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Bankruptcy is a process...Not the end.

Rhode Island & Massachusetts Bankruptcy Attorney

10 Things to Know about Bankruptcy Reform

The “New Bankruptcy Law,” formally known as The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, was enacted in 2005 and has made filing for Chapter 7 or Chapter 13 bankruptcy more difficult and more expensive for certain consumers, mainly those whose incomes are higher than their state’s average.

1. Means Testing: The New Bankruptcy Law is designed to curtail the amount of Chapter 7 bankruptcies and instead compel consumers to file for Chapter 13 bankruptcy. The bill mandates that any consumer filing for Chapter 7 whose income exceeds the state’s average must submit to a “means test,” which is a calculation of current monthly income and expenses. Some of the calculations are based upon presumed expense, and some of the calculations are based upon actual expenses. In most typical cases, after all expenses have been calculated, if there is more than around $100-$180 of monthly income left, then there will be a “presumption of abuse” and the consumer will usually be required to file for Chapter 13 instead. A presumption of abuse can only be overridden with proof of special circumstances.

2. Exemptions for Disaster Victims: The Justice Department has stated that it would not enforce the means test on disaster victims, such as those affected by Hurricane Katrina. This is not written into the law, however, and bankruptcy judges may choose to use it regardless.

3. New Requirements: Under the New Bankruptcy Law, bankruptcy attorneys are held responsible for the accuracy of their clients’ filings. Investigations of the filings are now mandatory, and this will likely increase attorney fees and decrease the amount of clients they are able to represent.

4. Audits: Bankruptcy filings can now be audited just like taxes. Audits ensure that the filing information is accurate and reduce fraudulent claims.

5. Chapter 13 Repayment Length: Chapter 13 repayment plans used to be, on average, 3 years, and they could be extended to up to 5 years on a case-by-case basis. Now, if the consumer earns more than the state’s average income, the repayment plan must be for duration of 5 years. Consumers whose income is less than the state’s average income can still apply for a 3-year repayment plan.

6. Exemptions and Homestead Rights Limitations: Before bankruptcy reform, consumers who were planning on filing for bankruptcy could move to another state and, after 91 days, take advantage of more lenient or unlimited homestead exceptions. The New Bankruptcy Law attempts to curtail these abuses, and has implemented a residency requirement of 2 years.

7. Bankruptcy Filing May Not Prevent Eviction: The New Bankruptcy Law still implements the automatic stay when an individual files for bankruptcy, but it does not apply to evictions if a judgment of possession was filed before the bankruptcy. This used to vary state-by-state.

8. Community Property Equalization Payments Are Non-Dischargeable: Under New Bankruptcy Law, community property equalization payments are no longer dischargeable except under certain conditions with Chapter 13. In accordance with the Old Bankruptcy Law, spousal support and child support remain non-dischargeable.
One of the criticisms of the New Bankruptcy Law, however, is that credit card debt repayment is prioritized over child support and alimony debt.

9. Increased Fees:The initial filing fee has increased from $209 to $299. Consumers who earn below 150% of the federal poverty level are exempt from these fees.

10. Mandatory Credit Counseling: In order to file for Chapter 7 or Chapter 13 bankruptcy, a consumer must have attended credit counseling from an approved nonprofit credit counseling agency. Individuals must also complete a personal finances management course. The efficacy of these programs is still being studied.

The New Bankruptcy Law makes many other changes to the bankruptcy process. If you have any questions or would like more information about bankruptcy reform and how it might affect you, contact a Massachusetts and Rhode Island Bankruptcy Lawyer to schedule a consultation.