Years ago, just about anyone could file for bankruptcy. As long as they could show an imbalance of debt-to-income ratio and an overload of debt, they would quality. Well, times have changed. With so many millions of people now in debt and numbers growing, the government stepped in and said, “Enough is enough.” While some of the new bankruptcy laws are good, others might be considered not so good.
On October 17, 2005, a new bankruptcy law went into affect as a means of providing more protection for consumers. Officially known as the Bankruptcy Abuse Prevention and Consumer Protection Act, or BAPCPA, this law was signed in by President George Bush, which covers many changes to include debtors being required to pass strict rules to qualify. Through rigid testing, a determination is made whether Chapter 7 or Chapter 13 bankruptcy can be filed.
As you will discover, quite a bit of controversy surrounds this new law and for good reason. People supporting BAPCPA agree that it prohibits debtors who can afford to pay off debts from filing for bankruptcy, thus abusing the system. On the other end of the spectrum are those who do not support BAPCPA. For these individuals, the consensus is that the law is too strict. Regardless, just about everyone agrees that the changes are indeed the most significant law passed in several decades.
Again, opinions about the new bankruptcy conflict and considering the political motives and various viewpoints, it can all seem very confusing. The truth is that using bankruptcy to erase debt is a necessary evil for people who would otherwise have not way to get out of debt, whether from illness, loss of job, family death, and so on. In the past 20 years, the number of bankruptcies has jumped from 280,000 to 1.5 million! In fact, in just the past 10 years, one million people have filed for bankruptcy every year!
The downside to bankruptcy is that for each person unable to pay off debt, means someone else has to pick up the slack, which is the system by which we live. With so much debt and numbers staggering, the bankruptcy reform was designed to prevent the laws meant to help people from being abused. Obviously, bankruptcy in any case should be a last resort since once its done, it will remain on the person’s credit report for the next 10 years, meaning financial power is diminished although not impossible.
The truth is that the benefits that bankruptcy affords in wiping out debt needs to outweigh any negative aspects, which is something any person contemplating this action should consider. For most people, they would rather not file for bankruptcy but in some cases, this action is inevitable. The new bankruptcy law, BAPCPA, most definitely makes it more of a challenge for people who can afford other options out of the financial situation. Below are the changes this new bankruptcy brings:
· During the mandatory 180-day period prior to filing bankruptcy, you would have to go through a special briefing by an approved not-for-profit credit and budget, counseling agency. This agency must provide you with information outlining various counseling services to help you out of the situation. Additionally, this agency must perform a budget analysis. Then, if you were unable to pay for the service, it would be offered to you at no charge.
· Next, for you to qualify for Chapter 7 bankruptcy under the new law, which is the option that gives you a clean slate by wiping out debt, you would have to have an income level below the median income for the same size family living within your state or undergo a bankruptcy means test. This particular test is somewhat complex and considered strict when it comes to expenses. For instance, you would be allowed $1,500 annually per child under age 18 for expenses associated with private education no matter the actual expense.
· If you had an income more than the median income level for the same size family living within your state and you were able to pay a minimum of $6,000 over a five-year period or $100 monthly, then you would be required to file bankruptcy under Chapter 13, which means a portion of your debt would have to be repaid.
· A bankruptcy lawyer is required to certify your financial statement to the court. In fact, the lawyer will now be held financially responsible should any of your statements be false or misleading. Because so much responsibility has now fallen back on the lawyer, you can expect fees for filing bankruptcy to be much higher.
· The cost of filing a Chapter 7 bankruptcy has increased fro $155 to $200 and for Chapter 13 bankruptcy, the cost has decreased from $155 to $150.
For creditors, requirements under the new bankruptcy law have changed as well. These include the following:
· Under the new bankruptcy law, the Federal Reserve Board is required to study the question of, “Is there a connection between credit card debts developed in college with bankruptcies?” With so much research on the issue, a tremendous amount of documentation shows there is indeed a strong connection. The primary problem is that credit card companies swoop down over innocent college students with little money, making it far too easy for them to charge!
· The next change for creditors under this new bankruptcy law is that creditors cannot cancel and must display payback time. In other words, a creditor cannot cancel a credit card if the consumer pays it off. Additionally, the creditor is required to list the amount of time it will take to payoff the balance by the consumer paying only a minimum payment. This means now, a creditor must show that a $5,000 balance at 17% requiring a 2% payment will take a whopping 40 years to pay off!
· Third, bank regulators are now mandated to study whether credit card companies are issuing cards indiscriminately, without consideration to a person’s ability to repay. Credit card companies must also be studies to determine if they are actually key contributors to bankruptcy.
As the debtor, there are a few other requirements to consider in addition to those already mentioned.
· If there were any charges made on a credit card within the first three months after bankruptcy, you would be required to pay them in full.
· The bankruptcy courts have never given much credence to child support but the new law now sets a higher priority on both child support and alimony. With this, your income from child support and/or alimony may now be considered whereas with the old law, it was typically overlooked.
· IRAs are another factor to consider under the new bankruptcy law. Although bankruptcy should protect any money put aside in an education IRA, it also puts a cap on what things can be shielded from creditors in a Roth or other IRA. Interestingly, the cap is $1 million.
While all of these changes bring about great concern for people thinking about filing bankruptcy, other factors in the new law raise even more concern.
· Living expenses can now be dictated by the court. The concern is that most people are not sure the law can dictate a reasonable amount for living expenses. The reason is that different parts of the country are dramatically different. For example, if you live in the State of California, cost of living is 50% or more than the west coast. The question that has risen is “How can any court dictate ‘reasonable’ living expenses accurately”?
· Assets cannot be shielded by the debtor by moving to Texas or Florida, or buying a high-end home. In other words, if the rich decide to move to a different state such as Florida or Texas as a means of benefiting from a higher state homestead exemption, the new law no longer allows this.
· Auto loans are also a concern under the new bankruptcy law. In this case, the full amount of the auto loan must be paid off or surrendered to repossession, even if the automobile is not worth the amount of outstanding balance. Unfortunately, we have all seen where a great car salesman sells a car with high interest and ridiculously high payments, more than the person can afford. After having the automobile for five or six months, he or she realizes that the payments are more than can be afforded. The only option is to file for bankruptcy. Under the old law, the car would be surrendered and the debt wiped out. Under the new law, the amount of the debt must be paid in full regardless of the balance!
· Renter evictions are also hit by the new bankruptcy law. Now, landlords are able to evict tenants that have fallen victim to bankruptcy much easier. While the old law provided some protection, the new law means if you fall behind on rent payments, you can be evicted quicker and easier.
· Finally, creditors are now permitted to ask the courts to dissolve the established bankruptcy plan if you are late filing your paperwork to include copies of paycheck stubs, tax returns, employment verification, bank statements, and so on.
In summary, the new bankruptcy law has advantages and disadvantages. With the freedom in which credit was issued having increased over the years, as well as contribution to credit card company’s bottom line, changes had to be made. Although some of the new laws seem a bit harsh, the goal is to teach people to be more financially responsible. However, the new laws are also designed to help the people that REALLY need the help, not those just looking for a fast and easy way out. The key to the new bankruptcy law working is all about balance, social and economic balance.
While the changes with the bankruptcy law are certainly not perfect, the bottom line is that they are final. Therefore, reaction will occur but the law will stay. Keep in mind that as debt and the need for solutions continues it is likely that additional amendments will surface some day.
http://www.creditrepaircommando.com/new-bankruptcy-law.html
