Last updated October 2005
New Bankruptcy Law which went into effect on Oct 17, 2005
Here are the major changes, summarized.
Want to see who voted for this mess? Here's the bill (S256) in its entirety.
Debt counseling required.
According to the new bankruptcy laws which , all consumers must attend credit counseling education within 6 months before filing for bankruptcy. Here is a website which gives you a list of qualified credit counseling centers. Only education from one of these centers qualifies. In addition, consumers must complete additional financial education/certification before having their debts finally discharged in the process. Here is a list of the approved centers for financial education: http://www.usdoj.gov/ust/eo/bapcpa/ccde/de_approved.htm.
Means Test
Applicants must also pass a Means Test (to see if your income and/or ability to pay excludes you from filing).
Repayment period of Chapter 13s will be almost twice as long.
For those pushed to Chapter 13 bankruptcies, the repayment period is 5 years instead of 3 years.
State Exemptions:
You cannot use the exemptions in your state of residence unless you have lived there at least 2 years.
Homesteads:
The exemption is limited to $125,000 of your state's homestead exemption if the property was acquired within the previous 1215 day (3.3 years). The cap is not applicable to any interest transferred from a debtor's previous principal residence (which was acquired prior to the beginning of such 1215-day period). How does this work?
Example 1: In Arizona, the homestead exemption is $100K. No matter when you have acquired your home, the amount of equity you are allowed to keep in your home is $100K. If you have more equity than this, you will probably be forced to sell.
Example 2: Kansas, Texas, Florida, Iowa, and South Dakota have unlimited homestead exemptions. So if you have $1 million in equity in your $2 million dollar Texas mansion, and you've owned it more than 3.3 years before filing a bankruptcy, the equity is completely exempt. If you bought it within the last 3.3 years, you are only allowed to have $125K in equity.
Vehicles:
If there is security put in place within 3 years on your vehicle, you must pay the full amount owed or lose the vehicle. Current bankruptcy laws allow you to get the loan stripped down to the value of the vehicle and you make payments at that rate.
What does this mean to the consumer? Let's say you had poor credit and could only afford to buy a car from that shady used car dealership that sells cars to people with bad credit. Typically, the interest on these cars are over 20%, which can make a loan for $2000 car $16,000 if you added up all the payments made for the life of the loan. Under the new laws, the consumer would be required to pay the entire $16,000 back, or lose the car. The old laws reduced the amount of the loan to what the car was worth, and payments would continue from that point.
Counseling:
You must have finished counseling within the last 6 months before you can file.
Critics say this requirement, in addition to adding costs, ignores Senate investigations that suggest the counseling industry is rife with excessive fees, pressure tactics and poor service. Moreover, no approved list of counselors exists. The legislation charges the U.S. Trustees office with creating such a list.
And if you've read this site at all, you know how much I'm horrified at the non-profit credit counseling industry.
Child Support and Alimony:
These debts would go from a priority of 7th to 1st.
Bankruptcy Lawyers are held accountable for supplying accurate information
Under the new law, if information about a client's case is found to be inaccurate, the bankruptcy attorney may be subject to various fees and fines." What this means is that the lawyer can be fined if his client has supplied the him with false information that the lawyer, having no reason to think the information is incorrect, forwards to the court. This doesn't cover information supplied by a lawyer which he knows is false, obviously wrong and fines should be levied in such cases. But this isn't what the law says. The law can be interpreted to say a lawyer can be found liable if his client lies to him.
Tithing:
Up to 15% of your income can be given to charity. This is seen by some as a loophole allowing people who may be just over the thresh hold of having to file Chapter 13 to drop down low enough to file Chapter 7.
Asset Protection Trust
The new law leaves intact an increasingly popular loophole called asset protection trusts. These trusts allow people to protect substantial assets from creditors even after filing for bankruptcy.
Setting up these trusts can cost many thousands of dollars. Maintaining them and paying an in-state trustee can cost thousands more. That rules these trusts out for people of modest means, making them an option mainly for the wealthy.
Until 1977, these trusts could only be opened offshore. But since then, eight U.S. states -- Alaska, Delaware, Utah, Nevada, Rhode Island, Oklahoma, South Dakota and Missouri -- have passed laws exempting assets held in the United States from federal bankruptcy laws. People opening one of these trusts don't have to be a resident of the state, but merely establish the trust through a financial institution located there.
My take:
I think this is the most despicable bill to pass in Congress in a long while. It just shows that in today's politics, money rules the show. The credit card industry has spent untold millions in lobbying fees and donations to Congressional "re-election" funds to ensure the legislation would pass. The net result? We have the finest Congress money can buy.
It should also be noted that the new bankruptcy laws leave in important loophole which benefit only the wealthy: the homestead provisions and the Asset Trusts.
In February, 92 bankruptcy and commercial law professors, saying they represented all major political parties, wrote the Senate to decry the current legislation as deeply flawed. They predicted that it would harm small businesses, the elderly and families with children.
"The bankruptcy filing rate is the symptom. It is not the disease," wrote the professors. While some people do abuse bankruptcy, they argued that the bigger problem has been the way credit is marketed to consumers extending debt, notably credit cards, "to riskier and riskier borrowers" with the predictable consequence that more consumers are going belly-up.
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