Bankruptcy laws were updated in 2005, under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The BAPCPA was passed to make it more difficult for individuals to file for bankruptcy by eliminating the presumed eligibility to file for Chapter 7 Bankruptcy and forcing the repayment of some of an individual’s debt under Chapter 13 Bankruptcy.
Until 2005, most individuals filed for Chapter 7 Bankruptcy because debts were discharged and did not have to be repaid. Changes to the bankruptcy laws required more individuals to file for Chapter 13 Bankruptcy, which requires an individual to develop a 3-5 year repayment schedule for debt repayment, and does not allow the immediate discharge of debt.
The BAPCPA also required Credit Counseling before filing for Chapter 7 or Chapter 13 bankruptcy, and additional budget and credit counseling prior to the discharging of debt. In addition, there are increased costs for filing for bankruptcy and hiring a bankruptcy attorney.
To determine if an individual is now eligible to file for Chapter 7 Bankruptcy, a Means Test is conducted. The first test is used to evaluate the individual’s disposable income level. Individuals are eligible to file for Chapter 7 Bankruptcy if their income is less then the median income compared to other households of similar in size in their state. If an individual’s income is higher than the state’s median income average, additional "means testing" is done to determine if they have enough disposable income to re-pay their debt.
A Bankruptcy Lawyer should be consulted to determine if you are required to file for Chapter 13 Bankruptcy, but to get a rough estimate of your disposable monthly income (DMI) take your six month average income and subtract all allowable expenses. Expenses can include: mortgage and rent, past due taxes, priority debt, secured debt and $1,500 in private school tuition. If the difference is more than $166.66 per month and $10,000 of the debt owed could be paid with in 5 years, you are required to file for Chapter 13 Bankruptcy. If not, additional calculations must be made.
The next calculation is used to determine if you will have more than $100 per month to pay at least 25% of your unsecured debt to creditors over the next 60 months. If you do, then you will be required to file for Chapter 13 Bankruptcy, if you do not, then you can file for Chapter 7 Bankruptcy. If a judge determines that you have "extenuating circumstances," he or she may determine that you are eligible to file for Chapter 7 Bankruptcy regardless of the outcome of the calculation.
The BAPCPA also required individuals to under go credit counseling with a credit agency that is approved by the United States Trustee’s Office prior to filing for Chapter 7 or Chapter 13 Bankruptcy. The goal of credit counseling course is to provide information about avoiding debt accumulation, create a repayment schedule or give advice to eliminate the need to file for bankruptcy. All repayment plans and evidence of completing the credit counseling class must be submitted to the bankruptcy court prior to filing for Chapter 7 or Chapter 13 Bankruptcy.
Individuals must also complete another credit counseling course to learn financial management prior to the discharge of debt under their bankruptcy plan. Evidence of the credit counseling completion must also be submitted to the bankruptcy court before the dismissal of debt under the bankruptcy process.
New bankruptcy laws have also been updated to require bankruptcy filers to reside in their state at least 2 years before they can file for Chapter 7 or Chapter 13 bankruptcy. The residency provision was added to stop individuals from moving to states that had more consumer friendly bankruptcy laws.
New bankruptcy laws have made filing for Personal Bankruptcy not only more expensive, but also more complicated. Bankruptcy attorneys now have to spend more time on means testing and validating the accuracy of each client’s bankruptcy filings. It is not required that you hire a bankruptcy attorney prior to filing for personal bankruptcy, but the changes in the law have made completing bankruptcy on your own more complicated. A qualified bankruptcy attorney can make sure your financial situation is evaluated accurately, help schedule all court appearance and complete all necessary bankruptcy documentation.