Short Guide to Bankruptcy Laws

Page 2

Let's take a closer look at how the new law works.

Before you can file either a Chapter 7 or Chapter 13 bankruptcy claim, you must attend a 90 minute credit counseling meeting with an approved agency within 180 days of filing a petition. This meeting is designed to give you an idea of whether you should file for bankruptcy or if an informal payment plan would help you get your financial affairs in order. This meeting is not free and is estimated to cost around $75.

Counseling is required even if it's obvious that a repayment plan isn't feasible or you are facing debts that you find unfair and don't want to pay. You are required only to participate, not to go along with any repayment plan the agency proposes. However, if the agency does come up with a repayment plan, you will have to submit it to the court, along with a certificate showing that you completed the counseling, before you can file for bankruptcy. (2)

If you do enter bankruptcy, more meetings are required (basic money management type) before your case can be discharged. We'll talk more about this later.

If you have decided that bankruptcy is your best option, you must first take a Means Test to determine whether you can file for Chapter 7. The first step of the Means Test involves measuring your currently monthly income against the median income for a similar size family in your state. Your currently monthly income is your income average over the last six months before you file. It's important to point out that if you've lost your job recently, and your income has dropped to whatever unemployment insurance provides, the court will still use the six month average!

Now, if this six month average is higher then your state's median, you cannot file Chapter 7, you have to file Chapter 13. However, if your income is above the median income, you cannot be forced into Chapter 13 unless you have at least $100 a month left over at the end of the month after deducting certain allowed expenses.(1)

The second part of the Means Test can be most easily described as this mathematical example:

Currently monthly income - allowable expenses = money left for creditors.

Your currently monthly income is determined as described above, no matter if you just recently lost your job or not. Here's the other kicker: Your allowable expenses are not determined by you, but by IRS determined "allowable amounts." - These amounts as determined by the IRS are not based on reality.

Generally, you cannot subtract what you actually spend for things like transportation, food, clothing, and so on: instead, you have to use the limits the IRS imposes, which may be lower than the cost of living your area. The allowances for this means test are posted here:

This Means Test is not black and white and is actually quite complicated to figure out to a satisfactory point to where the Trustee and bankruptcy judge won't think you are trying to abuse the system. This is where your attorney comes in and earns part of his or her fee (which has also increased due to the increased work and liability of the new law. More on this later).

However, the general rule of thumb for the means test is if your total monthly disposable income is less then $100, you pass. If your disposable income is between $100 and $166, and if this amount times 60 (12 months X 5 years = 60) would pay at least 25 percent on UNSECURED CLAIMS (credit cards, not your house or car which is secured) then you flunk the Means Test. If that amount is less then 25 percent of unsecured claims, you pass.

"If what is left is between $100 and $166, AND if this amount times 60 is not enough to pay at least 25 percent of all of the debtor's unsecured claims over 5 years, then the debtor is has again passed the means test and there is no presumption of abuse." (1)

If it is more then $166.66, you flunk and are prohibited from filing Chapter 7 UNLESS you can prove special circumstances to the bankruptcy judge. However, this involves more filing, court appearances and work on the part of your attorney which will end up costing you more to prove your case. If your Means Test shows you can pay $166.66 or more per month, you must do a Chapter 13 under a 5 year plan. The 3 year plan option is not available to you.

NOTE: These requirements have been eased for Hurricane Victims. However, no special easing of requirements have been put into place for those who file bankruptcy for medical reasons. If you get cancer or are injured in a car accident, the federal government says "too bad" unless you can prove your special circumstances to a judge.

Other Changes to the Law...