The year 2005 was witness to one of the most significant overhauls
of the personal bankruptcy in more than half a century. The new laws
enacted by Congress and signed by the President will make it much
more difficult for many consumers to walk away from credit card
debt, overdue bills and other debts.
This overhaul of the
bankruptcy system was designed to cut down on the perceived abuse of
the system by people who could afford to pay the money they owed but
chose to file bankruptcy instead. These new laws, however, are
likely to affect more than just those who were out to cheat the
system. It is important for every consumer, no matter what their
current financial situation, to understand the new bankruptcy laws
and how they could potentially be affected.
The two types of bankruptcy filing
There are two distinct types of bankruptcy filing, Chapter 7 and
Chapter 13. When an individual files for Chapter 7 bankruptcy
protection, all of his or her assets (minus any assets exempted by
the state) are liquidated, with the proceeds being used to pay the
creditors. The remaining debts are cancelled under a Chapter 7
filing, providing the individual with a fresh start.
A Chapter 13 filing is somewhat more complicated, with the
bankruptcy filer being put on a payment plan which can last up to
five years. Any debts which have not been repaid by the end of the
plan term are cancelled.
The intent of the new law
The intent of the new, more restrictive bankruptcy filling law is
to force more consumers into the more restrictive Chapter 13
bankruptcy filing, thus forcing more consumers to pay back a greater
percentage of what they owe.
Perhaps the biggest change in the new bankruptcy law is the
qualifying test. Under the new bankruptcy law, each individual’s
income will be subjected to a two part means test. The first means
test uses a formula to exempt expenses like rent, food and other
necessities in order to determine if the debtor is able to pay back
at least 25% of the non-priority unsecured debt. This unsecured debt
includes things like credit cards.
The second part of the means test compares the income of the
bankruptcy filer to the median income level for the state. Those who
are determined to be able to afford to pay back 25% of their debt,
and whose income falls above the median for the state will be
required to use the Chapter 13 bankruptcy filing, while those who
fail the means test will be permitted to file under the more
generous Chapter 7 rules.
