What is "The New Bankruptcy Law"?
The "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" proposes to amend §707(b) and adopt a means test to determine eligibility to file.
The change in §707(b) would impose the following:
- Create a presumption that a debtor is abusing the bankruptcy law and deny a discharge if the debtor's income exceeds the state's median income. Currently, §707(b) Motions to dismiss can only be brought by the US Trustee and the Trustee has the burden to prove "substantial abuse." Under the new law, creditors can also bring a motion objecting to discharge on "substantial abuse" grounds.
- Even if a debtor makes less than his state's median income, the law presumes the existence of abuse for debtors who can repay 25% of their unsecured debt or $10,000 over five years.
- The determination of a debtor's ability to pay 25% to unsecured or $10,000 would be reached as follows:
The Census Bureaus statistic for median family household income;
Family Household Expense figures for IRS collection efforts (often unrealistically low):
- Allow debtors to overcome the abuse presumption only by demonstrating special circumstances
- A debtor's attorneys would be required to reimburse Chapter 7 bankruptcy trustees for the cost of successfully prosecuting §707(b) actions, driving up legal fees and costs.
- Create sanctions for creditors who unsuccessfully prosecute §707(b) actions if the creditor is owed at least $1,00
Mandatory Credit Counseling and Debtor Education
- The new law amends the Bankruptcy Code to require debtors to receive a full budget analysis with an approved nonprofit budge and credit counselor within 180 days of filing bankruptcy. The court may waive the requirement for up to 45 days after filing for emergency filings.
- Denies a discharge to debtors who have not completed an instructional course on personal financial management before the discharge of the case.
Protection of Marital Obligations
- Child support obligations will receive the first priority if funds are available to make payments to creditors.
- A debtor's failure to make post-filing child support payments will be a basis for dismissal or denial of discharge of a Chapter 13 case.
- Under the current law, divorce property settlement obligations would normally be discharged unless they are in lieu of support/maintenance and a former spouse has to object to those obligations being discharged. The new legislation would make these obligations automatically non-discharegable.
- The Trustee and Debtor can no longer avoid liens on property placed for the purpose of enforcing payment of marital obligations.
Protection of Personal Property Liens
- The "automatic stay" that prevents creditor action would end automatically if a debtor failed to either reaffirm the debt or redeem the collateral within 45 days of filing. So, a creditor would be able to repossess a debtor's car without having to ask the court's permission if the debtor failed to reaffirm or redeem within 45 days of filing.
- "Household goods" are defined very specifically by the new law, therefore, limiting a debtor's ability to avoid liens placed on certain types of personal property.
- Under the old law, in a Chapter 13, a debtor could repay a small percentage on any portion of a vehicle loan that exceeded that car's fair market value. Under the new law, the unsecured portion of the loan can only be reduced if the loan was incurred more than 30 MONTHS before filing bankruptcy.
- Under the old law, all unsecured debts (credit cards, medical bills, etc.) could be paid at a percentage on the dollar. The new law only allows you to pay a percentage of the debt if the debt was incurred more than one year before filing.
Discouragement of Serial Bankruptcy Filings
- If a debtor filed more than one bankruptcy case within a year, then the automatic stay will "expire" 30 days after filing, unless the debtor brings a motion to extend the stay, provides notice to creditors and prevails in a hearing before the court where the debtor would have to prove that the filing is in good faith.
- If the debtor filed two or more prior cases within the last year, the automatic stay would not go into effect until the debtor, within 30 days, brings a motion to implement the stay and establishes at hearing that the filing is in good faith. In other words, the stay would not be "automatic". The debtor is not afforded any protection from creditors until he prevails on this motion.
- The allowable time between filings of Chapter 7's is increased from
six (6) years to eight (8) years
- A debtor may only receive a Chapter 13 discharge if the debtor has not received a discharge in a Chapter 7, 11, or 12 within
four (4) yearsof the filing.
Increased Burdens on Debtors' Attorneys
The new law requires debtors' attorneys to certify the accuracy of their clients' disclosures. Now your bankruptcy lawyer actually has to verify what you are telling him about your income, expenses, assets and debts.
The new legislation also requires an attorney to audit a client's budget to determine if the debtor can afford to reaffirm a debt. Current law simply requires debtor's attorneys to certify that the reaffirmation does not create a "substantial hardship" on the debtor.
If a debtor wants to reaffirm a debt, but the attorney knows the client can't afford it, the debtor and the attorney may have a conflict of interest. The debtor wants to keep the property but the attorney could be exposed to liability for certifying a reaffirmation that is not affordable.