Lawyers and other advisors may suggest that bankruptcy is the only suitable way to get out of debt, but one should keep in mind bankruptcy has many disastrous effects on one’s credit records and credit history. Bankruptcy is a serious decision that can haunt you for many years to come.
New bankruptcy regulations have added to the complicated requirements in order to file for bankruptcy. The new law is making the process further more time consuming, which in effect is causing high lawyer fees. The regulation also imposes the mandate that lawyers must personally vouch for the accuracy of the information that clients provide which accordingly is very time consuming. This hike up in fees is only the beginning of the rough ride that is to come.
In 2005 Legislature was passed that allowed the courts to change the order of Chapter 7 Bankruptcy into Chapter 13 Bankruptcy. Regardless that Chapter 13 filers had to hand over all of their disposable income, they are still required to calculate their disposable income using allowed expense amounts dictated by the IRS -- not their actual expenses. This means that debtors may be required to pay a much larger amount of their "disposable income.
There are two basic types of bankruptcies that apply to most individuals: reorganization (Chapter 13) or liquidation (Chapter 7).
VALUE OF PROPERTY IS RAISED UP BY REPLACEMENT COST:
According to former law, Chapter 7 filer can rate or value their property at what they could get for it as auction. This means that household stuffs which are generally low in cost a defaulter can keep it with him/her since these stuffs are categorize as exempt property. (Exempt property is property that for which creditors or the trustee are not allowed to take from you -- you are permitted to keep it.).New law has completely transformed the way how the filers should value the property. According to new law the debtors are allowed to value their property according to what retail buyer would have offered one keeping in view .In this way the debtors are getting precise value for their property so which means more debtors stand to have their property taken and sold by the trustee.
CONSTRAINT ON ELIGIBILITY FOR LIQUIDATION TYPE BANKRUPTCY:
Originally debtor had the right to choose any type of bankruptcy that he seems more precise for him. Mostly debtor prefers chapter 7 over chapter 13 but new law has some constraint .Now debtor with high income cannot choose chapter 7 for them.
HOW TO EVALUATE YOUR MONTHLY INCOME?
According to new law, the first step in assessing whether you qualify for opting chapter 7 is that firstly you have to compare your current monthly income against average income of a family of your size in your state. Your current monthly income does not refer to your income at the time you file but actually it refers to your average six month monthly income. Therefore for many people specifically for those who are filing for bankruptcy because they have lost the job their "current monthly income" according to these rules will be much more than they take in each month by the time they file for bankruptcy. Once you've calculated your income, compare it to the median income for your state. If your monthly income is less than or equal to median income of your state you can file for liquidation type of bankruptcy. If your income is more than the median income then you have to pass the mean test.
WHAT IS THE CRITERIA TO PASS THE MEAN TEST?
The purpose of mean test is that after subtracting certain allowed expenses and debt payments you still have the disposable income to make payment for chapter 13 plans. To find out whether you qualify for mean test you have to subtract the following expenses from your current monthly income:
- Certain allowed expenses, in amounts set by the IRS. Generally, you cannot subtract what you actually spend for things like transportation, food, clothing, and so on; instead, you have to use the limits the IRS imposes, which may be lower than the cost of living in your area.
- Monthly payments you will have to make on secured and priority debts. Secured debts are those for which the creditor is entitled to seize property if you don't pay (such as a mortgage or car loan); priority debts are obligations that the law deems to be so important that they are entitled to jump to the head of the repayment line. Typical priority debts include child support, alimony, tax debts, and wages owed to employees.
If after subtracting all these expenses from your total monthly income your disposable income is less than $100 .You pass the mean test and you qualify to file for chapter 7.If your remaining disposable income is more than $166.66 this mean you have failed in passing the mean test and you are prohibited to file for chapter 7. If your remaining monthly disposable income is between $100 and $166.66, you must figure out whether what you have left over is enough to pay more than 25% of your unsecured, non priority debts (such as credit card bills, student loans, medical bills, and so on) over a five-year period. If so, you flunk the means test, and Chapter 7 won't be available to you. If not, you pass the mean test, and Chapter 7 remains an option.
RELAXATION FOR DEBTORS WHO ARE HURRICANE VICTIMS:
After Hurricanes Rita and Katrina .the United States Trustee’s announced special enforcement guidelines for debtors that are affected by the hurricanes. These guidelines were the major step in order to provide relaxation to filers who may have become homeless due to these hurricanes. . Apart from other things, these guidelines make the following changes for victims of natural disasters who file for bankruptcy:
- Credit counseling will not be required.
- Debtors who cannot provide required documents due to a natural disaster will not face enforcement actions.
- Trustees have to consider the income loss, increased expenses, and other effects of a natural disaster as "special circumstances" that may allow a debtor who doesn't otherwise pass the means test to qualify for Chapter 7.
- Trustees will provide alternate means for debtors to attend creditors' meetings, if necessary. For more on these rules, go to the website of the United States Trustee (www.usdoj.gov/ust), and click "Enforcement Guidelines for Debtors Affected by Natural Disasters."
CONSTRAINTS ON AVAILIBILITY OF STATE EXEMPTIONS:
Under the old bankruptcy law, type of bankruptcy was determined by the laws of the state where debtors lived (as long as they lived there for at least three months). Under the new law, you must live in a state for at least two years prior to filing in order to use that state's exemption laws. Otherwise, you must use the exemptions available in the state where you used to live. Similar rules apply to homestead exemptions, which determine how much equity in a home you can keep when filing for Chapter 7 bankruptcy. However, to use your new state's homestead exemption, you must live there for at least 40 months. Because exemption amounts vary widely from state to state, these new residency requirements could make a big difference in the amount of property you get to hold on to. For example, if you recently moved from California to Nevada and you have a fairly valuable car, you might want to wait to file for Chapter 7: Once you've been in Nevada for two years, you can claim its $15,000 exemption for motor vehicles. If you have to use California's exemptions, you can keep only $2,300 worth of equity.
