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Bankruptcy Laws

Bankruptcy law is governed by federal and state statutes that give protections to both the debtor and the creditor. The law defines a way for debtors to get out of debt without harming their ability to lead a productive life in the future.

Federal bankruptcy laws were most recently updated in 2005, under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The purpose of the law was to make it more difficult for individuals to file for bankruptcy and eliminate debts that they might have the assets to pay off.

BAPCPA eliminated the automatic eligibility to file for Chapter 7 bankruptcy and forces the repayment of some of an individual's debt under Chapter 13 bankruptcy. Until 2005, most personal bankruptcy cases were filed as Chapter 7 Bankruptcy because debts were discharged and did not have to be repaid. A "Means Test" was added to the law so that those with the means to pay some of their debts now must file for Chapter 13 Bankruptcy.

Under Chapter 13 bankruptcy, an individual must develop a bankruptcy repayment plan for debt repayment. These payments are generally made over a 3 to 5 year period. The discharge under Chapter 13 bankruptcy is not issued until the last payment has been received by the bankruptcy trustee.

Changes to the federal bankruptcy laws also created the requirement that everyone seeking bankruptcy protection must undergo credit counseling before filing for Chapter 7 or Chapter 13 bankruptcy. Those who have filed bankruptcy must also go through additional budget and credit counseling prior to the discharging of debt. It also increased the fees associated with bankruptcy and the paperwork necessary for filing.

The initial step in the means test to determine eligibility to file Chapter 7 bankruptcy is to determine an individual's income. To do this, you will be required to state your income for the past 6 months. That number will be used to determine annual income. If a person's annual income is below the average income for the area in which they live, they will automatically qualify for Chapter 7 bankruptcy. If not, the means testing continues in order to determine if there is any disposable income to facilitate a payment plan under Chapter 13 bankruptcy.


Means Testing

Calculating Disposable Monthly Income:
To calculate your disposable monthly income, you simply deduct your expenses, including mortgage payments or rent.

A bankruptcy attorney should be consulted to determine if you are required to file for Chapter 13 Bankruptcy, but to get a rough estimate of your disposable monthly income (DMI) take your six month average income and subtract all allowable expenses. Expenses can include: mortgage and rent, past due taxes, priority debt, secured debt and $1,500 in private school tuition. If the difference is more than $166.66 per month and $10,000 of the debt owed could be paid with in 5 years, you are required to file for Chapter 13 Bankruptcy. If not, additional calculations must be made.

The next calculation is used to determine if you will have more than $100 per month to pay at least 25% of your unsecured debt to creditors over the next 60 months. If you do, then you will be required to file for Chapter 13 Bankruptcy, if you do not, then you can file for Chapter 7 Bankruptcy. If a judge determines that you have "extenuating circumstances," he or she may determine that you are eligible to file for Chapter 7 Bankruptcy regardless of the outcome of the calculation.


Credit Counseling:
The BAPCPA also required individuals to under go credit counseling with a credit agency that is approved by the United States Trustee's Office prior to filing for Chapter 7 or Chapter 13 Bankruptcy. The goal of credit counseling course is to provide information about avoiding debt accumulation, create a repayment schedule or give advice to eliminate the need to file for bankruptcy. All repayment plans and evidence of completing the credit counseling class must be submitted to the bankruptcy court prior to filing for Chapter 7 or Chapter 13 Bankruptcy.

Individuals must also complete another credit counseling course to learn financial management prior to the discharge of debt under their bankruptcy plan. Evidence of the credit counseling completion must also be submitted to the bankruptcy court before the dismissal of debt under the bankruptcy process.


New Residency Requirements
New bankruptcy laws have also been updated to require bankruptcy filers to reside in their state at least 2 years before they can file for Chapter 7 or Chapter 13 bankruptcy. The residency provision was added to stop individuals from moving to states that had more consumer friendly bankruptcy laws.


Do I Need A Bankruptcy Attorney?
New bankruptcy laws have made filing for personal bankruptcy not only more expensive, but also more complicated. Bankruptcy attorneys now have to spend more time on means testing and validating the accuracy of each client's bankruptcy filings. It is not required that you hire a bankruptcy attorney prior to filing for personal bankruptcy, but the changes in the law have made completing bankruptcy on your own more complicated. A qualified bankruptcy attorney can make sure your financial situation is evaluated accurately, help schedule all court appearance and complete all necessary bankruptcy documentation.


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