Bankruptcy new law

Bankruptcy filing in United States is a legal way of mitigating the pressure of debts on a debtor, who, due to mismanagement or circumstances beyond his control, finds himself in a financial mess that he is unable to resolve. Bankruptcy petition is filed with United States Bankruptcy Court, which is a unit of United States District Court. Bankruptcy code and federal laws govern the procedures.

What are the types of bankruptcy filings available to a debtor?

Basically, there are three types of bankruptcy available to debtors

  • Chapter 7 bankruptcy filing, which entails liquidation
  • Chapter 9 bankruptcy filing, which is related to municipalities
  • Chapter 11 to 13 bankruptcy filings, which entail reorganization and restructuring of assets and debts. Chapter 11 filing is generally used by business enterprises. Chapter 12 is for family farmers and family fisherman. Chapter 13 is the filing that individuals opt for if they prefer to reorganize or restructure their finances.
    • Chapter 7 bankruptcy filing completely wipes out the unsecured loans of the debtors. It also wipes out most of the assets of the debtor through liquidation. Proceeds from such liquidation are utilized for clearing creditors claims. If the proceeds are less than the outstanding amounts, then they are cleared according to a predefined procedure. There are, however, a few of these unsecured debts that are not eligible for such write off, like alimony, child support, student loans, etc. Unsecured debts that are written off usually are credit card debts, and indebtedness for utilities, etc.

    Chapter 11 to 13 bankruptcy filing helps the debtors in restructuring their debts in such a manner that unsecured debts are not entirely wiped off. Instead they are partially repaid over a time frame of three to five years. The applicant is required to surrender monthly income to a trustee appointed by the court. This trustee appropriates the surplus based on predefined priorities. An individual applying under Chapter 13 is entitled to receive discharge letter from trustee like the debtor filing under Chapter 7. However, no such discharge letter is issued to companies and business enterprises.

    Discharge letters do not extinguish the liability of the debtor in respect of secured loans to the extent they are secured by any collateral. Similarly, there are a few debts like outstanding child support, alimony, student loans, etc., that continue to be in force. Unscrupulous people misused the provisions of former bankruptcy act. Therefore, a new Bankruptcy Abuse Prevention and Consumer Protection Act, was promulgated in 2005, which plugs some of the loopholes of the previous act.

    Major differences between the old and new bankruptcy laws are:

  • Though the fees for filing bankruptcy have not been increased under the new bankruptcy act, other fees and charges make filing for bankruptcy under the new act more expensive.
  • New bankruptcy act makes it mandatory for all the debtors to undergo credit-counseling class before filing an application for bankruptcy. In addition, these debtors have to undergo another class before the debts are discharged.
  • New bankruptcy act has changed the method of valuing the properties for determining the inability of the debtor to repay the debts. Formerly the assets of the debtor were taken at their resale value. Under new bankruptcy act, the assets of the applicant have to be considered at their replacement value. This means assets of debtor are valued at a higher rate.
  • Eligibility criteria has been set for Chapter 7 bankruptcy filing, which was formerly universally available. Under the new bankruptcy act, if the income of a family were at par or above median income in the state, then the applicant would have to undergo a means test. This test means deducting from applicants income the following:-

    • i. Any alimony

    ii. Any child support

    iii. Any student loan

    iv. Any mortgage and car payments, and

    v. Money for food and other necessities as per the standard set under IRS. Note that formerly, this amount was at discretion of the court and the debtor.

    After deducting the above amounts, if the balance of monthly income that remains is more than $166, then Chapter 7 bankruptcy filing is out of question. If this disposable income is in the range between $100 and $166, then a new type of Chapter 7 filing will be applicable. If the disposable income is below $100, then the debtor can file for conventional Chapter 7 bankruptcy.

  • Chapter 13 bankruptcy filing has also undergone changes to prevent its misuse. Under the old law, court used to ascertain how much a person was able to set aside on a monthly basis for repayment of dues. This decision was based on the expenses that the debtor claimed to be his monthly expenses. Under the new bankruptcy act, the monthly expenses of the debtor are based on IRS standard. Therefore, the monthly expenses are decreased by the new act. This means a higher amount is available for repayment of the debts.
  • The new bankruptcy act does not permit inclusion of retirement plans as assets available for distribution to creditors.
  • The new bankruptcy act imposes an obligation on unsecured creditors to consider the proposals of consumer credit counseling agencies favorably within stipulated time frame. If the creditors fail to do so, they could lose 20 percent of their claims prior to any interest additions.
  • The new bankruptcy act changes the priority for payment of unsecured debts. Child support backlogs have to be cleared before discharging any other unsecured debts.
  • Under the new bankruptcy act, the debtor can exit from reorganization, provided that the majority creditors are agreeable to such proposal.
    • Disadvantages of bankruptcy filing

    Bankruptcy filing may seem a nice way of escaping the creditors. However, there are adverse implications too. Chapter 7 bankruptcy filing requires that the said fact be revealed in the credit report of the person for 10 years. Similarly Chapter 13 bankruptcy requires that the credit report of the person reflect such step for the next 7 years. Such remark on credit report drives away public lenders like bankers and financial institutions. This forces the debtor to take loans from private institutions, which charge exorbitant interest rates, because of debtors predicament. In addition, the debtor cannot seek Chapter 7 bankruptcy every year, as it can be filed only once in six years.

    Even after the 10 years period of disclosure for Chapter 7 bankruptcy filing, and 7 years period of disclosure for Chapter 13 bankruptcy filing, the public records do not delete such antecedents.

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