In 2005, Congress passed new laws restructuring the bankruptcy options available to most individuals. The Bankruptcy Abuse Protection and Consumer Protection Act of 2005 was a response to an upsurge in bankruptcy filings, and a perception by some that consumers were abusing their right to file for bankruptcy. Don't worry -- even though some rules have changed, you still have the right to file for bankruptcy. But the act makes it harder to protect your assets, requires credit counseling before you may file, and puts extra requirements on bankruptcy attorneys.
Before you can file for bankruptcy, the new law requires that you complete a 90-minute credit counseling session with a counselor approved by the U.S. Trustee. This is required regardless of whether you know you won't be able to repay the debt. You must submit a certificate showing that you completed this session, as well as any repayment plan the counselor draws up, to the court. Later, before your bankruptcy can be completed and your debts discharged, you must attend more debt management classes and show the court proof that you attended them. You must pay for these classes yourself.
Before the new law, it was up to the judge in your case to decide whether you had enough money to declare Chapter 7 bankruptcy, in which you liquidate your assets. Now, there's a complex financial test the court must use to make that decision. Essentially, it looks at how much disposable income you have, and how much money you make compared to families of the same size in your state. First, the court must decide whether you can afford to pay at least a quarter of your unsecured debt. Basic living expenses like food and rent, as well as secured debt like a mortgage, will be subtracted from the income used to make this decision.
Second, the court must compare your income to the median income of a family of the same size in your state. (More specifically, it uses your average monthly income over the past six months.) If your income is above the median and you can afford to pay a quarter of your unsecured debt, you're not allowed to file for Chapter 7 bankruptcy. If your income is below the median but you could still afford to pay 25% of your unsecured debt, your judge may choose whether you can file for Chapter 7 bankruptcy. You may also ask the court to consider making an exception under special circumstances, such as losing a job in the past six months or being affected by a major disaster. Most of those who aren't allowed to file for Chapter 7 bankruptcy must file for Chapter 13 bankruptcy instead.
Chapter 13 filers set up a payment plan with the court to pay off all the debt they can over a series of years. Before October of 2005, a judge decided what these filers could afford to pay. Now, the court must use stricter standards set by the IRS that determine what's a reasonable charge for food, rent and other reasonable living expenses. You may contest the result, but of course, that takes time and money.
Homeowners are also subject to new laws determining how much of the equity in their homes is protected. Before, the laws in the state where you live determined this, as long as you'd lived there for three months or more. Now, you must live in a state for at least 40 months (three years and four months) before you can use its homestead laws. People seeking to protect personal property like cars must live in a state for at least two years before they can use its exemption laws.
The new law is also tough on bankruptcy lawyers, who can be subject to steep fines if their clients' information turns out to be inaccurate. This means bankruptcy attorneys must now take more time to make sure their clients' personal financial information is accurate and complete -- which in turn increases the clients' attorney fees. In effect, this requirement places another financial burden on bankruptcy filers.