New Bankruptcy Law Tougher On Consumer

Jeanette A. Tucker  |  10/28/2005 8:40:12 PM

News You Can Use For November 2005

A new bankruptcy law went into effect on October 17, making it more difficult for consumers to prove they should be allowed to clear their debts through Chapter 7 Bankruptcy.

Those who do file for bankruptcy will be paying much higher fees to bankruptcy attorneys and may experience delays at the bankruptcy courts for the next few months while the multitude of filings that were initiated under the old law are addressed.

LSU AgCenter family economics professor Dr. Jeanette Tucker explains the major reforms under the new law, officially known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

• Mandatory credit counseling. 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.

• 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.

Tucker adds that 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 – $38, 017 for a family of two in Louisiana, $51,402 for a family of four – you won’t 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.

• More filings expected under Chapter 13. 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 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 a job loss, but who can get back on track, if given time to catch up.

• Tax returns and proof of income required. Under the new bankruptcy provisions, individuals filing for bankruptcy under Chapter 7 or Chapter 13 must show their income by providing federal tax returns from the previous tax year. If a filer has not paid taxes for the previous year, he or she must do so before the bankruptcy can proceed.

• 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 will be 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.

• New priority for unpaid child support and alimony. Unpaid child support and alimony payments will now take priority over payment to any other creditor.

• Mandatory financial management education. 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.

• Tougher homestead exemptions. Under the new law, if filers haven’t lived in a state for at least two years, they may take only the state 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.

• Lawyer liability. Under the new law, the bankruptcy attorney may 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.

Tucker says 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.

For information on related family economics topics, click on the links at the LSU AgCenter home page, at www.lsuagcenter.com. For local information and educational programs, contact an extension agent in your parish LSU AgCenter office.

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On the Internet: LSU AgCenter: www.lsuagcenter.com/

Contact: Jeanette Tucker (225) 578-5398, or Jtucker@agcenter.lsu.edu

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