Bankruptcy

The New Bankruptcy Law

There are two basic types of bankruptcies that apply to most individuals: reorganization (Chapter 13) or liquidation (Chapter 7).

Bankruptcy Chapter 13

In a reorganization bankruptcy, you are required to file a repayment proposal with the bankruptcy court. Some debts must be repaid in full, some are repaid as a percentage of the original debt, and others aren't repaid at all. In general, Bankruptcy Chapter 13 requires you to pay back your secured debt and as much of your unsecured debt as possible. Payment plans usually cover a five year period. During the repayment period, the court will place restrictions on how you can spend money. In many cases, a set amount will be garnished from your wages and a trustee of the court will make the payments to your creditors.

Bankruptcy Chapter 7

In a liquidation bankruptcy, you must turn their personal property (with a few exceptions) over to the court, which sells it and uses the proceeds to pay all your debts or a portion of your debts. Bankruptcy Chapter 7 has generally been the most common form of bankruptcy filing for those people who have no assets to lose and therefore are seeking a "fresh start." However, recent changes in bankruptcy law have made this type of filing much more difficult.

The Means Test
In order to file under Chapter 7 Bankruptcy, your income must be below the median income for same sized families in your state or you'll be required to go through a bankruptcy means test. Your income is determined by calculating your average income from the past six months. For families with a recent loss of income due to job loss or declining wages, this average may not reflect their actual current income. Even if you pass the first part of the means test and you have an income lower than your state's median, there is an additional test for your expenses which places severe restrictions on your spending. If the court believes that you have $100 or more per month in disposable income that you could apply towards your debt repayment after allowances for child support, food, housing, and other related expenses, you'll be pushed into a repayment plan under Chapter 13.

Other Key Changes

Residency requirements
Bankruptcy laws exist at both the state and federal level. Some states' laws are more favorable than others. New residency requirements are designed to prevent debtors from moving to a state with more favorable laws and immediately filing bankruptcy. In general if you have lived in a new state that has more favorable bankruptcy laws for less than two years, you cannot use the more favorable provisions.

Mandatory Credit Counseling
The new bankruptcy law requires that anyone who files bankruptcy must received credit counseling and financial education by government-approved programs as a condition for filing bankruptcy and discharging debts. (See What is Credit Counseling? for more information about their programs) No one can file bankruptcy unless they complete an accredited credit counseling program within 180 days of their bankruptcy filings.