Changes in 2005 change the face of bankruptcy
On October 17, 2005, new bankruptcy laws went into effect as a result of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The old rules allowed most filers to choose between Chapter 7 or Chapter 13, and most chose Chapter 7 because it allowed for the complete elimination of debts without repayment. The new law prohibits filers with higher incomes from filing under Chapter 7.Can I still file under Chapter 7?To determine if you are still eligible to file for bankruptcy under chapter 7, you must first determine your current monthly income. Your current monthly income is your average monthly income over the previous six months before you file.Next, compare your current monthly income to the median monthly income for your state. If your current monthly income is less than the median for your state, you are allowed to file under chapter 7. If it is not, you must pass the new "means test" to file under chapter 7.The Means TestThe purpose of the means test is to determine if you have enough disposable income to make payments to creditors under the chapter 13 plan. To see if you pass the means test, start with your current monthly income from above and subtract certain allowed expenses in amounts set by the IRS and monthly payments on secured and priority debts. The result is your disposable income.If your disposable income is less than $100, you qualify for chapter 7. If your disposable income is over $166.66, you must file chapter 13. If you are between $100-$166.66, you must determine whether your disposable income is enough to pay more than 25% of your unsecured, nonpriority debts over five years. If it is, you must file chapter 13. If it is not, you may file chapter 7.New Bankruptcy Law Changes the Way Property is ValuedUnder the old chapter 7, your property was valued at what it would sell for at a "fire sale" or auction. Under the new law, property is valued at what it would cost to replace it from a retail vendor, likely a higher amount than what it would sell for at auction. This means more debtors are likely to have their property taken and sold by the trustee.Do I Need a Bankruptcy Attorney?Filing for bankruptcy is a difficult and emotional decision filled with embarassing and complicated issues. A bankruptcy attorney is familiar with the new laws and can help you through this difficult time, explaining your options and determining which is best for you.