2006-04-14 / Columnists

Notes On Consumer Affairs

By Assemblywoman Audrey Pheffer

Audrey PhefferAudrey Pheffer A new law signed by the President on April 20, 2005, makes it more difficult for people to file for bankruptcy. The new law, known as the Bankruptcy Abuse Prevention and Consumer Protection Act, went into effect on October 17, 2005.

The act is intended to prevent people from abusing the bankruptcy system. Approximately 1.6 million people file for bankruptcy every year in the United States. According to the American Bankruptcy Institute, up to twenty percent of those who go bankrupt will be disqualified under the new law.

In the past, consumers who file for bankruptcy were able to choose between Chapter Seven or Chapter Thirteen of the federal Bankruptcy Law. Last year alone, roughly 1.1 million debtors filed under Chapter Seven, and approximately half a million filed under Chapter Thirteen. Chapter Seven bankruptcy allows the liquidation of certain assets to satisfy debt; any remaining debt that cannot be satisfied by the debtor's assets is discharged. Chapter Thirteen bankruptcy is geared toward those who seek to reorganize and retain assets, such as a business. Chapter Thirteen requires a repayment plan of up to five years; any debts not paid or addressed during that time are forgiven if the requirements of the plan, approved by the court, are met. Formerly, a judge determined whether a person is allowed to file for Chapter Seven or Chapter Thirteen bankruptcy.

The new law requires all who file for bankruptcy to submit to means testing. Those with an income above their state's median income who are able to pay at least $6,000 over five years at a rate of $100 per month are only eligible to file Chapter Thirteen bankruptcy, and a judge will order a repayment plan. Those who do not meet or exceed this measure are still allowed to file Chapter Seven bankruptcy, which allows all debts to be erased completely after the forfeiture of assets not exempted, such as an allowance or a home.

The law also requires that those who intend to file for bankruptcy to complete financial counseling within the six months prior to filing. Additionally, the debtor will have to attend money management classes before the discharge of any debts. The debtor will be liable for any fees charged for both the financial counseling and the money management classes. Debts that are related to child support or alimony will now be the first priority, instead of the seventh priority, meaning that a spouse's claim for child support or alimony will have top priority among creditors' claims against the debtor. This law also increases the waiting period between bankruptcy filings. Debtors now have to wait eight years from their previous filing before filing again, instead of six years under prior law. This law also restricts the ability of a debtor to protect some part of the value of his or her home from creditors by capping the amount that can be shielded at $125,000 if the filer purchased the home within three years and four months of filing.

This law does contain certain benefits for some consumers. The new measure's income test has additional accommodations for active duty service members, low- income veterans, and people with serious medical conditions. The new law also permits filers to give up to 15% of income to charity. States also have specific exemptions that can be used by resident filers, but only if the person has lived in the state for at least two years.

For more information on the new bankruptcy laws, consider visiting the American Bankruptcy Institute's website at www.abiworld.org, or the United States Trustee Program's website at http://www.usdoj.gov/ust/.

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