New Bankruptcy Law Did Not Slow Down Filings
After listening to financial institutions and lender complain about the amount of money their companies and shareholders were losing to bankruptcy, the government tightened the requirements for bankruptcy in 2005. Under the new bankruptcy law, filing a Chapter 7 bankruptcy is not as easy as in the past and many hoping to see their debts wiped clean in a hurry found themselves restricted to Chapter 13 bankruptcy, which is a court-ordered repayment plan to pay off debt.
Under the new bankruptcy law, persons looking to file must complete a debt counseling program during which it is determined if the person has the ability to pay their loans under a court-ordered plan. Once the bankruptcy goes through the court, before the debts are discharged, they have to attend a second session on debt management and money management. The new bankruptcy law does not stipulate they follow anything they learn in the sessions, only that they have to attend before their slate can be wiped clean.
Additional changes allows for some assets that used to be exempt to be confiscated and sold by the bankruptcy trustee to satisfy a portion of the debt. State exemptions for certain properties also play a role in the new bankruptcy law. For example, a person living in Nevada, having met the residency requirement and passed the bankruptcy income test, can claim a $15,000 exemption on a motor vehicle. In California the exemption is $2,300 under the new bankruptcy law.
Passing Means Test Is First Important Step
To determine if a person can file under the new bankruptcy law, a means test is completed. If the current monthly income is below the average income in the state in which they reside, they can file for Chapter 7 bankruptcy. It should be noted that the current monthly income is calculated as an average for a six-month period prior to filing and not the income for the past month. If a person lost their job and wants to file for bankruptcy, any employment during the previous six months will be considered during application of the means test.
If their current monthly income exceeds the state average income they will need to file for Chapter 13 bankruptcy. Additionally, an income level as low as $166 a month over the average will push them towards Chapter 13, under the new bankruptcy law, regardless of actual living expenses. All expenses are governed by the Internal Revenue Service's expense guidelines, even if the area in which they live has a higher cost of living.