The New Bankruptcy Law (Part 1)

The new bankruptcy laws went into effect on October 17, 2005 and 500,000 people rushed to file in the month prior to the new law. The terrain has changed, but has the underlying idea of a "fresh start" changed too? Bankruptcy filers are now subject to different eligibility requirements and have to classes to help educate them on debt management. Several new requirements for attorneys means that finding a truly qualified attorney can be tougher than ever.Before filing a Chapter 7 or a Chapter 13 you must complete a credit counseling course with an approved agency approved by the U.S. Trustee's office. This unbiased counseling session should help you decide if it would be in your best interest to file for bankruptcy.After you have filed bankruptcy you will be required to take another course on financial management. For Chapter 7 filings this course must be taken within 45 days of your §341 meeting of creditors. In a Chapter 13 case you have up until your discharge (completion) to complete the course. It is absolutely essential to stay on top of this course due to the fact that in the event that this course is not completed on time you may be subject to not receiving a discharge on your debt. A discharge is the court order absolving you from all dischargeable debts. Under the new bankruptcy laws there are rules for determining who is eligilble to file a Chapter 7 or Chapter 13. The key to finding out who is capable of filing a Chapter 7 or Chapter 13 is to evaluate your "current monthly income" (CMI). CMI is your average monthly income for the past six months. Once you have ascertained your current monthly income, you should compare it against your state's median CMI for the size of your household. If you are below the state's average CMI for the size of your household, then you are eligible to file a Chapter 7. People who fall above the average must file a Chapter 13 and are subject to the "means test."The means test is used to verify that you will have enough disposable income (income - allowable expenses) to make your regular Trustee payments. To pass the means test you should start off with your CMI and start subtracting for allowable expenses. Monthly payments made on secured claims (mortgage and vehicles) and priority claims (IRS, child support, etc.) creditors are subtracted from your CMI. In addition to those, expenses such as food, transportation, clothing, and utilities are allowed for a predetermined amount set by the IRS. The remaining balace is referred to as your disposable income. If this amount is less than $100 then you pass the means test and can file a Chapter 7 bankruptcy. However, if your disposable income is greater than $166.66 then you have failed the means test and will be required to file a Chapter 13. For individuals whose disposable income falls between $100 - $166.66 are left to determine whether their disposable income would repay 25 of their unsecured creditors (credit cards, certain signature loans, medical bills, etc.) in a five year repayment plan. If your disposable income would allow for such a repayment plan then you will be required to file a Chapter 13. Conversely, if your disposable income would not allow for a repayment plan per the specifications above, then you can file a chapter 7.The new law has imposed additional requirements for all parties involved. Despite the additional steps that are necessary, bankruptcy can still offer a viable solution to many financial woes. We will continue to monitor and report on new law developments in part 2 of this article.

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