The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, aka the "new bankruptcy law", became effective October 17, 2005. The law introduces several changes to the existing bankruptcy rules. Some of these changes include the fact that potential bankruptcy filers must meet a "means test". The test determines, whether you are eligible to file for bankruptcy or not.
The term "Creditor" refers to those organizations owed money. "Debtor" refers to the consumer who owes money. "Filer" refers to the consumer filing for bankruptcy.
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Here is a summary of the major changes:
"Means Test" for Chapter 7
A creditor may file a motion to dismiss a bankruptcy case, if the debtor's income is greater than the median state income and the debtor can afford to pay $100 per month over a period of five years towards paying down your debts. In this case, a debtor has to file for Chapter 13 instead of Chapter 7.
Mandatory Credit Counseling
Potential bankruptcy filers must undergo credit counseling via an "approved nonprofit budget and credit counseling agency", prior to filing for bankruptcy. Here is the list of government approved consumer credit counseling agencies.
Mandatory Debtor Education
Chapter 13 filers must complete a course in "personal financial management" prior to filing for bankruptcy.
Discharge of Debts
Certain debts cannot be discharged. Debts to a single creditor of more than $500 for luxury goods that were incurred 90 days before filing cannot be discharged. In addition, cash advances of $750 within 70 days are also non-dischargeable.
Proof of Income and Tax Return Filings
Filers must show proof that they paid taxes from the last year. This also provides verification of income. If a filer has not paid taxes for the previous year, they must pay before they can continue the bankruptcy process.
Time between Discharge
If you are filing for Chapter 7 and you have a previous discharge within the last 8 years - you cannot receive another discharge. This time period used to be 6 years.
Fewer "Automatic Stay" Protections
Filers will no longer enjoy some of the legal protections they used to have such as stopping or delaying evictions, driver's license suspensions or child support proceedings.
Attorney Verification Required
Attorneys are responsible for verifying that information contained in petitions and schedules are "well grounded in fact." Attorneys are required to sign petitions to acknowledge this fact.
Eviction Proceedings
Filing for bankruptcy will not stop an eviction proceeding.
Priority For Unpaid Child Support and Alimony
The repayment of unpaid child support and alimony take priority over any other creditor.
Retirement and college savings gain protection
Funds in retirement accounts such as 401K, 403b and IRAs are deemed as assets that are not available to creditors as part of the bankruptcy. Debtors can continue to contribute to these accounts, if they can. Additional accounts that are exempt are college savings funds for children.
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