Bankruptcy Law Changes

On April 20, 2005, several new bankruptcy law changes were passed and they took effect on October 17, 2005 - exactly 180 days after its signing by President George W. Bush. That's good news for the credit card industry since they've been pushing for tougher bankruptcy laws for the last eight years. For many consumers, this new law meant a rush to file for bankruptcy before the October deadline.

Bankruptcy Statistics

For many families, filing for bankruptcy is a difficult and painful decision. If you think that many filers are wealthy families looking to beat the system, think again. According to recent studies, the vast majority of filers earn less than $25,000 a year and many of these families experience the loss of a job in the months or years prior to filing.

Additional Resources

Credit card companies stand to gain from these changes, with estimates as high as $5 billion annually. Credit card companies point to the rising rate of bankruptcy filings - with 2.1 million filings in 2005, bankruptcies are up by nearly 140% over the last ten years. And credit card companies are often hit the hardest when individuals do file for bankruptcy because the money owed is usually in the form of an unsecured loan on their credit card.

Recent Changes to the Bankruptcy Laws

Senator Edward M. Kennedy was an outspoken critic of the changes to the bankruptcy law, citing his own statistics:

Approximately 50% of all bankruptcies were caused, at least in part, by illness or medical debts. This means medical bankruptcy involved between roughly 2 million Americans in 2001.
Credit card profits have skyrocketed in recent years. From 2000 to 2004, credit card profits jumped from $20 billion to $30 billion - a 50% increase.
The credit card industry is looking to entrap many of those same individuals that cannot manage their debt, including aggressively seeking out teenagers. The average household now has more than $8,500 in credit card debt alone.

Modifications to Bankruptcy Law

All together there were about six important changes to the existing bankruptcy law that affect both individuals and businesses. The categories of these changes include:

Eligibility for Bankruptcy - it is now more difficult for individuals to file for Chapter 7 bankruptcy.
Proof of Income - federal income tax returns will be used as proof of income and the information will be supplied by the IRS.
Chapter 13 Bankruptcy - as individuals are excluded from Chapter 7, there will be a migration to Chapter 13 filings which require setting up repayment plans.
Credit Counseling - credit counseling is now mandatory for individuals declaring bankruptcy.
Child Support and Alimony - money going towards the payment of child support and / or alimony are now prioritized.
Automatic Stay Protections - declaring bankruptcy is no longer a guarantee of protection against creditors.

The paragraphs below address these six important changes in additional detail.

Eligibility for Chapter 7 Bankruptcy

Under the new law, certain individuals are prohibited from filing for Chapter 7 bankruptcy altogether. Specifically, individuals whose income is above the state median and who can afford to pay $100 per month to creditors can no longer file for Chapter 7. The determination as to whether or not the individual can afford to pay $100 or more a month will be calculated using Internal Revenue Service rules as a guide as to what constitutes reasonable expenses.

Tax Returns Used as Proof of Income

The IRS will also get involved when determining proof of income. That's because the new bankruptcy law requires the use of federal tax returns as proof of income. That's true whether the person is filing for Chapter 7 or Chapter 13. If the filer did not pay federal taxes in the prior tax year, then they need to file a tax return before declaring bankruptcy.

Bankruptcy Filings under Chapter 13

Since many filers will no longer be eligible for Chapter 7, that means they must file for Chapter 13 bankruptcy instead. The big difference between Chapter 7 and 13 is that Chapter 13 requires the debtor to enter into a multi-year repayment plan that is based on an expense-to-income formula. This means mandatory payments back to creditors under Chapter 13.

Credit Counseling

The new law also requires mandatory credit counseling using a government approved program. The purpose of using a credit counselor would be to equip the filer with the basics of home budgeting, finance, or economics. Credit counseling must take place before individuals file for bankruptcy while debtor education must take place after filing.

Unpaid Child Support and Alimony

Current bankruptcy law prescribes a repayment system- based on standardized calculations - for debtors to pay off money owed creditors. The new bankruptcy law changes this repayment priority and places families owed child support and alimony at the top of the list. That means family members get paid before credit card companies or other lending institutions.

Automatic Stay Protections

Under current law, people filing bankruptcy are protected against creditors and debt collectors until after their bankruptcy proceeding. The new law changes some of these "automatic stay" protections - especially those involving legal action against the debtor. This means that filers are no longer protected against possible eviction, driver's license suspension, and child support and divorce proceedings.

Hurricane Katrina and Bankruptcy

As was the case following Hurricane Andrew, the financial affects of Hurricane Katrina will be widespread and these changes to the U.S. bankruptcy law couldn't happen at a worse time for those that lost their loved ones, homes and even their jobs.

When the New Orleans' federal bankruptcy court closed its doors filers were redirected to the court in state capital of Baton Rouge. In addition, courthouses in Alexandria, Lake Charles, Monroe, Opelousas and Shreveport also took emergency filings.

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