521 statement of intent as to secured property within 30 days after the date set for the first creditors meeting. Failure to either redeem the property or reaffirm the debt within 45 days after the section 341 meeting results in termination of the automatic stay and allows the creditor to exercise whatever remedies it has under applicable non-bankruptcy law, subject to a request by the trustee to extend the stay upon providing adequate protection to the creditor.
15. Domestic Support Obligations
Child Support and Alimony obligations have a first priority of payment. The automatic stay does not apply to the payment of a domestic support obligation from property that is not property of the estate or to the enforcement of a wage withholding order under a judicial or administrative order or statute, including obligations accruing from both before and after the filing. Failure to remain current on support claims is grounds for conversion or dismissal of a case. The debtor must be current with post-petition obligations in order to confirm a plan, the plan must provide for priority payment for support debts, and the debtor may not obtain a discharge unless such obligations are paid in accordance with the terms of the plan.
16. Superdischarge in Chapter 13 Reduced
Debts for trust fund taxes, taxes for which returns were never filed or filed late (within two years of the petition date), taxes for which the debtor made a fraudulent return or evaded taxes; fraud and false statements under section 523(a)(2), unscheduled debt under section 523(a)(3), defalcation by a fiduciary under section 523(a)(4), domestic support payments, student loans, drunk driving injuries, criminal restitution and fines and civil restitutions or damages awarded for willful or malicious personal actions causing personal injury or death are now excepted from discharge.
17. Eviction Proceedings
The stay will not prevent or halt an unlawful detainer action if the debtor failed to pay rent after filing.
18. Tax Returns Mandatory
A debtor must file its tax returns, if it was required to file such returns, no later than the day before the meeting of creditors is first scheduled or the case “shall” be dismissed, after notice and a hearing, if requested by a party in interest or the U.S. Trustee. The U.S. Trustee may allow a reasonable period of additional time before holding the meeting of creditors if the required tax filings have not occurred. All tax returns must be filed for a plan to be confirmed in Chapter 13. The debtor must file all returns from four years prior to the Chapter 13 filing.
19. Nondischargeability of Student Loans Expanded
Student loan nondischargeability is extended to for profit and non-governmental entities.