Bankruptcy Reform Act of 2005
April 22, 2005
Federal Bankruptcy laws have changed for the first time in more than a quarter century. The key change caused by the Bankruptcy Reform Act affects whether individuals or married people filing jointly can file under Chapter 7 or Chapter 13 of the Bankruptcy Code. Chapter 7 Bankruptcy is a 90 day process that discharges all of a person's debt at once. Chapter 13 on the other hand involves a 3 to 5 year repayment plan in which a monthly payment is made to the Bankruptcy Trustee who distributes the funds to the creditors.
The affect of the law change will be felt most acutely by those whose income is above the median in Colorado, approximately $75,000.00 for a family of four. People making over the median income will no longer be eligible to file a Chapter 7; instead they will be forced to file a Chapter 13. The court will also employ a "means" test to determine who can file under Chapter 7. Individuals that have the ability to repay 25% or more of their debts will not be eligible to file a Chapter 7. All individuals seeking bankruptcy protection will have to undergo mandatory credit counseling through a recognized credit counselor within the six months preceding the filing of the petition.
Provisions of the new law affect others as well, especially those that have filed Bankruptcy before. One of the most powerful tools used to protect individuals, the Automatic Stay, prevents creditors from commencing any type of collection activity once a petition is filed. This protection is being drastically changed for debtors that have filed before or for debtors that have had their cases dismissed because of problems with the Schedules they submit to the court. The new law allows creditors to ignore the Automatic Stay if they are deemed to have received insufficient notice of the Bankruptcy filing.
As of April 20th, when President Bush signed the law, individuals must have lived in their state for the two years prior to filing in order to use the exemptions of the state in which they live. If you do not meet the two year residency requirement, you must use the exemption laws of the state in which you spent the majority of the previous two years. This provision is an attempt to close the unlimited homestead exemptions of states like Florida and Texas.
The new laws are much less debtor friendly and considerable litigation is sure to arise over the next few years as attorneys try to make sense out of the sometimes contradictory bill. Fortunately only one provision of the new law will not be fully implemented for six months from the date President Bush signs the legislation, giving attorneys and their client's time to discuss the best way to structure their petitions.
