Priority Financial Managment

   The filing rate for bankruptcy has more than doubled during the last decade, and last year approximately 1.6 million households filed for bankruptcy. Congress saw the increase as a abuse by people who would otherwise be able to repay their debts. The primary supporters behind the new, recently passed Bankruptcy Reform are your creditors. They feel they are getting less than they should when people file for bankruptcy. Obviously, some consumers do abuse the bankruptcy system, but the overwhelming majority of people filing bankruptcy are in financial distress. Most consumers are filing as a result of job loss, medical expense, divorce, or a combination of those causes. The ability to file for bankruptcy and to receive a fresh start provides crucial aid to families overwhelmed by financial problems. This new act will deny many consumers access to bankruptcy court and the ability to file Chapter 7. Banks, big business, lending institutions, and credit card issuers will benefit greatly from the new laws.

   Under the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, you will be required to receive a certificate of completion from an approved non-profit credit-counseling agency within 180 days prior to filing bankruptcy. The certificate must state that you have received a briefing on opportunities for available credit counseling and have been assisted in performing an individual budget analysis. People who have even the smallest ability to pay on some of their debts will be strongly encouraged to utilize the non-profit counseling service, even if it means they will be repaying a higher percentage of debts than they would with even a Chapter 13 Bankruptcy. The Bankruptcy Reform Act clearly favors credit-counseling plans that provide for repayment of 60% or more of the debts. However, the debt is to also be repaid over a much shorter period of time. Remember, a credit-counseling plan may only be set for 36-60 months , whereas the original credit card could have been payable over 20 years. What does this mean? For starters, your monthly payments may go up significantly. However, this requirement may not apply if the debtor faces a potential loss of property before he or she can complete the good faith attempt to repay the debt balance owing.

   The most controversial provision of the new Bankruptcy Abuse Act is the enforcement of the “Means Test”. The “Means-Test” essentially denies access to Chapter 7 bankruptcy to debtors deemed “able” to pay their debts. The “Means-Test” examines three different aspects of your income and expenses and then determines your ability to file Chapter 7 Bankruptcy. The first scenario is, does a family earn above the average median income for their state? The numbers that will be used as the median income for each state can be found here. If the combined gross income of your family is greater than the median family income in your state, you cannot file Chapter 7. Then, your option is to file a Chapter 13 repayment plan. The Chapter 13 Bankruptcy requires you to repay a percentage of your debts over a 36-60 month period. At this point if you answered “no” to the first question, you would need to answer the following question. Do you have excess monthly income of more than $100.00 after you deduct the National Standards for Allowable Living Expenses based on your gross monthly income? If the answer is “no” you still must answer another question. Do you have excess income to pay 25% of your unsecured debt over the next 60 months or 5 years? If the answer is “no” - Congratulations. You are now eligible for a Chapter 7 Bankruptcy. If the answer is yes to any of these, then Chapter 7 may not be filed but you could qualify for Chapter 13. Any time a debtor has $100.00 a month more income than the IRS National and Local Standard Expense guidelines will allow, they must submit themselves to a 60 month Chapter 13 repayment plan. This kind of plan will only yield a mere $6,000.00 for creditors over five years, less costs of government-sponsored administration.

   The “Means-Test” examines your previous six months income. However, a lot can change during six months. If you lose your job, see a reduction in wages, or lose income due to medical problems, the “Means-Test” could still force you to pay higher monthly payments in a Chapter 13 plan than you are able to afford. This could eventually lead to wages being garnished, repossession of your cars and foreclosure actions on your house. The test also limits private parochial school tuition expenses to $1,500.00 per year. Based on statistics provided by the National Center for Educational Statistics, $1,500.00 would have covered parochial school in 1993, but it is now barely a third of what parents are paying. This may force struggling families to remove their children from private or parochial school for three to five years in order to complete their Chapter 13 repayment plan. The law does allow for up to 15% of your gross annual income to be given to charities or tithed.

   Debtors filing Chapter 7 or Chapter 13 bankruptcy, must provide a copy of their most recent tax return to the trustee, at least seven days prior to the 341 meeting. Under existing law, debtors in Florida, Texas, Kansas, Iowa and South Dakota can shield an unlimited amount of home equity from creditors by filing for bankruptcy protection. Under the new agreement, an individual must own a residence in the state for at least 40 months before declaring bankruptcy to get qualify for that exemption. If unable to meet the residency requirement, a debtor would be allowed to take only a $125,000 homestead exemption. This new language applies only to states whose homestead exemption already exceeds $125,000. The new Bankruptcy Bill has no negative impact on situations where a debtor has lived in their home for 40 months, even if they recently paid down significant portions of their mortgage.

   Another new addition to Chapter 13 Bankruptcy Laws affects your ability to keep your car during a filing. Under the previous Bankruptcy law, debtors could keep a car without making all of the payments on the loan. They could pay only the Blue Book Value and still be able to retain the vehicle. However the new Bankruptcy law states that you complete the full term of the loan at the original amount or allow the car to be repossessed. This means that people who owe more than their cars are worth could be negatively affected. The new Bankruptcy law also places a cap on the amount of money that can be protected in an IRA, pension or retirement savings. Current legislation allows you to protect all of the money you have in your 401(k) if you file bankruptcy. In the past, Individual Retirement Accounts were treated the same way. This is not true, however, under the bankruptcy reform. This new bill would allow only the first $1 million saved in an IRA to be protected from creditors. Any amount over that is unprotected. However, if you recently changed jobs and rolled your 401(k) into an IRA then your creditors will not have access to those funds. Education IRAs will also be protected.

   In summary, the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 makes it much more difficult to file for bankruptcy. President Bush signed this bill on 4/20/05 and it goes into effect 180 days after that date.

   If you are struggling with debt and want to avoid the arduous process of filing bankruptcy, contact Priority Financial Management, LLC. We can help you avoid bankruptcy and can negotiate settlements on your debts, reducing them by 40-60% on average. Our consultation is completely free with no risk or obligation. You can contact us or fill out the Free Consultation Form