Bankruptcy Laws Changed Dramatically in 2005
Des Moines, IA (Law Firm Newswire) June 9, 2011 – Bankruptcy means different things to different people. The traditional point of view is it protects the creditor and debtor.
“To most people, bankruptcy is about shucking their debts and coming out the other side debt free. It’s actually more complicated than that, as they discover when they file. But by and large bankruptcy protection is not just about the debtor, it is also about the creditor and his or her right to payment. The law in this area balances those rights and offers a path for debtors to get out of debt without messing up their chance to be productive later,” said Kevin Ahrenholz, an Iowa bankruptcy lawyer.
Federal bankruptcy laws were revamped in 2005 under the auspices of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The whole idea behind this piece of legislation was to make things more difficult for people to file for bankruptcy and get rid of debts that they might actually have the assets to pay.
“What that meant, or means, is that the act got rid of automatic eligibility to file Chapter 7. It also forces repayment of some debts under Chapter 13. This is something you will want to know before you file, so it’s a good thing to ask a qualified bankruptcy lawyer what applies to you and what doesn’t,” Ahrenholz said.
To look at this from a different perspective, most personal bankruptcies filed for Chapter 7 up until 2005 because they knew they could get their debts discharged and there was nothing to repay. To avoid this, and ensure the debtor did assume some responsibility, a means test was added. Those with the means to pay some of their debts must now file for Chapter 13.
“With a Chapter 13 bankruptcy, the debtor has to draft out a repayment schedule to repay their debts. In most cases, the payments are made over a three to five year period, and a discharge is not given to the debtor until the last payment has been received by the trustee,” Ahrenholz said.
Along with the changes in filing, there were changes that meant debtors had to get credit counseling before filing for a Chapter 7 or 13 bankruptcy. Those who have filed must also receive extra credit and budget counseling before their debts are discharged. “Did this drive up the cost of filing for bankruptcy? Yes, but by the same token, the new process was designed to make sure those needing help with budgeting got that help. The idea is to keep them from going bankrupt again,” Ahrenholz said.
“The first step in the bankruptcy process is determining eligibility to file Chapter 7. You will need to state your income for the past six months. If your annual income is under the average for where you live, you automatically qualify for Chapter 7. It it’s over, the means test will determine if there is any disposable income to draft a repayment plan for a Chapter 13,” he said.
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