Updated Bankruptcy Information
It Has Finally Happened! Thanks to the powerful credit card companies and other business special interests who paid millions of dollars to members of Congress, the bankruptcy “reform” bill is now law. President Bush signed the bill into law on April 20, 2005. This is very bad news for debtors, particularly for low to middle income persons. Very possibly, for some debtors this new law could mean the difference between being able to file a Chapter 7 bankruptcy and not being able to file for such relief. One of the principal goals of this new law is to force persons into filing a Chapter 13, in which they will be required to make monthly payments for five years
Make no mistake about it: This bill marks the most sweeping changes in the Bankruptcy Code in 20 years. Almost without exception, the changes favor business interests to the prejudice of debtors. It is clear that the big losers are the persons who need to file for protection under the bankruptcy laws. As expressed by Lawrence P. King, legal professor about the bill passed by the U.S. Senate, “In my 40 years of dealing with Congress on bankruptcy legislation, this is the worst I've ever seen. It's the kind of bill that makes you want to point your fingers at individual congressmen and say, 'Shame on you.'”
Understanding that it will take time to review and analyze the many changes that will take place, the following is a summary of some of the more significant changes in the law.
Dismissal of a Chapter 7 Case for Abuse. Under the old law, only the US Trustee's office or the court can seek dismissal of a Chapter 7 case for “substantial abuse,” and there is a presumption that the case should not be dismissed
The new law expands this to provide “any party in interest” may file such a motion for “abuse.” A presumption is created that the case should be dismissed if the debtor fails the “means test” and has income above the median income in his or her state. The “means test” is a complicated test designed to determine whether someone has enough income after expenses, some of which cannot be over a certain amount, to pay off a significant amount of debt over five years. Debtors who have enough excess income will fail the test, and if they have filed under Chapter 7, their filings would be presumed to be an “abuse.” This presumption, however, will apply only if the debtor's current monthly income is above the median income in his or her state. Even so, the bill requires that all the information and calculations involved in the test be submitted in every case filed under Chapter 7, regardless of the debtor's income. The information and calculations will also have to be submitted when filing for Chapter 13 if the debtor's income is above the state median.
Tax Returns are Required. Under the old law, there was no particular rule regarding filing of tax returns as a condition of filing a bankruptcy petition.
The new bill changes this to provide that a debtor who files under any chapter must submit to the trustee his or her tax return, or a transcript of it, for the most recent year in which they filed or should have filed one. They also must submit to the trustee copies of tax returns that they file with the IRS during the time that the bankruptcy case is pending. In order to be able to confirm a plan in Chapter 13, debtors must have filed tax returns with the IRS (if required to do so by nonbankruptcy law) during the four taxable years before filing for bankruptcy.
Credit Counseling Is Required. The old law had no requirement that a debtor participate in any credit counseling before filing a bankruptcy petition.
The new law requires that individual debtors within 180 days before filing under any chapter must receive credit counseling consisting of “an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted that individual in performing a related budget analysis.” Also, after filing for bankruptcy, in order to get a discharge, a debtor must “complete an instructional course concerning personal financial management ” from an approved credit counselor. Fortunately, in the Eastern District of Louisiana, where I practice, the United States Trustee's office has determined that there are not enough credit counseling organizations to service our area, and has waived the credit counseling requirement for the time being.
Stricter Exemption Requirements. An item of property which is exempt is protected from seizure or administration by a bankruptcy trustee. Under the old law, a debtor was entitled to use the exemptions which are applicable in the state in which he or she has been domiciled within the 180 day period immediately before filing, or, if the debtor has lived in more than one state during that period of time, the state in which he or she has resided for the greatest period of time.
Under the new law, for a state's exemptions to apply, the debtor must have lived there for two years immediately prior to filing for bankruptcy. If the debtor did not live in any single state for those two years, the debtor must use the exemptions of the state where he or she lived during the six months (or the majority of that time) just before the two-year period.
New Rules for Luxury Items and Cash Advances. Under the old law, there was a presumption that a credit car or similar debt was not dischargeable if within 60 days of the filing of the petition charges were made for “luxury goods or services” for more than $1,125 or cash advances were made for the same amount.
Under the new law, this is tightened considerably. A debt is presumed nondischargeable if it was for luxury goods costing $250 or more and was incurred within 90 days before filing for bankruptcy, or if it was for cash advances of $750 or more obtained within 70 days of filing.
IRAs Protected. This may be the single provision that may offer more protection to the debtor than under current law applicable in Louisiana, although this is not yet clear. Under the new law, IRAs are exempt. This would apply even if the debtor is otherwise using state law exemptions (which is the case in Louisiana). The exemption would be capped at $1 million as to amounts that are not “attributable to rollover contributions” from various types of retirement plans listed in the bill.
Currently, under Louisiana state law IRAs and similar retirement plans are exempt, except to the extent of contributions made during the year preceding the filing of the bankruptcy petition. Note, however, that if a retirement plan is “ERISA qualified”, as are most employer sponsored plans, the issue of whether the fund is exempt does not even come up—these funds are not even considered part of the bankruptcy estate and therefore are fully protected.
Evictions Aren't Stayed. Under new law, an eviction cannot be stayed (stopped) in bankruptcy.
No “Cramdown” of Debts in Chapter 13. Under current law, debtors in Chapter 13 are allowed to “cramdown” or “stripdown” a secured debt (except for a mortgage on real estate), meaning that they can reduce the amount of a secured debt to the value of the collateral, leaving the difference unsecured. Often, this allows debtors to pay less to the secured creditor.
The new bill provides that this is no longer possible for automobiles unless the debt is more than 910 days old or for other property unless the debt is more than one year old.
More Nondischargeable Debts in Chapter 13. Under the old law, more kinds of debts were dischargeable under Chapter 13 than under Chapter 7.
Under the new law, the list of nondischargeable debts is expanded to make it almost the same in in Chapter 7 cases. For example, debts for willful or malicious injury, and debts for money or credit obtained by false pretenses will now be nondischargeable. If the nondischargeable debt is not paid in full under the Chapter 13 plan, the unpaid amount of the debt will still remain at the conclusion of the case.
New “Disposable Income” Test. “Disposable income” is the amount that a debtor in a Chapter 13 case pays on a monthly basis to the trustee.
Under the new law, in calculating this amount, if the debtor's income is higher than the state median, then his or her expenses must generally be determined using the standards that the IRS uses for collection of unpaid taxes. This can result in an artificial amount that may not be realistic for the debtor.
Five-year Chapter 13 Plan for "High" Incomes. Under the old law, there was no special requirement for debtors with high income; this was not a factor in determining the length of a Chapter 13 plan. Normally, the maximum length of a Chapter 13 plan was three years, unless more time was required to pay certain debts.
Under the new law, debtors in Chapter 13 are required to use a five-year plan if their income is greater than or equal to the state median, unless they can pay unsecured creditors at 100% in a shorter period of time.
Stricter Limits On Repeat Filings. Under the old law, debtors could not file a Chapter 7 if they had received a discharge in a previous Chapter 7 case which was filed within six years or a Chapter 13 case in which less than 70% of unsecured debts were paid. There was no restriction from using Chapter 13.
Under the new law, after obtaining a discharge under any chapter, debtors are barred from using Chapter 7 for eight years, and Chapter 13 for five years. The new law also restricts the granting of an automatic stay if the debtor has already had a stay, and the case was dismissed, within the past year. A hearing is required, and the debtor must overcome a presumption.
Divorce Settlements are Nondischargeable in Chapter 7. Under the new law property settlements in divorce can no longer be discharged in Chapter 7. Under the old law they could be discharged if the debtor met a "balancing of the hardships" test in the Code.
Support Obligations Have Higher Priority. Under the old law, alimony and support debts were priority claims (paid before other, lower ranked claims), but were ranked seventh in the Code.
Under the law law, alimony and support claims have the highest priority—ahead even of administrative expenses, including trustee's fees. Many experts believe that in Chapter 7 cases, this may simply cause trustees to abandon any assets unless there would be enough proceeds from a sale to cover all the alimony and support debts and the expenses of selling the assets. As a result, spouses and children may receive less than they would under the old law.
Ex-Spouse Can Garnish Wages. Although alimony and child support obligations were nondischargeable under the old law, it was unclear whether or not an ex-spouse could proceed with a garnishment while the bankruptcy case was pending. Also, the old law provided that an ex-spouse could agree to a discharge even though a portion of an alimony or support debt had not been paid.
The new law changes this to provide that even after a debtor files a Chapter 13 case, his or her wages can still be garnished to pay a pre-bankruptcy debt for alimony or support. Ex-spouses must be paid in full. The law now makes full payment of alimony and support debts a mandatory condition of discharge in Chapter 13.
Nothing contained herein should be construed to constitute advice for your personal situation. Furthermore, this is intended as a peripheral glance at the various options available, but by no means is this a comprehensive or exhaustive analysis of the bankruptcy laws. Whether or not you should file a bankruptcy, will vary depending on your personal situation. This decision should only be undertaken after careful consideration and analysis, and after consultation with a professional. This informative summary may contain information and rules peculiar to the Eastern District of Louisiana.