The New Bankruptcy Law
*How The Changes Will Effect The Individual Rights Of Debtors Filing For Bankruptcy*
According to The American Heritage Dictionary: 2nd college edition, the word “bankruptcy” refers to a debtor that, upon voluntary petition or one invoked by the debtor's creditors, is judged legally insolvent. The debtor's remaining property is then administered for the creditors or is distributed among them.”
Before this new bill was passed on October 17th of 2005, individuals drowning in debt considered the simplicity of just ditching their debt through a Chapter 7. The purpose of this effortless “liquidation” was to allow filers to hand over possessions in exchange for the release from their debt. This was a basic option for those with few belongings, little to no revenue, and a ton of debt and was usually seen as a last resort. Although there are the evident “bad effects” of a Chapter 7 (halt to garnishments and credit rating damage), nonpayers saw it as a chance to clear away most debt, including taxes.
However, now that the government has put to effect the “anti-debtor” modifications made to the bill, the new law has put limitations on the right to file bankruptcy under Chapter 7.
The new law makes it more difficult to file a Chapter 7, which enables you to write off your debt. Instead it puts you through a means test by way of the new bankruptcy code in the Bankruptcy Law Reform. The test will prohibit debtors from the protections of Chapter 7.
The Means Test:
The purpose of the test is to recognize those who have the potential financially to pay some of their debt to creditors they owe the money to.
After subtracting necessary living expenses from your income, the court will determine if afford to pay at least 25% of your non-priority unprotected debt, including credit cards.
In the first test, the questions of whether or not the family is earning above the median state income is raised. If the answer is “No”, then a person is able to file for Chapter 7. If the answer is “Yes”, then one moves on to Test #2.
For the second test, you will be asked to answer whether or not you have excess monthly income over $166.66 per month to pay $10,000 worth of debt over a five-year time period. Again, if the answer is “No”, then you are eligible to file for a Chapter 7, however if “Yes” is the answer, then a Chapter 13 can be filed.
Lastly, in the third and final test, if a person were to answer “No” to the question for Test #2, they will be asked if they have excess income of greater than 100$ per month to pay at least 25% of their unsecured debt over the next 60 months. If they answer “No” they can file Chapter 7. If they say “No” they can only file Chapter 13.
The government wants proof of income from those filing Chapter 7 and Chapter 13 bankruptcy. Debtors subjected to this requirement must give a copy of a tax return or transcript of a tax return to the trustee, at least seven days prior to 341 meeting, which is a meeting of creditors in which the debtor is questioned under oath by creditors, a trustee, an examiner, or the United States trustee about his or her financial affairs. The tax return must be provided for the time period of which it was most recently due.
The new bankruptcy law also requires that before anyone can file, they have to finish a financial counseling course or a credit counseling briefing, created to inform them of their options in dealing with their debts, six months prior. The U.S. Trustee Program of the Department of Justice, the proprietor for different aspects of the new bankruptcy law, must approve the program.
In order for someone to file a Chapter 13 they are obligated to enter into a repayment plan rather then just easily liquidating their unpaid debts.
The test, a lot like the concept of bankruptcy, is intricate. People will no longer be able to use Chapter 7 to get a fresh start. Under the new bankruptcy law, the court will insist that you file under Chapter 13 if it is believed that you would abuse the system by filing for a Chapter 7. In deciding your income and what you can afford to pay, the court will determine your expenses based on living standards instituted by the IRS.
In some cases, the expenses the court will apply to cases may end up being lower than actual expenses. In doing so, they will make it appear that you will be able to afford a Chapter 13 repayment plan when in actuality you may not.
The "Bad Effects" of Bankruptcy:
Filing for bankruptcy, in itself, is a risk that many people take, not really realizing how it can affect other financial aspects of their lives. While it will clear you of most or all of your debt, bankruptcy filing delivers a devastating blow to your credit and FICO score, but it does not mean you have to wait 10 years before you can qualify for a mortgage. Many consumers who have filed for bankruptcy have been able to obtain a mortgage, although it is often at a higher rate than someone qualifying for a prime or "A-paper" loan.
While credit card companies may care about what happened before you filed for bankruptcy, many mortgage lenders are more interested in your recovery — what you have done since your filing. It will not happen over night, but here are some tips and things to keep in mind when you inquire about a mortgage with a tarnished credit past:
Give explanations. No mortgage lender is going to ignore the fact that you have filed bankruptcy and he or she will likely want to know the cause of the filing. Your lender will be particularly interested in whether the same situation could happen again. Your chances of being qualified are much better if your bankruptcy was caused by a single event such as a loss of employment or a death in the family, than if it was the result of “just spending too much.”
If the bankruptcy resulted from a single event, it is important to show your lender paperwork describing the incident, such as the layoff notice or death certificate. You may also want to bring in court documents to indicate when the bankruptcy was filed.
Demonstrate good money habits now. Many people who file bankruptcy swear off credit altogether, however, it is important to re-establish your credit rating. Get a secured credit card or take on some sort of loan — furniture, a car or a major appliance — to demonstrate that you are able to make timely payments. Make sure you are making other payments (utility bills, cell phone, etc.) on time as well. You will not turn things around in a year but your credit score will improve ov er time.
Dispute any credit report errors. There is no need to add to your troubled credit history with errors on your credit report. Get a copy of your credit report from each of the three major credit reporting agencies: Equifax, http://www.equifax.com; Experian, http://www.experian.com; and TransUnion, http://www.tuc.com. If you encounter any errors, inform the CRA in writing what information you believe to be inaccurate and request deletion or correction.
Save your money. Lenders may be more willing to loan you money if you have saved up a considerable amount of money for a down payment.
Live within your means. Even subprime lenders won’t risk loaning you money for an opulent oceanfront mansion. Think small when the time comes to look for a home. Smaller homes often mean smaller mortgages.
"Mean Test" chart credited to MortgageFit.com
Median Family Income
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