Bankruptcy Article #2

My recent blog articles on BAPCPA

Bankruptcy Reform- 1 Year Later - November, 2006 Effects of Bankruptcy Reform - August, 2006

When Congress enacted the Bankruptcy Reform Law in October 2005, everyone expected that it would be more difficult to file bankruptcy. The credit card companies rejoiced - they wanted to collect more money from consumers and they had paid enough money to Congress to get the law passed. Consumers would be hounded by debt collectors and discouraged from filing bankruptcy.

The reality has been far different- learn more in a recent posting on my Bankruptcy Blog

Also, I encourage you to read my new article, Winners and Losers of BAPCPA

Please review my newest information on Debt Relief Agencies to understand your options now that the new law has been enacted. Call our office if you are concerned about correcting your debt- (207) 283-3777.

Reform Introduction

Since 1997, Congress has contemplated major changes in the Bankruptcy Code. These changes were proposed to Congress as a result of a rising number of consumer bankruptcy filings during the 1990s. Congress considered the 1990s a time when the economy was booming, yet the number individual bankruptcies reached an all time high.

Congress created a commission to tour the country and conduct hearings to determine what changes, if any, would be appropriate to the Bankruptcy Code to address this problem. The Bankruptcy Commission proposed few significant changes to the Bankruptcy Code concerning consumer matters. Nonetheless, the credit card industry, banks, and credit unions drafted a bill which was endorsed by many members of Congress.

On April 20, 2005, as a result of heavy lobbying by the credit card industry, with millions of dollars being spent on the re-election campaigns of Senators and Representatives alike, Congress enacted bankruptcy reform. The legislation was signed by President Bush and took effect fully in October of that year.

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Means Testing

Bankruptcy Reform includes "means testing" which attempts to determine which debtors will be required to file a Chapter 13 Bankruptcy instead of a Chapter 7. Debtors with income sufficient to repay some of their debts will no longer be able to use Chapter 7 as a means for bankruptcy relief. Instead, they'll be forced into a Chapter 13 bankruptcy filing.

The test of whether or not an individual is required to file a Chapter 13 is in Section 707(b) of the Bankruptcy Code whereby a Chapter 7 case will be dismissed if it is an "abuse" of the provisions of Chapter 7. A case is seen to abuse Chapter 7 if an individual's expenses on a monthly basis (as set forth by standards created by the Internal Revenue Code) enable that individual to pay some portion of their debt. The IRS standards for expenses can be quite restrictive. Not withstanding these restrictive expense categories, the means test allows for secured debt deductions (such as homes or vehicles), increased expenses for chronically ill dependents and private school expenses (perhaps faith based?).

Credit counseling and education

Credit counseling agencies may become the "gate keepers" for debtors who need or want to file bankruptcy. Congress may well place more confidence in these organizations than in debtors' bankruptcy attorneys to determine which debtors are deserving of Chapter 7 or 13. While the new legislation should provide a safety valve to permit filings without debt counseling, the test is likely to be "exigent circumstances". This safety net will be scrutinized by aggressive creditors, and provides another obstacle to overcome by debtors who seek financial relief through bankruptcy. The primary concern regarding credit counseling organizations role as a gate keeper is that credit counseling employees or "counselors" may not be especially skilled at determining who is a good candidate for bankruptcy.

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Dischargeability of debts

Congress has tightened the current presumptions of fraud contained in Section 523(a)(2)(c). Formerly, fraud was presumed for debts for "luxury goods" or cash advances of $1,000.00 or more within sixty days of filing bankruptcy. The reform legislation now looks back for a longer time period (90 days) and allows a lower amount of money ($500.00). These changes increase the likelihood that debtors will need to wait until April of each year before filing bankruptcy (90 days after Christmas).


Tax returns and other disclosures

Debtors are required to file their last three years of tax returns with the tax authorities or the court upon request of any party and interest. Given the disorganized state of financial affairs presented by many debtors, this could prove to be in insurmountable obstacle to successfully filing a bankruptcy petition under any chapter. Some debtors have not filed returns for several years while others have filed, but never kept copies or can't locate them.

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Repeat filings

The reform legislation has strengthened the time between which a debtor can obtain a discharge under Chapter 7 from six years under the current law to eight years. A Chapter 13 discharge will not be available to any debtor where a Chapter 13 case was filed four years before the new Chapter 13 case. This is significantly more burdensome than previous law.

Debt relief agencies

The new legislation categorizes attorneys along with other providers of assistance to debtors in the bankruptcy system. The effect has been dramatic on a debtor's counsel's practice from advertising to disclosure to contracts with clients. In essence, by labeling bankruptcy attorneys as debt relief agencies, Congress expects to so burden debtor's attorneys that it will eliminate the number of attorneys willing to perform that legal task. If there are few attorneys assisting debtors filing bankruptcy, there may be fewer bankruptcies filed.

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