New Bankruptcy Law Changes

Many people have asked about the new Bankruptcy Law changes and how they would affect someone thinking about filing. The short answer: It will cost you more time and money in connection with the filing of a case, but that's about it.

Here is a brief overview about Bankruptcy and the new law changes:

For the average consumer there are basically two types of Bankruptcies that are available to them. A Chapter 7 (straight Bankruptcy or referred to as a liquidation) and a Chapter 13 (often referred to as a reorganization). Below is a general overview and is not intended as legal advice. You should always consult with an attorney prior to making any type of legal decision. Filing for Bankruptcy is never pleasant and should always be considered as a last resort. Although your credit profile will be affected for 10 years, there are programs out there that are specifically designed to assist a post-discharged consumer with restoring and rebuilding his or her credit profile. Your attorney can discuss this as well as other options with you. Make sure they are in good standing with their Local Bar Association and shop around. Price isn't as important as comfort in my opinion.

Chapter 7 bankruptcy is designed for someone that does not have the financial ability to pay their existing debts. In a Chapter 7, you must disclose all of your debts and all of your assets. Once filed, a Chapter 7 Trustee is assigned to your case to liquidate your assets to pay your creditors. You may claim certain property as exempt from seizure under governing law. The purpose of filing Chapter 7 is to obtain discharge of your existing debts; however some debts are not dischargeable under the law.

Chapter 7 is basically used to discharge (forgive) unsecured debt; credit cards, unsecured loans, deficiency balances on repossessed automobiles, medical debts, etc. A Chapter 13 is designed for someone with regular income who is temporarily unable to pay their debts but would like to pay them in installments over a period of time. Most often than not, a person seeks relief under Chapter 13 to re-organize on back mortgage payments (to prevent foreclosure and save their home). Other people seek relief to pay back past non-dischargeable taxes or child support. You file a plan with the court to repay your creditors all or part of the money you owe them, using your future earnings. The court must approve your repayment plan before it can take effect. Under Chapter 13, unlike Chapter 7, you may keep your property (usually), both exempt and non-exempt, as long as you continue to make payments under the plan. After completion of payments under your plan, your debts are discharged. There are some exceptions such as, alimony and support payments and long term secured obligations.

With the new bankruptcy law, it is going to be tougher to file for Chapter 7. It is assumed that if the individual can make some type of payments to their creditors (I am referring to unsecured debt like credit card companies), then you must file for relief under Chapter 13 and repay all or part of that debt.

NEW RULE - Prior to filing for relief under Chapter 7, you must now complete a certificate from an approved debt/credit counseling agency. The cost of this additional requirement is $50 to $100. Since the passing of the new law, studies have shown that approximately 96% of all individuals going through this service actually did in fact qualify for relief under Chapter 7 and credit counseling was of no use to them.

You will also be required to file additional documentation along with your filing. You will need to submit detailed income and expense statements, tax returns, pay stubs and disclosure of any anticipated increase in income. This additional burden not only requires you to take more time gathering documents prior to the filing of your case but, it will also result in an increase in attorney’s fees associated with the filing. In some cases, you can file for relief without the additional documents but, you will need to file them with the court within 45 days after the filing of your petition. Failure to do so may result in your case being dismissed.

So, if you are thinking about filing for bankruptcy, gather up all of your bills, pay stubs and tax returns in order to have them ready when needed. If you are filing your case in Pro-Se (representing yourself without an attorney), make sure that you follow all of your Chapter 7 Trustee’s instructions and provide him/her with any additional documentation they ask for.

NEW RULE - One of the strongest benefits that filing for relief under bankruptcy affords an individual is sec. 362 the "Automatic Stay". This means that once a debtor files for relief under bankruptcy, any creditor is "stayed" from taking any action against you. They must stop wage garnishments if they are in effect. They must stop foreclosing on your home, can’t repossess your vehicle, etc. while the Stay is in effect. The new rule limits some of this protection. If a bankruptcy action is filed within one year of a previous case that was dismissed, the stay automatically ends 30 days after the petition is filed unless the court approves the extension. If there are two previous dismissals, there is no automatic stay unless the court approves one. So, if you have previously filed for bankruptcy, be sure to file the required papers with the court to have the automatic stay continue to be in effect. NEW RULE - Luxury goods are not dischargeable. The amount of non-dischargeable (meaning you are going to still be legally bound to pay the debt) debts incurred to purchase "luxury" goods has decreased. If you spent $500 or more on items that are deemed to be luxuries within ninety (90) days (or $750 within seventy (70) days) of the filing for relief, those debts are deemed not dischargeable in bankruptcy and must be paid.

If you run up your credit cards in the 2-3 months prior to filing for bankruptcy, it is most likely that you will have to pay those charges as well. So, if you are even thinking about filing for bankruptcy, stop using your credit cards now.

NEW RULE - The time between bankruptcy discharges has increased. A debtor cannot obtain a discharge in a Chapter 7 case if the debtor obtained a discharge in (a) a Chapter 7 case filed within the past 8 years, or (b) a Chapter 13 case filed within the past 6 years. The time periods in either case are measured from the commencement dates of the respective cases. The dates of discharge have no bearing on the disqualification.

A debtor cannot obtain a discharge in a Chapter 13 case if the debtor obtained a discharge in (a) a Chapter 7 case filed within the past 4 years, or (b) a Chapter 13 case filed within the past 2 years. The time periods in either case are measured from the commencement dates of the respective cases. The dates of discharge have no bearing on the disqualification.

Debt can be daunting. Remember, you have options. Doing nothing is only delaying the inevitable. The sooner you bite the bullet and get help, the better your future will be. Always explore all of your options. Debt Settlement is usually the best course of action. Let a professional negotiate with your creditors to help you get out of debt. My second choice is usually bankruptcy (as long as you have at least $15,000 in unsecured debt or major medical bills). My third choice is consumer credit counseling. You don't get any benefit from this. You pay back everything you owe, your credit profile is still affected and you will normally be in a program for 5-8 years.

If you have real property with equity, you could consolidate your credit card debt but it is very risky. You not only convert an unsecured debt and make it secure, you put your house in jeopardy if you miss any payments. On top of that, most studies show that people go back and charge up the credit cards again leaving them in worst shape from where they started.