WARNING:
On April 20, 2005, President George W. Bush signed a new bankruptcy law that severely restricts your right and ability to file for bankruptcy relief.
Effective on October 17, 2005, every person that wants to file must meet a “means test”. Besides having to qualify to file, you must also complete credit counseling at your expense before you can find out if you qualify. Then after you file, you must take financial management classes which you must pay for. There are several more changes that effectively limit or eliminate many of the benefits under the present bankruptcy law. Therefore, if you need bankruptcy relief and a fresh start, you must do it now before it is too late.
An Honest Assessment of the New Bankruptcy Laws from Attorney Blake Owen Brewer
Over the past seven or eight years, it has been my pleasure to represent hundreds and hundreds of families and individuals in Cuyahoga, Lake, Lorain, Geauga, Medina and Summit Counties in bankruptcy proceedings to help them achieve legal debt relief. In some cases, we have filed Chapter 7 bankruptcy to eliminate unsecured debt. In other cases, we have filed Chapter 13 cases to re-structure debts over time, usually to stop foreclosures but also to keep assets with a lot of equity in them. The legal fees associated with filing a bankruptcy action have traditionally been very reasonable as compared with legal fees to perform other types of work due to the heavy competition. All of this is coming to an end in the very near future.
The changes to the bankruptcy law are enormous and the very best legal minds in the country are still struggling to understand the finer points even now. However certain things are clear right now, and I will try to summarize them for you.
1. New Means testing:
The Bankruptcy Trustee or any creditor can bring a motion to dismiss under §707(b) if the debtor’s income is greater than the state median income. Abuse is presumed if the debtor’s currently monthly income as determined by an average of the previous 6 months, whether or not that income is accurate now.
Example: if you are unemployed now the income for the last 6 months when you worked is used against you. Debtors who meet this new standard would be shifted to 5 year repayment plan in Chapter 13.
If a debtor’s income falls below the state median the court may still find abuse but the creditors do not have the standing to file the motion. (You can only file a Chapter 7 Bankruptcy if your income is below the state average income because most bankruptcy attorneys will probably not take on the case due to extreme extra liability and work). The attorney can be sued if he files a petition that is abusive. Above the average income you will be presumed to be filing an abusive petition, forcing you into a 13 repayment plan. There is a grey area in between where no petition can be filed. A no mans land where you have too much income to file a 7 and not enough disposable income left over to file a Chapter 13. By filing a petition for a person who has above average income any creditor can file a motion requiring you or your attorney to pay their attorney fees and stating that the petition has to be changed to a 13.
2. Mandatory Credit Counseling
No individual may be a debtor under the new law 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. Bankruptcy Trustee. (There are exceptions where there is an emergency and the person could not receive counseling within five days, or where the U.S. Bankruptcy Trustee has determined that the approved agencies are not adequate to provide the required counseling.) If a debt management plan is developed by the credit counseling agency, it must be filed with the court. Of course, the debtor must pay for this counseling.
3. No Lien stripping.
In the past a $20,000 car note could be separated into a $15,000 secured claim that was paid in full for a car only worth $15,000 and an unsecured claim for $5,000 that was paid partially along with other unsecured debt. This allowed a “cram down” for secured debts like car loans where the debtor owed much than the collateral was actually worth. Now Chapter 13 plans 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 purchased within 910 days (almost 3 years) of the filing. Bottom line, you will be stuck with paying car notes in full for purchases made in the 910 days prior to your filing, even if you owe much more than the car is worth.
4. Mandatory Debtor Education
The court will not grant a Bankruptcy discharge unless the debtor has completed an education course in personal financial management as approved by the U.S. Bankruptcy Trustee. A Debtor will be denied a discharge under §727 if the Debtor fails to complete the course. This is on top of the consumer credit counseling you paid for to be eligible to file the bankruptcy, and you pay for this course as well.
5. Fraudulent Discharges Expanded
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 also non-dischargeable. The old rule was $1,000 dollars within 60 days.
6. No more “Chapter 20.”
In the past, it was sometimes a good idea to file a Chapter 7 first to discharge unsecured debt, then file a Chapter 13 to deal with a mortgage foreclosure. Now, a discharge will not be granted in Chapter 13 if the debtor obtained a discharge in Chapter 7, 11 or 12 within the 4 years prior to the date of filing of the pending case, or in a Chapter 13 case filed within 2 years of the pending case. This provision, though, does not prevent the debtor from filing a Chapter 13 case, and receiving the benefits of the stay, including the ability to cure arrearages on secured claims over a period of time. It just means that you had better not file a Chapter 13 if you filed a Chapter 7 within four years, or if you filed a Chapter 13 in the past two years.
7. Time between Chapter 7 Discharges
A Chapter 7 Debtor cannot receive a discharge if a prior discharge was received within 8 years of the new filing. Under the old law, you could file another Chapter 7 after six years had passed since your discharge.
8. Homestead Exemptions reduced and two year residence required to prevent “forum shopping”
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, but 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 of engaged in certain criminal conduct, the cap is $125,000, whether or not there is a higher State law exemption. To the extent the homestead was obtained through fraudulent conversion of nonexempt assets during the 10-year period before the filing, the exemption is reduced by the amount attributed to the fraud.
9. No more Reaffirmations
Increased liability may cause attorneys to refuse to sign reaffirmations due to liability. Section 524 now contains extensive new 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, a certification that the agreement does not impose an undue hardship on the debtor. Such 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). The disclosure requirements are satisfies if “given in good faith.” A creditor can accept payments under a non-compliant reaffirmation as long as the creditor “believes in good faith” that the agreement is effective.
10. Automatic Stay Limited
No case may be filed within a year of the last filing (No more chain filing of petition after petition or filing a Chapter 20 which is Filing a Chapter 7 and then a 13 to reduce the amount of unsecured debt) The new Bankruptcy law limits the application of the 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 1 year after the prior case (under any Chapter) was dismissed (except for a case refiled in another chapter after a dismissal of a Chapter 7 case based on the means test). A party in interest (including the debtor) may move to extend the stay and show that the filing is in good faith. A case is presumed to be in bad faith for this purpose if more than one case was pending in Chapters 7, 11 or 13 (again, not in Chapter 12) and at least one such case was dismissed for failure to file required documents without substantial excuse, to provide adequate protection, or to complete a plan, and there is no showing that the debtor’s financial situation has changed so as to allow a final discharge or completion of a plan. 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. The same bad faith factors noted above are also applicable to this determination. The Bankruptcy law also provides that the stay will terminate if the debtor does not timely file (i.e., within 30 days after the petition date) its statement of intent with respect to property subject to a security interest and timely (i.e. within 30 days after the first date set for the §341 meeting) complies with the stated intention. The court may extend the stay upon the motion of the Bankruptcy trustee if the property is of the value to the estate and adequate protection is afforded to the creditor.
I have tried to summarize these changes as best I can. Of course, you should consult with a bankruptcy attorney about your situation prior to making any decisions. This is not legal advice; rather it is designed to give information about this new law. Therefore you should not make any legal decisions based solely on what you read on my web site.
In my opinion this new bankruptcy law is a disaster for the consumer and a boon to the credit card companies which are already raking in record profits. The bottom line is: higher legal fees due to more work and increased professional liability for the debtor’s bankruptcy attorney, more loopholes for creditors, more headaches for the debtor and more opportunities for the creditors to harass a debtor through filing motions during the bankruptcy.
– Blake Brewer
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