| Bankruptcy Law - Questions & Answers
How do the new bankruptcy laws affect
me?
On April 20, 2005 President Bush signed into
law a new set of bankruptcy statutes, most of
which became effective on October 17, 2005.
You may have read or heard that
the new bankruptcy laws would make it harder to
file bankruptcy. In our experience, a few people
are finding it more difficult to file bankruptcy,
but the vast majority of our clients are still
able to file.
The analysis of your situation requires a detailed
review of your income and expenses. The brief
overview of the new law on this web site is not
a substitute for counsel from an experienced bankruptcy
attorney. We strongly encourage you to get legal
advice for your personal situation.
The following are some of the changes that the
new law requires.
Qualification For Chapter 7: Means Testing
Whether you will be allowed to file a Chapter 7 (straight) bankruptcy case depends on your family income, family size, and family expenses. If your household income is greater than the state median income for a family of your size then your creditors, the court, or the bankruptcy trustee may request that the court dismiss your case due to “abuse," unless you can demonstrate that your monthly expenses justify filing a Chapter 7 case.
The state median income is determined by the
Census Bureau.
Below are the median income numbers for Texas
(these numbers do not apply to you if you reside
in a different state for 2006).
- 1-person family: $34,408
- 2-person family: $48,029
- 3-person family: $50,408
- 4-person family: $58,153
*For the 5th and each additional family member, add $6,300 per person to the number shown for the 4-person family.
How do you know if you are below the median income? In general, you total the gross income you received (not take home income) for each month for the 6 months preceding the month you filed the bankruptcy. Then, you double that number to get an annual number. There are several special adjustments that could apply in certain circumstances, such as if you are self-employed, were unemployed during that 6-month period, or received social security or disability income.
Presumably, if your adjusted gross household income is below the median income, you are eligible for Chapter 7.
Notice that because the gross income number is
calculated based on the six-month period preceding
the date of the bankruptcy filing, the timing
of your case can be very important. If you had
unusually high or unusually low income at any
time during the preceding 6 months, it can affect
your eligibility for Chapter 7.
If your adjusted gross household income is over the median household income, you must calculate whether or not you can "afford" to make a monthly payment under Chapter 13 and whether that payment will be sufficient to provide a benefit to the creditors.
The new bankruptcy law provides a list of permissible expenses that you may claim as deductions from your current monthly income. A detailed review of all of those expense deduction calculations is not feasible here. In general, though, you may count the full amount of your house payment (but not necessarily the full amount of your rent payment if you are renting), the full amount of your car payments (but not necessarily the full amount of your lease payment if you are leasing), an allowance for food, utilities, clothes, transportation and other living expenses, and the normal amounts deducted from your paycheck for items like taxes and insurance. You do not deduct amounts you are paying to unsecured credit card debts. The amounts of the allowances for various items change depending on your income level and family size. They may also change depending on what county you reside in.
If you have certain kinds of priority debts, like past due income taxes or child support, you can deduct those as well.
If you own your home or your car free and clear,
you may not be able to take a deduction for the
allowed ownership cost for the home or vehicle.
If you are receiving child support, repaying a
401(k) loan or, making contributions to a 401(k),
you may also be able to deduct those amounts,
particularly in a Chapter 13 case.
The court will presume that you are not eligible
for Chapter 7 bankruptcy if your current monthly
income should, after deducting permissible expense
amounts, leave you with at least $100 per month
to be repaid to your creditors. In such cases,
you may have to repay at least $6,000 over as
long as five years through Chapter 13.
In order to successfully argue against dismissal or conversion of your case to Chapter 13, you must demonstrate "special circumstances that justify additional expenses or adjustments of current monthly income." And even if your income falls below the state median, the court may still dismiss your case for “abuse”.
New Chapter 13 Provisions
The new bankruptcy laws provide different treatment for persons in Chapter 13, depending on whether their gross income is over or under the state median income.
In general, if your gross income is less than the state median income, the new provisions in Chapter 13 will not substantially affect the amount you pay to unsecured creditors in your case. See the other pages on our web site for a more detailed analysis of the pre-October 17 Chapter 13 provisions. But, the provisions discussed below for past due car payments and the discharge provisions discussed below do apply to you.
If your gross income is over the state median
income, Chapter 13 provides a new method of calculating
your payment amount. Under the new law, the debtor
must calculate a monthly disposable income amount
based on the same calculations described above
for computing whether you are eligible for Chapter
7 or not. But, some courts have ruled that for
Chapter 13 purposes, you look at expected income
in the future, not the average of the last six
months.
If you are not eligible for Chapter 7, you multiply
the monthly disposable income by 60 to produce
the total amount that must be paid to unsecured
creditors under Chapter 13. For example, if your
monthly disposable income is $200, you must pay
$12,000 to unsecured creditors in your Chapter
13 plan. The law seems to indicate that the $12,000
total in this example would include attorneys'
fees and other administrative costs. You may pay
that amount in monthly installments over as short
a period as you like or you may pay it for a period
not to exceed 60 months. But, some courts are
holding that the plan must exist for the full
60 month period. If you also need to include payments
on secured debt (such as past due car or house
payments), those amounts will increase your monthly
payment to the Trustee.
Whether you are over or under the median income, you will still be able to include past due amounts on house or car payments in your Chapter 13 plan in order to save your house or car. But, if you bought your car within the 30 months preceding the filing date, you may have to continue making all payments due on the car as specified in your contract. The same rule may apply to other property purchased on a secured credit account (like a furniture loan) within the 12 months preceding the filing date. But, this new provision in the bankruptcy code is very confusingly written; it may mean exactly the opposite of what car lenders think it means and it may permit debtors to dramatically affect these loans. Unfortunately, we will not know exactly how to interpret this provision until a court has decided what it means or Congress amends the law.
Certain debts that are dischargeable under current Chapter 13 laws will not be dischargeable under the new law. For example, income taxes for periods more than 3 years old but for which no return has been filed, debts arising by fraud or damage to another person's property, debts owed to a single creditor totaling more than $500 for luxury goods incurred within 90 days of filing, and cash advances of $750 within 70 days all are non-dischargeable in Chapter 13.
Mandatory Credit Counseling And Education
Prior to filing bankruptcy: Every individual who files for bankruptcy must, within the 6 months prior to filing, receive mandatory credit counseling from an "approved nonprofit budget and credit counseling agency." The credit counseling agency must provide proof that you have received the mandatory counseling.
After filing bankruptcy: You will not be permitted
to discharge your debts under Chapter 7 or Chapter
13 unless you complete a mandatory debtor education
course in personal financial management as approved
by the U.S. Trustee. You must choose your counseling
provider from a list provided by the court or
the US Trustee. In Dallas, Plano and Ft. Worth,
the Chapter 13 Trustees provide a debtors' education
course that may fulfill the requirements. Other
providers charge a fee for these services.
Using Bankruptcy To Stop Creditors
The new law may limit your ability to stop creditors through the use of the “automatic stay.” If you have filed for bankruptcy within the past year and need to re-file because the previous case was dismissed, your creditors may be able to collect again from you 30 days after the new case is filed. The automatic stay may be continued after the 30-day period for good cause. If two or more bankruptcy cases were dismissed during the prior year, the automatic stay does not go into effect at all unless the court orders it after a hearing and a demonstration that the filing was made in good faith. There is an assumption that you have filed your bankruptcy case in bad faith unless you can prove otherwise.
If you file for bankruptcy in order to stop an eviction proceeding, the landlord will be able to continue with the eviction if for any reason you fall behind on your new rental payments after the case is filed.
Documents To Be Provided For Your Bankruptcy Case
In addition to the list of creditors, schedules of assets, liabilities, income and expenses, debtors must provide:
- A certificate of credit counseling
- Pay stubs for the 60 days before filing your case
- Tax returns or transcripts for the most recent tax year
- Tax returns filed during the case including tax returns for prior years that had not been filed when the case began
- Photo identification
This provision will require that debtors file all or most delinquent tax returns — in most cases before the Section 341 Meeting of Creditors. Failure to provide the documents within 45 days after the petition has been filed results in automatic dismissal of the case.
Time Between Filing Cases
These provisions apply to cases filed both before and after October 17, 2005.
You will not be eligible to receive a discharge of your debts in Chapter 7 if you received a prior discharge and your previous case was filed within 8 years of the new filing. You will not be eligible to receive a discharge in Chapter 13 if you have filed a Chapter 7, 11 or 12 bankruptcy case within the 4 years prior to the date of filing of the pending case, or if you have filed a Chapter 13 case within 2 years of the pending case.
Other Miscellaneous Changes
If you have moved from a different state within the past two years, you may be subject to the laws of your former state of residence in connection with what property you are allowed to keep in Chapter 7. The amount of equity in your home that you’re allowed to keep is limited to $125,000, if you have owned your home for fewer than 3 years and 4 months (unless you moved from another home in Texas into your current home).
Debts owed to a single creditor totaling more than $500 for luxury goods incurred within 90 days of filing are presumed to be non-dischargeable; cash advances of $750 within 70 days are similarly treated.
For More Information:
There are several other changes in the new bankruptcy
laws that can affect you in certain circumstances.
There are also many new provisions that are confusing,
conflicting with other provisions, and that need
judicial interpretation or new rules to be issued.
The general information on this web site and other
web sites is not a good substitute for a detailed
review of your situation by a qualified bankruptcy
attorney.
The new laws make it especially dangerous to rely on advice from paralegal services, forms generation services, or attorneys who do not practice consumer bankruptcy regularly.
If you would like more information on the new bankruptcy laws or how they will affect your rights, please make an appointment with the attorneys at the Armstrong Law Firm for a low cost consultation. [
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