New Bankruptcy Laws - How They Affect Individuals in Bankruptcy

Changes to the 2005 Bankruptcy Code made it more difficult for some individuals to file bankruptcy and altered some of the protections for those in bankruptcy. In addition, it changed the nature of bankruptcy filings in some very important ways. If you are facing financial problems and either in bankruptcy or considering bankruptcy, it is essential that you understand exactly how those changes affect you.

Changes to the Bankruptcy Law

The major changes to the 2005 bankruptcy law that will affect those individuals who are considering bankruptcy include:

  • New provisions making it more difficult to qualify for Chapter 7;
  • A requirement that credit counseling be completed before bankruptcy can be filed;
  • A requirement that you produce your tax returns in order to file for bankruptcy;

Chapter 7 and Chapter 13 Bankruptcy

Prior to the 2005 bankruptcy law, most individuals who filed bankruptcy filed Chapter 7, or total liquidation bankruptcy. This meant that the process involved the sale of assets. The proceeds were used to pay off creditors, and then any remaining debts were forgiven, with the exception of non-dischargeable debts such as student loans and unpaid child support. This meant that, while you had to sell a lot of your belongings, you essentially started with a clean slate after bankruptcy.

The 2005 law, however, instituted a means test for those who want to declare Chapter 7. To declare Chapter 7, you now must prove one of two things:

  • That your income is below the median income level for your state; OR,
  • That you are unable to afford to pay anything towards your debts out of your paycheck after your required monthly expenses are subtracted (a specific formula is used to determine whether you will be able to pay or not)

If you are not eligible for Chapter 7 under the means test, you are essentially limited to filing for Chapter 13 as an individual. Chapter 13, or a “wage earners bankruptcy” requires you to establish a repayment plan. The plan must be approved by both the court and your creditors and will typically extend for a 3-5 year period of time, during which time you will pay a trustee and he will distribute the payments to creditors.

Credit Counseling is Required Before You File for Bankruptcy

Credit counseling is required through a government-approved program before bankruptcy can be filed. You may also have to complete a financial management education program. Proof of completion must be filed before the bankruptcy will be approved or debt discharged.

Tax Returns Must Be Produced Before You File

Because of the new requirements with the Chapter 7 means test, you are now required to produce your tax returns in order to be able to file for Chapter 7 or Chapter 13 bankruptcy. This means if you have not filed taxes, you must do so before you file for bankruptcy. This can pose a problem for some who owe back taxes, since these back taxes are not generally dischargeable in bankruptcy. Thus, you may find yourself wiping out some of your debts with the bankruptcy action but simultaneously getting stuck with a whole new problem of owing money to the IRS. If you find yourself in this situation, making an offer-in-compromise separately with the IRS to settle your debt may be your best bet.

Getting Help With Your Bankruptcy Filing

The Bankruptcy Code and laws in the United States are complex and you should not try to go through a bankruptcy filing without legal help. An experienced attorney can help those in bankruptcy to understand both their rights and their obligations under the new bankruptcy law.