Chapter 13 Statute Changes
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In 2004 more than 1.6 million people filed bankruptcy in the United States. This was a 600% rise from 1978 when bankruptcy laws became less stringent. Because of the rise in bankruptcy some lawmakers believed that consumers were abusing the bankruptcy system. In 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, was passed. This law radically changed Chapter 13 bankruptcy rules. It changed the eligibility for chapter 7 bankruptcy to those whose income falls below their state’s median income or whose income meets these criteria after certain deductions are made. This is called a “means test”. This forced most consumers seeking financial relief to file a Chapter 13 that requires a 3-5 year paying back of debts instead of the “fresh start” of Chapter 7.
Credit counseling
The new law requires both budget counseling and a financial management course before the discharge of any debts. High consumer debt and rapidly increasing numbers of people filing for personal bankruptcy created the need for credit counseling and budget analysis. These are now required components of a bankruptcy. Some lawmakers accredit the increase in personal bankruptcies to the aggressive marketing tactics of credit card companies. Within 180 days prior to applying for bankruptcy you must obtain credit counseling from an approved, nonprofit agency. Before discharge you must also complete a personal finance management course.
Eligibility
The new law tightened the eligibility for Chapter 7 bankruptcy forcing most people to petition for a Chapter 13 bankruptcy. It also tightened the eligibility rules for financial relief. You will not be able to file for Chapter 13 if within the previous four years you filed a Chapter 7, 11, or 12. If you filed for chapter 13 within the previous 2 years you are not eligible also. Now there is a tax return component. You must provide the court with the last years tax documents when you petition for relief. Along with the income tax documents you must also show proof of income. Because of the more stringent rules regarding bankruptcy more Americans are being forced to get consolidation loans from lenders who work with low credit score consumers.
Automatic stay protection
The immediate protection from creditors traditionally associated with the filing of Chapter 13 has been greatly changed. Many of the protections are now eliminated. If you are applying for stay from eviction proceedings commenced prior to your filing you are in for an unpleasant surprise. The new law does not provide for relief of eviction proceedings that were commenced before the Chapter 13 filing. Items that have been removed are evictions divorce proceedings, driver’s license suspensions, and legal actions for child support.
Stripping down
Stripping down is when you have a secured loan such as an automobile that you make bankruptcy payments on for three years (under old law) and at the end of the three years the amount still owed is then discharged. Under the new law the stripping down time was increased to 5 years. Also with a secure loan the entire balance is targeted for pay off, even if the loan amount exceeds the secured items value.
New priority
In Chapter 13 bankruptcy there is a re-payment priority of the people and entities that are owed money. With the new law unpaid alimony and child support take priority over all other creditors.
Next Step: Chapter 13 Bankruptcy - Trustee’s Role
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