Uncovering the New Federal Bankruptcy Law
Marshall Franklin - August 22nd, 2005

If filing bankruptcy is in your future you may not have as much time to file as you think. Qualifying for bankruptcy will be more difficult after October 17, 2005.

As of April 2005, the credit card industry finally succeeded in reforming the bankruptcy. The new law is to take effect on October 17, 2005. This new law has more strict guidelines and prohibits some people from filing for bankruptcy altogether. For those who manage to qualify for bankruptcy, it will make it harder to propose a manageable payment plan. The new law also has fewer protections from collection efforts than the previous law.

Creditors say changes were needed because of the increasing number of personal bankruptcies filed - based on the 1.6 million in 2004, in comparison of the 900,000 in 1995 - costing the creditors too much money. This statement contradicts the proven of $18.9 billion income increase for the creditors within the same time frame of 1995 through 2004. 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 compounding late fees and skyrocketing interest rates.

Fewer People Able to File for Bankruptcy

Under the current law more people are able to file for a "Fresh Start" Chapter 7 bankruptcy. However, under the new law, some people are prohibited from filing for Chapter 7 bankruptcy. These people are those who's income(s) are above the state median and who can pay as little as $100 per month to creditors. The decision of who can afford to pay $100 is not determined by the individual but by the IRS rules that state what "reasonable" expenses are.

People who are unable to file a Chapter 7 bankruptcy either have to file for Chapter 13 bankruptcy and provide a plan for repayment within 3 to 5 years or default further behind on their debts. These same debtors fear that if they are unable to file for a Chapter 7 bankruptcy to "wipe out" their credit card debts will have less money to pay "priority" debts such as tax bills or child support.

Debtors that are forced to file a Chapter 13 bankruptcy will find that the new law makes Chapter 13 bankruptcy more difficult. In chapter 13 bankruptcy, debtors (or the debtor's attorney) must provide a plan, basing their payments to the trustee on their income and expenses. Under the new law, these expenses are limited to only allowable expenses set each year by the IRS collections department. Certain expenses may be higher than the allowable amount - housing, for example - but debtors may only claim the allowed amount. This will put an strain on those requesting to file in an area where living expenses are higher than others and will be unable to follow through with an plan that can be approved by the trustee and bankruptcy court. Another significant change requires the debtor to pay any auto loan in full instead of the value of the car if the loan is less than two and a half years old as of the date of bankruptcy filing.

Less Protection from Creditors

One of the most common and powerful reasons to file bankruptcy is for the "automatic stay." This refers to rules that halt most collection actions and lawsuits against individuals who file for bankruptcy. The new law limits the automatic stay. The new law no longer protects debtors against evictions, lawsuits to establish paternity, child custody, child support, divorce proceedings, lawsuits related to domestic violence, and others.

The new law requires individuals to go through a credit counseling before filing bankruptcy. Debtors also have to complete a personal financial management course before completing a bankruptcy. These services may not always be free and it is up to the debtor to find and attend such courses as they are not set or provided by the court.

Another delay is debtors filing a Chapter 7 have to provide federal tax returns for the most recent tax year and those filing for Chapter 13 must be current on taxes for the previous four years.

The ironic fact is that, although the creditors are the ones fighting for the bankruptcy law to be changed, there are loopholes in the new bankruptcy guidelines that benefit the debtors instead of the creditor in comparison to the old / current law. If you are considering filing for bankruptcy but are unsure of what type of bankruptcy would best fit your financial situation or what law you should file under you should consult a bankruptcy attorney. Be sure to schedule a consultation soon to allow a sufficient amount of time to prepare and file your petition if the old / current law best suits your financial situation.

Julian Credit Management is a firm that practices exclusively in the area of Bankruptcy and Debt Consolidation and has offices in Clearwater (Pinellas County), Port Richey (Pasco County), Tampa (Hillsborough County), Lakeland (Polk County) and Orlando (Orange County). We represent persons throughout the State of Florida.

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