The major reforms under the new law, officially known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or BAPCPA, are as follows:
• Before filing for bankruptcy, applicants must complete a two-hour credit counseling session with an approved credit counseling agency within six months before filing. If the credit counselor recommends that you go through an independent repayment plan rather than filing bankruptcy, it will be a black mark on your papers if you decide to go through the filing process. Consult http://www.usdoj.gov/ust/bapcpa/ccde/cc_approved.htm for a list of approved credit counseling agencies.
• Consumers now face stricter eligibility for Chapter 7 filing. If you file for Chapter 7 bankruptcy, most of your unsecured debts are written off within 90 days of filing, and the bankruptcy will stay on your records for 10 years. Chapter 13 bankruptcy is a debt repayment plan. Filers set up a repayment schedule with your creditors, and the bankruptcy remains on your credit report for seven years. Bankruptcy applicants who wish to file Chapter 7 must now meet eligibility requirements under a two-part "means test."
1. If your income is above the state median, you may not be allowed to file for Chapter 7.
2. If you have enough disposable income to pay off $10,000 or 25 percent of your unsecured debt over five years, you will be ineligible for Chapter 7.
• If a bankruptcy applicant is ineligible for filing under Chapter 7, he or she must file under Chapter 13. The primary distinction is that the debtor enters into a five-year repayment plan in which he or she must pay a prescribed amount to creditors, based on a strict expenses-to-income formula. Chapter 13 is generally recommended for debtors who have fallen behind on their payments due to a temporary problem, such as illness or job loss, but who can get back on track, if given time to catch up.
• Under the new law there is a requirement that you provide past tax returns. You must provide:
1. Chapter 7—the most current year income tax return for the most current year (i.e., if you file in October 2006, you must have filed your 2005 income taxes);
2. Chapter 13—past four years; or
3. Proof that income was such that you did not have to file.
• Under old bankruptcy laws, people who file for bankruptcy were entitled to certain immediate protections from creditors and others—including most debt collection and lawsuit actions. These protections are part of what is called the "automatic stay" effect of a bankruptcy filing, because many potential legal actions are stopped. Some of these protections are eliminated under the new law. For example, bankruptcy filings will no longer delay or stop eviction actions, driver’s license suspensions, legal actions for child support, or divorce proceedings.
• Unpaid child support and alimony payments will now take priority over payment to any other creditor.
• Both Chapter 7 and Chapter 13 bankruptcy filers must now pay for and complete a government-approved financial management education program. It can be completed in person, online, or over the phone. For a list of approved financial management education providers, check http://www.usdoj.gov/ust/bapcpa/ccde/de_approved.htm.
• Under the new law, if filers haven’t lived in a state for at least two years, they may take only the state housing exemption of the state where they lived for the majority of the time for the 1,809 days before the period of two years. Filers may exempt only up to $125,000, regardless of their state’s exemption allowance.
• The bankruptcy attorney may now be subject to various fees and fines if information about the case is found to be inaccurate. This suggests that attorneys will be charging more because of the additional work and liability. Filing for bankruptcy should always be a last resort since it can damage your credit for many years, making it more difficult and costly to obtain credit.
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