Things to Know about the Bankruptcy Reform Law

The Bankruptcy Reform Law of 2005 vastly changes how bankruptcy can be declared by individuals and limits what many can do to eliminate debt. Some of the biggest changes include a rule that requires consumers to get credit counseling before they file a bankruptcy case. After filing, consumers must complete a financial management class designed to help them identify and correct what led to bankruptcy in the first place. Fewer filers will be able to use Chapter 7 and will have to “reorganize” instead and pay back debt under Chapter 13. The reform law requires close regulation of attorneys as well as nonattorney bankruptcy petition preparers, both of whom are required to give consumers detailed contracts about what they will do and charge. Fees for services cost more than before October 17.

Major changes are described below in a before-and-after comparison.

Bankruptcy Law before October 17, 2005 Bankruptcy Law after October 17, 2005
There was no income or expense test to determine if someone could file for Chapter 7 bankruptcy. A means test is applied to determine if people can file for Chapter 7. More people will go into repayment plans under Chapter 13 and cannot file under Chapter 7 because their incomes are too high. Debts that used to be wiped clean under Chapter 7 are instead repaid according to a different formula over a 5-year time frame.
Consumers did not have to contact a credit counselor before filing for bankruptcy, and after filing, did not have to finish a financial management course. Before consumers file, they must receive a briefing from a credit counseling agency that is approved by the bankruptcy court. After filing for bankruptcy, consumers must complete a financial management class that is supposed to help them identify and correct what led to bankruptcy in the first place.
It was easier for consumers to file a bankruptcy themselves or to use nonattorney petition-preparers. The bankruptcy reform law requires close regulation of nonattorney bankruptcy petition preparers and attorneys, both of whom are required to give consumers detailed contracts about what they will do and charge. Fees for services cost more than before.
Consumers who filed Chapter 7 had to wait 6 years before filing another Chapter 7 case. Consumers could file any number of Chapter 13 cases as long as they filed in “good faith,” even if they had filed for Chapter 7 the day before. Consumers who file after the reform law’s effective date have to wait 8 years between filings. Consumers cannot file for Chapter 13 for 4 years if they received a discharge under Chapter 7, 11 or 12 during the past 4 years, or for 2 years if they received a discharge under Chapter 13.
Filers in some states could take advantage of what is called the homestead exemption no matter what the homes cost. The new bankruptcy law limits the state homestead exemption to $125,000 for property acquired during the 1,215-day period before filling for bankruptcy (roughly, during the last 3 years, 4 months).
Giving written or even verbal notice to a creditor was enough to stop the creditor from trying to collect. Verbal notice or written notice without information like the address and account number used by the creditor may not be enough to stop collection attempts.
Income tax returns for the current year, and maybe the year before, were reviewed by a bankruptcy trustee but were not filed with the court. Filers must file any tax returns for the past 3–4 years that are due. The returns (along with any that become due while the bankruptcy is pending) must be filed with both the tax authorities and the court. If they are not, the bankruptcy case will be dismissed.
The standard for having student loans discharged in bankruptcy was to establish that repayment would constitute an undue hardship on the debtor. The types of educational loans that may not be discharged are broadened and the hardship standard for discharging a student loan in bankruptcy is preserved.



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