Bankruptcy Reform Laws
What You Must Know About the “Bankruptcy Reform” Laws
Back on April 20, 2005, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act. This was designed to eliminate perceived abuses in the bankruptcy system. It was a bill a long time in the making, and was sponsored by the banks and the creditors. For instance, it seeks to require debtors who can pay some, but not all, of their debts to file Chapter 13 bankruptcy as opposed to discharging their debt in full in a Chapter 7.
Here is what you need to know about the new law, and how it may affect you.
The primary purpose of Means Testing is to try and have the debtors pay more money to the creditors. It was designed to force more debtors to file Chapter 13 repayment plans if they had some means to do so. “Means Testing” involves numbers-crunching and analysis of a debtor’s monthly income and expenses. If there is a certain amount of excess income each month, a “presumption of abuse” arises and a person may not qualify for a Chapter 7 bankruptcy. Every debtor must provide a statement of monthly income and expenses. Debtors who make more than the median income each year must file a means test analysis. This measures their income as an average for the six‑month period prior to the bankruptcy filing. Then your actual mortgage and car payments are deducted, followed by any priority debt (usually past due taxes and support). Finally, you will be allowed to deduct other normal living expenses as defined by the tables used by the IRS when collecting taxes. (There are several other allowed deductions such as charitable contributions and a small amount for private schooling.)
If your amount left is more than about $100, a “presumption of abuse” will arise if this monthly payment over a five‑year period would pay at least 25 percent of your unsecured debt. If the amount is greater than about $166, the presumption of abuse arises regardless.
If the presumption arises, you will need to show some type of exceptional circumstance. Otherwise, your Chapter 7 case will be dismissed or your case may be converted to a Chapter 13 case.
The good news is most people who qualified to file a Chapter 7 before the law changed, still qualify to do so. It’s just much more complicated now. Prior to the law change in October 2005, some debtors prepared and filed their own Chapter 7 petitions. Others utilized the services of a paralegal, many of whom knew what they were doing. However, since the bankruptcy reform laws came into force, we do not recommend solely utilizing a paralegal. They can prepare the paperwork, but they cannot provide legal advice. Since the law changed, legal advice is more necessary than ever before.
Spousal and Child Support Payments Are Now Non‑Dischargeable
Prior to the Reform Act of 2005, spousal and child support were non‑dischargeable. This is still the case. Any kind of support payments still will not be discharged in all chapters.
A Bankruptcy May Not Stop an Eviction
The current law provides that the automatic stay which arises when a bankruptcy of any type is filed will not stop an eviction
if the state (California) court has already entered a judgment for possession of the premises.
IRA Accounts Are Now Exempt Up to $1,000,000.
401(k)and traditional retirement plans (those that were “ERISA qualified”) were, and still are, exempted (protected) in their entirety. IRAs, which are not ERISA qualified, were exempt to the extent that a Court deemed them to be reasonable and necessary for a person in their retirement. This applied to rollover IRA accounts as well. This ambiguous standard created much litigation and resulted in people losing their IRA account.
Now, IRA accounts, including rollover IRA accounts, are exempt up to $1,000,000. This creates a clear standard. Additional amounts can be protected if the court can be persuaded that it is necessary for a debtor in their retirement or in the general interests of justice.
New Limitations on Exemptions and Homestead Rights
Previously, a person was entitled the exemption rights of the state in which they resided if they lived there for a minimum of 91 days. Now there is a 2‑year residency requirement. The new law also provides that a person is only entitled to a maximum homestead of $125,000 until such time as they have lived in that state for approximately 3.4 years. However, in California, the homestead amount is $75,000 for a single person, $100,000 for married or head of household, and $175,000 for persons over 65 or disabled. So the effect of this last provision would only effect the aged or disabled. The new law was designed to prevent individuals from moving to states, like Texas and Florida, and immediately taking advantage of their unlimited homestead exemption.
Increased Burdens on the Debtor and Counsel
The new law greatly increases the burden on those who wish to pursue bankruptcy. Debtors must provide the trustee (the court appointed lawyer who administers your bankruptcy for the court) with their most recent tax return seven days prior to the first meeting of creditors. Any pay stubs, or evidences of income, from the 60‑day period prior to the bankruptcy must be filed with the bankruptcy petition and schedules. Every person filing bankruptcy must first go through a pre‑bankruptcy briefing provided by a non‑profit budget and credit counseling service. This counseling must include an analysis of the debtor’s income and expenses and discuss the availability of credit counseling through a third party. Moreover, before a debtor can receive a discharge they must go through a trustee‑approved debtor education course.
The role of the debtor’s attorney also changed. We are charged with verifying the accuracy of the information our clients give us, and we can be sanctioned if any information presented to the court or the trustee is inaccurate after a reasonably inquiry is made to verify that it is correct.
The Length of Chapter 13 Plans
Previously, a Chapter 13 plans was for 3 years, but it could be extended for up to 5 years by a judge in appropriate circumstances. Now, an individual whose income is less than the median can still confirm a 3‑year Chapter 13 plan. But, if an individual’s income is greater than the median, the Chapter 13 plan will now be for a mandatory 5 years. It is important to note that the longer the plan, the more money the debtor will have to repay on his/her debts.
For more information, contact a Southern California bankruptcy and civil litigation lawyer at
Jaurigue Law Group today to schedule a consultation with one of our friendly, courteous, and knowledgeable attorneys. Call
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