|
If you are in financial trouble and are looking for a fresh start, you need to know about a new bankruptcy law—the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005—that went into effect on October 17, 2005. The new law has drastically changed the way Americans file for bankruptcy and not for the better. Today, bankruptcy is a more expensive and drawn-out process that places numerous burdens on consumers and their lawyers. Consumers considering bankruptcy still have two options: liquidation (Chapter 7) or reorganization (Chapter 13). Under a Chapter 7 bankruptcy, some or all of your current property is liquidated (sold) to pay some of your debt and in return most or all of your debt will be erased. In a Chapter 13, you devote part of your income to paying down your debts over the course of three to five years (depending on your income and how much of your debt you can afford to repay). In the end, you get to keep your property, and much of your remaining debt is erased. Before the new law took place people could seek protection from a court even before they filed papers if, for example, they were facing an imminent foreclosure on their home. That's no longer true. Now, no one can file for bankruptcy until they can prove to the court that they've participated in credit counseling. In credit counseling many will find (especially those with above-average incomes) that they no longer qualify for Chapter 7 bankruptcy, but instead will have to repay at least some of their debts under Chapter 13. Those who do qualify for Chapter 7 will discover they have more hoops to jump through and fewer protections than provided under the old law. And, both Chapter 7 and 13 filers will be required to go through budget counseling before their debts can be discharged. Why such stringency? Because the credit industry successfully argued that many people were abusing the system and walking away from debt they could pay off. But according to a recently released survey by the National Association of Consumer Bankruptcy Attorneys, only 3.3 percent of those surveyed (61,336 bankruptcy filers since October 17, 2005) were eligible for a debt management plan and could have avoided filing for bankruptcy in the first place. Furthermore, 79 percent of those surveyed sought bankruptcy due to circumstances beyond their control such as divorce, losing a job, a medical emergency or some other unexpected event—not because they were financial deadbeats. Despite this news, it is still possible to get out of debt and begin anew. This article explains some of the most important changes in the new law and the two most common bankruptcy options, Chapter 7 and Chapter 13. Most legal self-help publishers are updating their bankruptcy books to provide you with step-by-step instructions and forms should you decide to file on your own. Our guide begins with a look at alternatives to bankruptcy and ends with a brief discussion about life after bankruptcy. Because the new bankruptcy law has made it harder to qualify, and more expensive to proceed, exploring alternatives to bankruptcy is more important than ever. Here is a list of some of your options. For additional information on how to get out of debt, see the resources section at the end of this guide. Negotiate Directly with Your Creditors. If you have some income or some assets you are willing to sell, you may want to negotiate with your creditors rather than file for bankruptcy. Try to work out different payment plans or options. Creditors would rather get some of their money back than none, so they might be willing to reduce your minimum monthly payments, waive late charges or give you more time to pay if it seems like you are making an honest effort to pay. If creditors begin to harass you, know your rights under the Fair Debt Collection Practices Act, which prohibits certain tactics used by debt collectors. Information about your rights under this act is available online at the Federal Trade Commission's Web site (www.ftc.gov) or by calling them toll-free at (877) FTC-HELP. Work with a Credit Counseling Agency. Another alternative to bankruptcy is to work with a credit counseling agency. Under the new law you will have to do credit counseling anyway, so you might as well see if an agency can help you get out of debt before you decide on bankruptcy. The new law creates stricter requirements for credit counseling agencies so make sure the agency has been approved by the Office of the U.S. Trustee. If you have an income, you can work with the credit counseling agency to consolidate your bills into one payment that you make to the agency. The advantages are that the agency will negotiate with your creditors to reduce your debt and you will be able to revive your credit if you successfully complete the debt management program. The disadvantages are that if you miss a payment a creditor could pull the plug on the whole plan. Also, debt management requires you to pay off all your debts, while bankruptcy discharges some of your debts. Wait it Out. If you don't have any income or property, and don't expect to have any, you're basically "judgment proof"—meaning you have nothing creditors could take even if they did sue you. Regardless of how poor you are, some of your property will always be protected under the law including your clothes, household furnishings and even your unemployment benefits. While no one would intentionally live in poverty just to avoid debt—if you find yourself in that unfortunate situation—you could wait until your debts become "uncollectible." Debts usually become uncollectible after several years and are removed from your record after seven. If you decide to file for bankruptcy you can go it alone, work with a bankruptcy petition preparer or hire an attorney. Go it Alone. If you decide to file for bankruptcy on your own, you'll want to become familiar with the new law, procedures and forms. Many legal self-help publishers are working feverishly to get do-it-yourself information about the new bankruptcy law into your hands. In the meantime, you can find lots of good information and help on the Internet. One place to start is the National Bankruptcy Law Project (www.bankruptcylawproject.com) which includes resources and referrals to bankruptcy petition preparers. You can also check the American Bankruptcy Institute (www.abiworld.com) which offers a Consumer Education Center on its Web site and makes, should you decide you need one, referrals to certified bankruptcy lawyers. Use a Bankruptcy Petition Preparer. Bankruptcy Petition Preparers (BPPs) cannot give you legal advice or help you make any decisions regarding your bankruptcy, but they can help you fill out the necessary documents for your case. BPPs will be familiar with the courts in your area and also the protocol for filing for bankruptcy. They are far less expensive than a lawyer but are also held to a stricter standard under the law, meaning they will be in bigger trouble if they try to do anything more than fill out documents for you. When you need advice, you could contact a telephone legal advice service, which can be found online or in your local yellow pages, and are sometimes even provided by your state bar association. Also, the BPP might have a lawyer they can recommend for consulting services. Hire a Lawyer. The new law has made bankruptcy more complicated, increasing the pressure to hire a lawyer. It also imposes new requirements and obligations on lawyers that make their jobs more difficult and time consuming. For example, lawyers must now personally vouch for the accuracy of the information their clients provide or face possible sanctions. In response, many have chosen to get out of the field altogether or are substantially increasing their fees. If you decide to hire a lawyer, make sure you select someone who is knowledgeable about the new law. Before you can file for either a Chapter 7 or Chapter 13, you must complete credit counseling with a government approved agency. To find an approved agency, go to the U.S. Trustee's Web site www.usdoj.gov/ust/ and click on "Credit Counseling and Debtor Education." The law requires counseling first to give you an idea of whether or not you really need to file for bankruptcy, and if you do, whether a repayment plan (Chapter 13) would be sufficient. You should know that if the agency proposes a payment plan, you don't have to follow it but you do have to present it to the judge, along with a certificate that shows you participated in counseling before you will be allowed to file for bankruptcy. You also have to participate in, and pay for, a debt management class after your case has gone through bankruptcy but before any of your debts can be officially discharged. Prior to the new bankruptcy law, people could generally choose which type of bankruptcy they filed. Under the new law, however, individuals must meet certain eligibility requirements and may need to pass a "means test"—essentially a formula to decide whether you have enough income left over to make the payments each month under a Chapter 13 bankruptcy. If you do, you cannot file for Chapter 7 bankruptcy. If you don't, you will be allowed to file for Chapter 7 bankruptcy, assuming you meet the other qualifications, including being up-to-date on your tax returns. Other types of bankruptcy also exist. Chapter 11 bankruptcy is for businesses and individuals with very large debts. Chapter 12 bankruptcy is for individuals whose debts are the result of operating a family farm. Neither is a popular option for most people filing for personal bankruptcy. You must participate in credit counseling before you file for any type of bankruptcy and a budget management course before the courts discharge your debts at the end of your bankruptcy. There are other eligibility requirements as well. The most notable is the "means test." You will have to pass a means test if your debts are primarily derived from consumer debt (racked up by you or your family, not by your business) and your current monthly income is more than the median income in your state. You can find median income tables, by state and family size, by visiting the U.S. Trustee's Web site www.usdoj.gov/ust—on "Means Testing Information." Under the means test, you cannot file for Chapter 7 if, after certain expenses are deducted—such as your mortgage, car payments and what you pay for food and clothing—your 5-year disposable income is at least $6,000 ($100 a month). An additional catch about your expenses is that you have to rely on limits the IRS imposes which could be lower than what you actually paid, especially if you live in an expensive area. If you do qualify, you will have to pay a $274 filing fee (as of 2006) and pay for any legal services you choose to use. You begin a Chapter 7 bankruptcy by completing forms that explain your current economic situation as well as information about your property (whether it's owned outright or if you're still making payments on it). All of the property you own at the time you file for bankruptcy is included in your "bankruptcy estate," including property located out of state and property being used by someone else. It also includes property you may obtain someday (possible inheritances) and property you own jointly with someone else. Assets you accumulate or come into after you file are not included in your bankruptcy estate. To pay off some of your dischargeable debts—which include most legal, medical and credit card debt, along with most loans and court judgments—the court will appoint a "trustee" who will sell property from your bankruptcy estate that isn't exempt. To figure out what property is exempt, you must become familiar with your state's exemption laws. Property exemptions differ in each state, and you must meet residency requirements (which have changed under the new law) before claiming a particular state's exemptions. Some states offer filers a choice between their state's exemption system or that provided by the federal bankruptcy code. While state exemption laws vary, they typically allow you to keep the equity in your home, your personal property (such as your furnishings, a car and or tools used for business and clothing), retirement plans, and up to 75 percent of the wages you earn. The trustee will sell property from your bankruptcy estate to pay off your "dischargeable" debts. But not all of your debts are dischargeable. Some, including back child support and alimony, student loans, back taxes, and debts resulting from criminal restitution claims must still be paid by you. If you change your mind after filing, you can ask the court to dismiss your case. A trustee might oppose your request if he or she does not think it is in the best interests of your creditors. If you do dismiss, you can file again later though you may have to wait 180 days and pay another filing fee. You also have the option of converting your Chapter 7 filing to Chapter 13. Assuming you meet all the restrictions placed on Chapter 13 filers (you've taken the requisite counseling courses, are up-to-date on your taxes and have supplied the court with your tax returns for the previous year, do not have secured debts that exceed $922,976 or unsecured debts that are more than $307,675, and haven't recently received a previous discharge under either Chapter 13 or 7), you can proceed with a Chapter 13 bankruptcy. In Chapter 13 bankruptcy, you will use your income to pay all or some of what you owe your creditors over a set period of time (typically three to five years). As long as you make your payments, you will not have to forfeit any of your property. You begin by filling out paper work that shows the court what you earn, owe and spend. You also need to present a certificate that shows you've attended counseling and present a plan to the court of how you are to pay down your debts with regular payments. You figure out what you can afford to pay by calculating what your disposable income is—using "official" expenses compiled by the IRS. You will make a payment (usually monthly) to the court-appointed trustee and the trustee will use the money to pay your creditors and also collect his or her own statutory fee (usually about 10 percent). Chapter 13 bankruptcies also have a $189 filing fee, as of 2006. If you complete your 3- to 5-year repayment plan, the balance of your dischargeable debts will be wiped out. If you cannot make your payments at any time during your repayment plan, you can ask the court for permission to modify your plan. The court also might let you end your case early and discharge your debts if you cannot pay due to circumstance beyond your control (called a "hardship discharge"). If neither of those options work for you, you can convert your case to a Chapter 7 (if you meet the requirements) or dismiss your case altogether and pay your creditors the balance of what you owe on your own. Bankruptcy will have an effect on your life far after the case is over. On the plus side, your debts will be gone or at least diminished. But on the negative side, your credit will be affected. Chapter 13 facilitates the process of restoring good credit moreso than Chapter 7, which you may want to consider before you file. After a bankruptcy discharge, government entities are not allowed to discriminate against you because you filed for bankruptcy, but private companies sometimes can. Current employers are not allowed to fire or discriminate against you for your bankruptcy filing, but future employers can, unless they are government agencies. Private companies can also consider your bankruptcy when renting you property or doing other business with you. What happens if you need to file for bankruptcy again? You can't get a Chapter 13 discharge if you received a Chapter 13 discharge within the past two years or a Chapter 7 in the past four years. If you do file again, you might have less protection from creditor harassment the second time around. The Complete Personal Bankruptcy Guide by Edward A. Haman. Sphinx Publishing, 1935 Brookdale Rd., Ste. 139, Naperville, IL (60563). 2006. 264 pages, $21.95 How to File for Chapter 7 Bankruptcy by Stephen Elias, Albin Renauer, Robin Leonard. Nolo, 950 Parker St., Berkeley, CA 94710. 2006 (13th Ed.). 352 pages, $29.99 J.K. Lasser's The New Bankruptcy Law & You by Nathalie Martin with Stewart Paley. John Wiley & Sons, 605 3rd Ave., New York, NY 10158. 2006, 226 pages, $12.95 The New Bankruptcy by Stephen Elias. Nolo, 950 Parker St., Berkeley, CA 94710. 2006 (1st Ed.). 400 pages, $21.99 Personal Bankruptcy Laws for Dummies by James P. Caher and John M. Caher. John Wiley & Sons, 605 3rd Ave., New York, NY 10158. 2006 (2nd Ed.). 364 pages, $19.99 Personal Bankruptcy Simplified: File for Bankruptcy with the New 2005 Bankruptcy Act by Daniel Sitarz. Nova Publishing, 1103 W. College St., Carbondale, IL, 62901. 2006. 288 pages, $29.95 Additional consumer information on the new bankruptcy law is published by the following organizations and can be found on their Web sites: American Bankruptcy Institute (www.abiworld.org)
National Bankruptcy Law Project (www.bankruptcylawproject.com)
Nolo (www.nolo.com)
|
