Interest Items

NEW 2005 BANKRUPTCY LAW SIGNALS DRASTIC CHANGES AHEAD

President Bush signed the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" into law on April 20, 2005.  The key provisions affecting debtors will apply to bankruptcy petitions filed on or after October 17, 2005.  This law will have significant ramifications for people seeking bankruptcy relief.  If you are considering filing bankruptcy, it may be in your best interest to try and beat the clock and file under the current law.  We are happy to advise you regarding the specific implications of the new law on your situation, but here are a few general observations.

The new law requires what’s referred to as a “means test,” which means that your ability to pay creditors will be scrutinized much more heavily.  Your income will be measured against the state’s median income and your ability to pay will be judged based on whether you should be living without some of those monthly expenses you think are necessary.  Under the new means testing, more individuals will be required to file chapter 13 bankruptcy and complete three to five year terms of making monthly payments that are distributed to creditors.

The new bill will require debtors to obtain credit counseling services before they will be allowed to pursue bankruptcy relief.  Debtors will also have to complete an instructional course concerning personal financial management as a condition to receiving a discharge of their debts.  A common reason for many debtors to choose chapter 13 is to “cram down” vehicle loans.  So, if your car is worth less than what you owe, current law allows you to reduce the secured loan and pay the amount due over the life of a chapter 13 plan.  Congress has specifically removed this option.  Other changes include lengthening the time from 6 years to 8 years for successive bankruptcy case filing eligibility and making more types of debt nondischargeable.  The law also imposes greater liability on lawyers filing bankruptcies so that the time required and average cost of filing a bankruptcy is likely to go up.