New Bankruptcy Law Attorneys in Washington, DC
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), a major reform of the bankruptcy system, was passed by Congress and signed into law by President Bush in April, 2005.
The new bankruptcy law provides additional challenges to people who have financial problems. The Bankruptcy and Debt Relief Law Firm of Ammerman & Goldberg is committed to continue its effort to assist clients in solving their financial hardship. Regardless of the many restrictions which now confront honest debt-ridden people, our legal services, including debt relief agency expertise, will be available to all persons who are over-burdened by debt. Irrespective of the bankruptcy law, you still have many legal options to resolve your financial problems.
If you are considering bankruptcy, call Ammerman & Goldberg for a free phone consultation. We handle Chapter 7 and Chapter 13 consumer bankruptcy filings in Washington, DC, Virginia, and Maryland.
The following is a detailed summary of the new bankruptcy legislation.
After several years and numerous failed attempts, the credit card industry has finally got the bankruptcy law "reform" changes they've been lobbying for. The new law becomes effective on October 17, 2005.
The new law, which marks the biggest change to bankruptcy law since 1978, prohibits some people from filing for bankruptcy altogether. And for those who manage to qualify for bankruptcy, it makes it harder to come up with manageable repayment plans and it has fewer protections from collection efforts than the prior law.
ARGUMENTS FOR AND AGAINST THE NEW LAW
The credit industry says changes were needed because the increasing number of personal bankruptcies-around 1.6 million in 2004, up from 900,000 in 1995-is costing them too much money. But while bankruptcy nearly doubled, credit card industry profits more than tripled in the same period-from $12.9 billion in 1995 to $31.6 billion in 2004. Senator Kennedy estimates the new law will net the credit card industry an additional $5 billion.
Those who opposed the new law say the credit card companies bring their problems on themselves by aggressively marketing high-interest credit cards to low income individuals and luring consumers with "easy credit" deals that balloon into huge debts due to compound late fees and high interest rates.
WHO FILES FOR BANKRUPTCY?
The vast majority of bankruptcy filers are not wealthy individuals trying to cheat the system. According to a 1999 study by federal bankruptcy judges, the average person filing for bankruptcy earns just $22,000 per year. Most have suffered a significant period of unemployment before filing.
According to a report by Consumers Union, 85% of elderly debtors cite medical or job problems as the reason for bankruptcy. Consumers Union also says that single moms trying to make ends meet make up a large portion of bankruptcy filers.
In addition, a recent Harvard study by Professor Elizabeth Warren reported that half of all bankruptcies are triggered b y sudden uninsured medical expenses.
The changes that the new law brings will be devastating to many people who find themselves out of work, ill, or injured, and over their head in debt. Following is a summary of some of the changes to bankruptcy law.
FEWER PEOPLE ELIGIBLE FOR CHAPTER 7 BANKRUPTCY
LOSERS: Those who want to file for Chapter 7 bankruptcy but have an above-average income and could afford to pay a little each month, according to the IRS.
Traditionally, bankruptcy's fresh start has been available to almost everybody. The new law, however, prohibits some people from filing for Chapter 7 bankruptcy altogether-those whose incomes are above the state median (quite low in some states) and who can pay as little as $100 per month to creditors. Whether or not a debtor can afford to pay $100 or more a month will be determined not by the person's actual income and expenses, but by IRS rules that state what "reasonable" expenses are.
People denied a Chapter 7 bankruptcy either has to file for Chapter 13 bankruptcy and come up with a three- to five-year repayment plan or keep slipping further behind on their debts.
This restriction is one reason many women's groups oppose the bankruptcy law. People who can't file for Chapter 7 bankruptcy and wipe out their credit card balances, they fear, will have less money available to pay other debts-child support, for example.
FEWER PEOPLE ABLE TO STICK TO CHAPTER 13 REPAYMENT PLANS
LOSERS: Those who want to file for Chapter 13 bankruptcy but reside where the cost of living is high.
Debtors forced into Chapter 13 bankruptcy because Chapter 7 is no longer available to them will find that the proposed law makes Chapter 13 bankruptcy more difficult. In Chapter 13 bankruptcy, debtors must put together a repayment plan, basing their payments on their income and expenses. Under the new law, actual expenses for many things don't matter-debtors are allowed to claim only allowed expense amounts set each year by the IRS collections department. Thus, for certain expenses-housing, for example-even if the actual cost is high, you will only be able to keep enough income to pay the allowed amount for housing. Some people, especially those living in areas where the cost of living is high, will be unable to follow through with a repayment plan.
LESS PROTECTION FROM CREDITORS' COLLECTION EFFORTS
LOSERS: People in the throes of an eviction, a state license suspension proceeding, or a family law proceeding.
One of the most powerful aspects of current bankruptcy law is called the "automatic stay". This jargon refers to rules that immediately halt almost all collection actions and lawsuits against someone who files for bankruptcy. The new law places limits on the automatic stay. Among other things, the automatic stay no longer stops or postpones:
- Evictions
- Actions to withhold, suspend, or restrict a driver's license
- Actions to withhold, suspend, or restrict a professional or occupational license
- Lawsuits to establish paternity, child custody, or child support
- Divorce proceedings
- Lawsuits related to domestic violence.
FEWER DEBTS WIPED OUT
LOSERS: People, who recently bought luxury goods or received cash advances, as well as those who owe child support or those who incurred debts through fraud.
Some types of debts can never be wiped out in bankruptcy, and the proposed law expands this list.
INCREASED COSTS AND DELAYS IN FILING
The new law requires most people to get credit counseling from a nonprofit agency before filing for bankruptcy. In addition, debtors have to complete a course on personal financial management before completing either Chapter 7 or Chapter 13 bankruptcy.
Another roadblock delays people who had not yet filed a tax return for a recent year. Anyone filing for Chapter 7 bankruptcy has to provide a federal tax return for the most recent tax year; those filing for Chapter 13 have to be current on tax returns for the previous four years.
And for those who seek an attorney's help, it will be harder to find a qualified professional. An attorney who represents debtors will have increased paperwork and new punitive laws that require attorneys to "investigate" the debtor's claims and make the debtor's attorney financially responsible for court costs and creditor's attorneys' fees if the debtor's statement about their property and finances turn out to be false or incomplete. Some practicing bankruptcy attorneys are expected to discontinue their practice rather than face the increased financial risk.
HARDER TO KEEP AUTOMOBILES
Changes in Chapter 13 law require debtors who wish to keep their car to pay the full loan amount on car loans, rather than just the current value of the car, as is currently done in Chapter 13 plans. The new rule applies to all car loans less than two and a half years old as of the date you file. Similar new rules apply to all other property purchased within the last year prior to filing.
CHECKLIST OF KEY CHANGES
The following is a more detailed summary of the key changes regarding the new bankruptcy law.
* Mandatory Credit Counseling
Before filing for bankruptcy most applicants must undergo credit counseling in a government-approved program.
* Stricter Eligibility for Chapter 7 Filing
Bankruptcy applicants who wish to file under Chapter 7 must meet certain eligibility requirements under a "means test". Under the "means test," if your current monthly income is less than the median income in your state, you can file for bankruptcy under Chapter 7. But, if your current monthly income is above the median income in your state, and you can afford to pay $00 per month toward paying off your debt, you cannot file under Chapter 7 and must proceed under Chapter 13. Whether you can afford to pay $100 per month (or $6,000 over a five-year period) is based on a formula that includes your monthly income, your expenses, and the total amount of your debt.
* Tax Returns and Proof of Income Required
Under the new bankruptcy law, people wishing to file bankruptcy under Chapter 7 or Chapter 13 must show proof of their income by providing federal tax returns from the last tax year. If a bankruptcy filer has not paid taxes for the previous tax year, he or she must do so before the bankruptcy can proceed.
* More Filings under Chapter 13
As discussed above, if a bankruptcy applicant is ineligible for filing under Chapter 7 based on the "means test," he or she must file under Chapter 13 instead. There are a number of major differences between Chapter 7 and Chapter 13 bankruptcy, but the main distinction is that under Chapter 13, the debtor enters into a five-year repayment plan in which he or she must pay a certain amount of money to creditors, based on a strict expenses-to-income formula.
* Fewer "Automatic Stay" Protections for Filers
Under the prior Bankruptcy Code, people who filed 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 against the filed are stopped (known as "stayed" in legal terms). But, under the new bankruptcy law some of protections have been eliminated. For example, filing for bankruptcy no longer delays or stops eviction actions, driver's license suspensions, legal actions for child support, or divorce proceedings.
* New Priority for Unpaid Child Support and Alimony
Bankruptcy laws provide a system of repayment priority for people and companies that are owed money (called "creditors"). Under the new bankruptcy law, among the changes in creditor priority is that people who are owed unpaid child support and alimony (i.e. the bankruptcy filer's family members) will take priority over any other creditor.
* Mandatory Financial Management Education
After the conclusion of bankruptcy proceedings, but before any debt can be discharged, bankruptcy debtors must participate in a government-approved financial management education program. The procedure and certified programs for financial management education are being established by the U.S. Trustee's Office, a component of the US. Department of Justice, which is responsible for overseeing the administration of bankruptcy cases.
NEW BANKRUPTCY LAW LIMITS HOMESTEAD EXEMPTIONS
The new bankruptcy law affects homeowners with more than $125,000 in equity who live in certain states (California, Texas and Florida) including the District of Columbia. Homestead exemptions are capped at $125,000, regardless of what the law of your state says, unless you have lived in that state at least 40 months. If you have lived in that state for more than 40 months, your state's homestead exemption amount applies, even if it's higher than $125,000. Homeowners from Maryland and Virginia will not be affected because their state homestead exemptions are already less than $125,000.
WHAT IS BANKRUPTCY?
A brief overview of U.S. bankruptcy laws and procedures.
Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcies can generally be described as "liquidations" or "reorganizations."
Chapter 7 bankruptcy is the liquidation variety-property is sold (liquidated) to pay off as much of your debts as possible, while leaving you with enough property to make a fresh start.
Chapter 13 is the most common type of "reorganization" bankruptcy for consumers-you repay your debts over three to five years.
Both kinds of bankruptcy have numerous rules-and exceptions to those rules-about what kinds of debts are covered, who can file, and what property you can and cannot keep.
Liquidation (Chapter 7)
The liquidation bankruptcy is called Chapter 7, and it can be filed by individuals (a "consumer" Chapter 7 bankruptcy) or businesses (a "business" Chapter 7 bankruptcy). A Chapter 7 bankruptcy typically lasts three to six months. In a liquidation bankruptcy, your property is sold to pay down your debt. In return, most or all of your unsecured debts (that is, debts for which collateral has not been pledged) may be erased. You get to keep any property that is classified as "exempt" under the laws available in your state (such as your clothes, car, and household furnishings). If you don't own much, chances are that all of your property is exempt and you have what is known as a "no asset" case.
If you owe money on a secured debt (for example, a car loan, where the car is pledged as a guarantee of payment), you have a choice of allowing the creditor to repossess the property; continuing your payments on the property under the contract (if the lender agrees); or paying the creditor a lump sum amount equal to the current value of the property. Some types of secured debts can be eliminated in Chapter 7 bankruptcy.
When Chapter 13 Bankruptcy is better Than Chapter 7 Bankruptcy
If you fit into one of the situations described here, you may be a good candidate for Chapter 13
There are many reasons why people choose Chapter 13 bankruptcy-and in particular, choose Chapter 13 bankruptcy instead of Chapter 7 bankruptcy. Generally, you are probably a good candidate for Chapter 13 bankruptcy if you are in any of the following situations:
You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. You cannot do this in Chapter 7 bankruptcy.
You have a tax debt. If a large part of your debt consists of federal taxes, what happens to your tax debts may determine which type of bankruptcy is best for you? You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of these five conditions are true:
The taxes are income taxes. Taxes other than income, such as payroll taxes, Trust Fund Recovery Penalty or fraud penalties, can never be eliminated in bankruptcy.
You did not commit fraud or willful evasion. You did not file a fraudulent tax return or otherwise willfully attempt to evade paying taxes, such as using a false Social Security number on your tax return.
You pass the three-year rule. The tax return was originally due at least three years before you file for bankruptcy.
You pass the two-year rule. You actually filed the tax return at least two years before filing the bankruptcy-having the IRS file a substitute return for you usually doesn't count. However, in some bankruptcy courts, agreeing to and signing the substitute return counts as filing a return for purposes of this rule.
You pass the 240-day rule. The income tax debt was assessed by the IRS at least 240 days before you file your bankruptcy petition, or has not yet been assessed.
Even if your taxes do qualify for discharge in a Chapter 7 bankruptcy case, your victory may be bittersweet. This is because prior recorded tax liens are not affected by your filing. A Chapter 7 bankruptcy will wipe out only your personal obligation to pay the debt. Any lien recorded before you file for bankruptcy remains. After your bankruptcy, the IRS can seize any property you owned at the time the bankruptcy was filed. But this doesn't mean that after your bankruptcy case is over the IRS will come and grab your property. Post-bankruptcy, the IRS tends to seize only real estate and retirement accounts or pensions. And even then, IRS seizures generally take place only when a taxpayer has made no efforts to otherwise resolve the problem. Furthermore, IRS collectors must obtain approval from their supervisors before seizing a house or pension. The IRS is very concerned about negative publicity.
If you cannot discharge your tax debts in a Chapter 7 bankruptcy, Chapter 13 may be a better alternative. There, you pay your tax debts over time.
You have a sincere desire to replay your debts, but you need the protection of the bankruptcy court to do so.
You need help repaying your debts now, but need to leave open the option of filing for Chapter 7 bankruptcy in the future. This would be the case if for some reason you can't stop incurring new debt.
You have valuable nonexempt property. When you file for Chapter 7 bankruptcy, you get to keep certain property, called exempt. If you have a lot of nonexempt property (which you'd have to give up if you file a Chapter 7 bankruptcy), Chapter 13 bankruptcy may be the better option.
You received a Chapter 7 discharge within the previous six years. You cannot file for Chapter 7 again until the six years are up. The new bankruptcy law expands this time period to eight years.
You have a co-debtor on a personal debt. If you file for Chapter 7 bankruptcy, your creditor will go after the co-debtor for payment. If you file for Chapter 13 bankruptcy, the creditor will leave your co-debtor alone, as long as you keep up with your bankruptcy plan payments provided that the Plan of repayment is 100%.
Drawbacks of Chapter 13 Bankruptcy
A major difficulty in Chapter 13 bankruptcy that does not exist for Chapter 7 bankruptcy is that you usually need to complete your entire repayment plan to get any benefit form the Chapter 13 process. (Although the court will, in some circumstances, let you off the hook early for hardship reasons.)
But, if you miss a payment under your repayment plan-and many people do-you're Chapter 13 bankruptcy fails. If you then convert to a Chapter 7 bankruptcy and discharge the debts in their entirety (as is often the case), the money you put toward your unsecured debts under the Chapter 13 repayment plan will have been paid for naught. However, if instead of converting to Chapter 7, you decide to handle what debts remain outside of bankruptcy, you may not have as much debt to repay as when you originally filed your Chapter 13 case.
Chapter 7 May still be viable for some people
Assuming you qualify for Chapter 7 relief based on the "means test", you will emerge debt-free except for a mortgage, car payments, and certain types of debts that survive bankruptcy, such as student loans, recent taxes, and back child support. A typical Chapter 7 case is opened and closed within three to six months and creditors may no longer communicate with you.
Although you can lose property in Chapter 7, most filers don't lose any property. Bankruptcy lets you keep most necessities-if you have little to begin with, chances are good you'll be able to keep most items (unless you pledged the item as collateral when you bought it).
However, based on the new bankruptcy law--"means test"-- if it appears that you have enough income to pay off all your priority debts over a three-to-five year period and still pay a portion of your unsecured debts, you will only be permitted to file for Chapter 13.
If you have questions regarding changes in the new bankruptcy law, call Ammerman & Goldberg. We handle Chapter 7 and Chapter 13 filings in the District of Columbia, Virginia, and Maryland. Contact a Washington, DC, bankruptcy law firm.
