The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, otherwise known as the New Bankruptcy Law took effect on October 17, 2005. It presented changes on the requirements and processes involved in filing for bankruptcy.
A lot of people perceive this new law as somewhat limiting. After all, the provisions of the bankruptcy law made it more difficult for some people to file bankruptcy. Is this contention true?
To better understand the new bankruptcy law, allow us to tackle the most significant changes included in the new law.
Provisions in the 2005 Bankruptcy Law
Let us enumerate the changes presented in the bankruptcy law.
1. Strict Requirements for Chapter 7 Bankruptcy. In the old law, people have more freedom to choose which type of bankruptcy to file. Most people chose Chapter 7 over Chapter 13 Bankruptcy. This is because this option allows them to liquidate their assets to retire their debts. But the new bankruptcy law is more prohibitive. It prevents people with higher incomes to file for Chapter 7 bankruptcy.
In the new law, a filer is required to compute his current monthly income. Then he must compare it with a median income earned by a household of the same size, in his state. If the income is less than or equal to the median, the person is allowed to file for Chapter 7 bankruptcy. Otherwise, he must first pass the means test before he can file for this type of bankruptcy
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2. The Means Test. In relation to the first provision, the means test determines if you qualify for a Chapter 7 Bankruptcy. This test will determine whether you have enough disposable income that will allow you to repay your debts under Chapter 13 Bankruptcy. How does this work?
First you must know your current income. Then, you will subtract certain allowed expenses and debt payments from your earnings. If the disposable income is below a standard amount, then you qualify for Chapter 7 Bankruptcy. Otherwise, you will be encouraged to be a Chapter 13-filer.
3. Need to Undergo Credit Counseling. The new bankruptcy law also requires filers to complete credit counseling. The purpose of this is to help you determine whether you need to file for bankruptcy or not. This is because some filers have the capability to repay their debts through informal repayment plans.
Once you have taken credit counseling you will need to get the repayment plan suggested to you. You should also get the certificate of completion. These two documents are essential papers that you need to present in courts, before you can file for bankruptcy.
You also need to attend another counseling session after your bankruptcy case. This session serves a new purpose. It will help you learn how you can manage your finances well. You need to complete this credit counseling since it is a requirement before the court thoroughly wipes out your debt.
4. Filers of Chapter 13 Bankruptcy Will Need to Live on Less. The new bankruptcy law provides the IRS to dictate the allowed amount of expenses. This is a great shift from the provisions of the old law. Before, filers must devote all their disposable income to their repayment plans. Now, aside from handing over their disposable income, filers must adhere to the dictated amount by the IRS. They have to subtract the amount given by the IRS, and not their actual expenses, from their monthly income. This means that people filing for a Chapter 13 Bankruptcy will have to live on less money to support their monthly expenses.
These are just some of the provisions of the new bankruptcy law. We hope that through this short overview you have gained a better understanding of the changes presented in the new law.