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Changes in Bankruptcy Laws - Credit Counseling, Means Test

Have There Been Any Changes to the Bankruptcy Laws?

Last Updated: May 10, 2016

Filing for bankruptcy in 2016 is virtually no different than any other year. The bankruptcy laws haven't changed much since 2005, when President Bush signed into law "The Bankruptcy Abuse Prevention and Consumer Protection Act." This article will summarize the changes made back in 2005 and what those changes mean to you.

Credit Counseling Required

Before you can file for bankruptcy, either Chapter 7 or Chapter 13, you must complete credit counseling with an agency which is approved by the United States Trustee's office. The purpose of this counseling is to give you an idea of whether or not you really need to file for bankruptcy. All consumers must attend a credit counseling education session at least 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.

Means Test

Prior to the new bankruptcy laws of 2005, filers could choose the type of bankruptcy that was best for them, either Chapter 7 (liquidation) or Chapter 13 (repayment). Most filers chose to file Chapter 7 Bankruptcy. Now, applicants must pass a Means Test to see if their income and/or ability to pay excludes them from filing one or the other type of bankruptcy. That is, if you have enough disposable income to make payments on a Chapter 13 plan, you will not be able to file Chapter 7.


Longer Repayment Time For Chapter 13 Bankruptcy

For those filing Chapter 13 bankruptcy, the repayment period has been extended to five years instead of three.


State Exemptions

You cannot use the exemptions in your state of residence unless you have lived there at least two years.


Homesteads

The exemption is limited to $125,000 of your state's homestead exemption, if the property was acquired within the previous 1,215 days (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 1,215 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 rates are over 20 percent, which can make a $2,000 car loan equate to well over $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.


Child Support and Alimony

These debts went from a priority of 7th to 1st.


Bankruptcy Lawyers are 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 a lawyer can be fined if his client has supplied false information to the lawyer, who, having no reason to think the information is incorrect, forwards this information 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 percent 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, able to drop their income 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.

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