Understanding the Provisions of the New Bankruptcy Law

Copyright (c) 2010 Liz Roberts

On October 17, 2005, the New Bankruptcy Law took effect. This new law is also known to legal experts as the Bankruptcy Abuse Prevention and Consumer Act of 2005. With this new law, important adjustments on requisites and procedures were done with regards to filing bankruptcy.

A lot of consumers today believe that the provisions of the New Bankruptcy Act are somewhat prohibitive. This is because the law made it harder for most people to file for bankruptcy. But is such belief accurate? To answer this question, allow us to discuss some of the relevant changes that were made to the stipulations of the New Bankruptcy Law.

New Provisions of the Bankruptcy Law of 2005

1. Stringent Requirements for filing Chapter 7 Bankruptcy. The old bankruptcy law allows consumers to decide which type of bankruptcy to file. Most of them prefer filing Chapter 7 over Chapter 13 Bankruptcy. The reason for this is that Chapter 7 Bankruptcy allows them to liquidate some of their assets to settle their unpaid credit obligations. However, the New Bankruptcy Law is more limiting. It prevents individuals who possess high paying jobs to file for Chapter 7 Bankruptcy. What does this mean?

In the New Bankruptcy Law, a filer is obliged to calculate his monthly earnings. Then he will compare his total income with the median income earned by a household of the same size in his home state. If the value he arrived at is less than or equal to the median, the consumer will be allowed to discharge his debts. Otherwise, he will be asked to take the means test to verify whether or not he is eligible to file for Chapter 7 Bankruptcy.

2. The Means Test. The Means Test determines whether or not a consumer qualifies for filing Chapter 7 Bankruptcy. This test will tell whether or not an individual possesses sufficient disposable income that he can use to pay off his debts under Chapter 13 Bankruptcy. But how does this test work?

The first thing a filer should know is his gross income. Then, he will deduct allowed expenses and credit payments from his earnings. The final value that he will arrive at will be his disposable income. If the computed value is below the standard amount set by the IRS, the consumer will be allowed to pursue his application for Chapter 7 Bankruptcy. Otherwise, he will be encouraged to file instead for Chapter 13 Bankruptcy.

3. Requirement for Taking Credit Counseling. The provisions of the Bankruptcy Law of 2005 also obliges filers to enroll and attend credit counseling programs. Why is this requirement needed? The reason why a person is required to undergo a credit counseling program is to help him/her decide if filing for bankruptcy is the best option for him/her. The reason for this is that there are consumers who have the financial capability to settle their credit accounts through informal debt payment plans.

Moreover, credit counseling programs will also provide consumers tips and suggestions that they can use to avoid falling into new debt traps. This way they can stay free from any credit troubles that they might encounter right after their debts have been discharged.

4. Filers of Chapter 13 Bankruptcy Will Need to Live on Less. The New Bankruptcy Act gives the IRS much authority to dictate the allowed amount of expenses for each bankruptcy filer. This is a great change from the previous provisions of the old bankruptcy law. In what way?

Consumers were previously required to provide their self-computed disposable incomes to pay for their existing credit accounts. However, today, bankruptcy filers must adhere to the dictated amounts of the IRS. They would have to deduct not their actual expenses, but the dictated amounts given by the IRS from their monthly earnings to determine their respective disposable incomes. This goes to show that filers for Chapter 13 Bankruptcy may have to live on less money just so they can keep up with their credit payments.

We hope that this short article provided you much insight on the provisions and stipulations of the Bankruptcy Law of 2005.